What happens to Family Loans and Gifts upon Divorce?
Many parents will be familiar with providing financial assistance to their children and their spouses, whether it is to assist with the purchase of a home, to renovate an existing home, or to invest in a family business.
However, what is not always fully considered at the time of any monetary advancement is what implications there are for the repayment of the monies should the recipient and their partners separate.
Let’s take a look…
Often, gifts and loans agreed by family members are informal arrangements, which are agreed verbally rather than in writing. But what implication does this have on the ability of those providing the financial assistance to recover these monies in the future?
When there is an application for a financial order made by a spouse in divorce proceedings, the court draws a clear distinction between monies which were gifted by third parties during the marriage and monies which were loaned.
There is a ‘gift’ of money when parents (or other third party) have no expectation of either that money being repaid to them or having any interest in any property acquired with those monies. Although in some circumstances, the fact that a significant gift was made by one of the spouses’ parents can be seen as a significant ‘contribution’ by that spouse (which should therefore be taken into account in what financial order is made), in most cases the couples’ respective needs will override any contribution argument and the entirety of the couples’ assets (including the gift) will be divided in accordance with those needs.
However, if the monies are treated as a loan, the divorcing couple will be required to repay the monies in accordance with what was agreed with the family member before their remaining assets are divided by the court.
Often, because there was no formal written agreement entered into at the time or the terms of any agreement change, a dispute arises between the divorcing couple and their family members as to whether the monies advanced should be treated as a loan or a gift.
In these circumstances the family members who advanced the monies may have to join or intervene in the family proceedings and give evidence.
In the first instance, payments made by a parent for the benefit of a child are presumed to be gifts. However, this presumption can be rebutted with clear evidence that the transfer had a different purpose or intention (such as a loan) at the time of the transaction and that there was a requirement for repayment. The court is less likely to consider a payment a loan if the terms are vague, uncertain, or unlikely to be enforced.
The court considers on the balance of probabilities whether it was the intention of the parties that the monies be paid on the condition that it should be repaid.
The court will consider various factors, including:
- The existence of any written loan agreement
- The terms of repayment
- Whether any repayments have been made
- Evidence of the discussions between the parties
- Whether there was an expectation of repayment
- Whether there was any security provided in respect of the loan
If the court is satisfied that the loan is repayable, the court may order that the parties repay the loan from the matrimonial assets before the remainder of those assets is divided between them. Where the court is not satisfied that the loan is repayable then it is likely to determine the advance to be a gift and not repayable.
Seek Advice on Family & Financial Matters
Family members who have financially assisted couples (or plan to) should take advice from a family finance specialist as to how best to protect their interest and intentions in the event that the parties separate in the future.