How are loans and gifts considered in family law?

Loans and gifts in family law

When separation occurs it is necessary to do a property settlement and calculate what assets, superannuation and liabilities are in the property pool. Liabilities are including debts except alleged debts that are vague, uncertain or unlikely to be enforced (such as an unsecured loan from a parent of a party); or debts that were unreasonably incurred after separation.

Family Law Gifts and Property Settlements

We have talked about how to determine if something is a gift or loan in family law and we have discussed at length who gets what in separation, however what if something is a gift intended only for one person? Should they keep that gift or does that gift get included in the property pool? Well, like many things with family law that completely depends.

How are significant gifts treated in a property settlement?

In a family law property settlement, one of the main factors on who gets is who contributed what. In most cases, the court will form the view that the parties will have contributed to the relationship equally, especially when the relationship has been long. However, if one party receives a significant gift, the court will likely take the view that the gift is a contribution and adjust the settlement accordingly.

Family Law Gifts
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Gifts from parents

Generally, the rule is that if a parent gifts a child something, unless evidence exists otherwise, it is taken that gift is for the benefit of their child alone. It is considered as a contribution in a family law property settlement.

Will the gift be excluded from the property pool?

It may be excluded from the pool, or it may be more practical to make a very favourable adjustment to the contributing party.

In a 2018 case held before the Family Court, a married couple had separated after 8½ years of marriage. Shortly after the separation, the wife’s parents had gifted the parties their unencumbered home, in which they were living, at the time of the trial. This piece of property was valued at approximately $1.8million and made up almost 70% of the ‘non-superannuation’ property pool. The trial judge had accepted that it was a significant ‘financial contribution’ on the wife’s contributions, including those of the husband. The husband in the ended up receiving an entitlement of 30% of the ‘non-superannuation pool’ or ’35 % overall’, which may be seen as fairly generous, considering the significant ‘financial contribution’ by the wife. It is a requirement by the Family Court to take a holistic approach to an assessment of contributions – simply, it is not a straightforward mathematical or accounting exercise.

What if the intention was to gift both the child and their partner?

If an intention exists that the gift was for both people in the relationship, then the gift will be taken as an equal contribution.

In a 2009 case Aunties gifted their nephew land and transferred that land into their nephew and his partner’s name. The court found that this was a gift to both parties and made it an equal contribution.

How to protect gifts in family law?

Firstly determine whether it truly is a gift or a loan, if it is a loan, then it must be documented properly or follow the general requirements set out in family law for a loan. If it is not a loan but truly a gift, then it must be clear whom the gift is supposed to be benefiting and documented if need be. To truly protect any large gifts, a lawyer might suggest a financial agreement.

When do disputes arise out of loans or gifts in family law?

Most of the time when a dispute arises over whether it is a loan or gift, it is money, usually from parents but it can be loans or gifts between spouses, friends, family members and businesses partners. For example

  • when a director takes a loan from a company instead of a drawing.
  • Or a spouse gifts a car and then says it was a loan (in one case a husband was made to pay a debt after he cancelled the loan agreement on his wife’s car.)
  • Or when a spouse gifts property to someone and the other spouse says it is a loan.

But usually yes it’s money from parents that spouses argue are loans not gifts.

Loan Or Gift

Why does it matter if it is a loan or a git?

If a payment to one of the spouses is treated as a loan it will result in a reduction of the available property, which means that there is less money overall to divide up between the parties. If it is a gift it will form part of the property for a division and the other spouse will potentially receive part of it, overall increasing the property pool available for division. 

A gift the parties can keep. A loan must be paid back.

What is considered a gift?

Almost anything that isn’t a loan is a gift, if you don’t have to pay it back and it doesn’t meet the requirements for a loan, then in family law it’s a gift. If the party genuinely has a claim over it than it’s not a gift.

Is all money leant by family considered a gift?

Generally, if there is an unsecured debt owed to family members that is not documented, this causes issues, especially if one of the parties does not acknowledge that the loan exists.

The court is generally hesitant, and seeks evidence, if one party advises that there is a loan payable to a family member with no documentation to back it up, and no clear evidence that the loan will be called upon by the lender in the future.

In these circumstances, the court will consider any evidence available, and either take the loan into account on the basis of that evidence or disregard the loan.

However it doesn’t always happen to be that for example in one case a father’s company loaned the couple some money and registered it over the mortgage. The father than called in the mortgage just after separation despite sitting tight on it for 5 years. The court found that it had appropriate documents and repayments were included in the documents, even though they weren’t actually made for five years.

What if the gift was given specifically to one spouse?

Even if it is considered a gift, it will be considered as a contribution by one party. Contributions to the property pool are considered a s 79(4) element of determining who is entitled to what in a property settlement.

In one family law case the mother gave the husband a loan, the loan had no indication of when it was to be paid back nor were there an official agreement. The court determined it was a gift, but considered it a significant contribution from the husband.

Additionally, in another case, a transfer of land registered in both spouses names was considered to be a significant contribution of the spouse’s whose parents transferred the land.

But in cases where the gifts are given to both spouses, it will be an equal contribution.

How do you know it’s a loan?

In determining if funds loaned to a party should be considered a loan, the court will take into account several factors including: 

  • The formality of the loan, that is, has the loan been recorded in writing;
  • The terms of repayment of the loan, if any;
  • Any demands for repayment of the loan from the lender; and
  • The capacity to repay the amount loaned.

Technically, loans should be documented correctly, registered correctly and calculated and repaid in the normal fashion, with appropriate security if applicable. 

What if they have already paid the loan back?

In some cases, one party may have already disposed of the funds that they say was a loan by repaying the loan after separation. This might be seen by the court to be a disingenuous way of defeating one parties’ claim to part of the property pool if it is found that the monies loaned were indeed a gift. This would be the case because the property pool available for division would be less.

The court commented on this in Petersen’s case as follows: 

“In taking account of the ‘obligations’ of the parties, I must consider how pressing such an obligation is. It is fairly common in this Court to meet a situation where a parent has made a loan to a child which is in all respects legally enforceable, but which is not in fact enforced and would not really be expected to be enforced. It is no doubt an ‘obligation’ but if the obligation is not likely to have to be met, it should not be taken into account.”

But it really is a loan how can I prove it?

It is important in these kinds of cases to ascertain whether the monies are a gift or a loan by firstly gathering and assessing all the documentation that are said to evidence the supposed loan, and marrying them up with the chronology or timeline to see whether the documents facilitate a genuine loan. This assessment will vary case by case, but the formulation and steps to follow in ascertaining the nature of funds coming in or out of the property pool in this matter are well established. 

Does it matter in the end whether it is a loan or gift?

It’s important to note that you should make commercial decisions and it might not be worth fighting over whether a small deposit for a house is a gift or loan. However, it is a large amount of money and is genuinely a loan then it’s worth pursuing the cause. Remember if you are loaning or someone is providing you with a loan that you document it correctly and include terms of repayment, interest and anything else that is considered standard in a loan.

Luke Cudmore

Principal Family Lawyer at Cudmore Legal Family Lawyers Brisbane Co. Luke is experienced in family law matters ranging from divorce to child custody. He is a skilled negotiator and strategist and fights zealously for his clients family law rights.