Loans to Adult Children

We all love our children and want to give them all we possibly can, including providing loans to assist them financially. Loans to children are often unsecured, informal and rely on the trust and relationship between the parent and child and sometimes that child’s partner. What is often not considered is the risk of lending money to a child who may later be subject to a family law property settlement. This article will discuss the risks of, and canvas how you can better protect yourself against, your child’s estranged spouse or de facto partner benefiting from your money lent in good faith.

The most common reasons money is loaned by parents to children are to assist with the:

  1. purchase of a family home (conveyancing);
  2. payment of school fees;
  3. purchase of (or injection of cash flow into) a business; or
  4. payment of legal or medical fees.

The Family Court’s position …

When parties apply to the Family Court for property orders, the court will take into consideration the assets and debts of the relationship. Where the debts include an unsecured debt owed to family members, the court may disregard that debt entirely.

Alternatively, the court may consider your loan a financial resource of your child and make an adjustment in favour of the estranged spouse or de facto partner!

Conclusions that the court may draw include that the funds loaned by you are:

  1. A genuine loan (this conclusion is likely to be the case where the loan is on the same or similar terms to a bank or other 3rd party loan);
  2. A genuine loan but a financial resource of the child (this conclusion is more likely the case where the loan is secured and there is written acknowledgement from the child’s estranged spouse or de facto partner);
  3. A genuine loan but a financial resource available to the child (this conclusion may be reached where there is no security or written acknowledgement but other factors indicate the loan is genuine; for example, a steady reduction of the loan balance and your need for repayment of the loan to, for example, fund retirement); or
  4. Simply a disguised gift, with the court concluding that you have no realistic intention to seek repayment, other than temporarily in an attempt to improve your child’s property settlement prospects, and with the court likely to be unimpressed by sudden commencement of interest payments or repayments of a so-called loan after your child’s domestic relationship breaks down.

How can you best protect your loan?

A recent case illustrates the danger of lending money without any security in place. A self-funded retiree, Jerry, lent his son, Homer and his partner, Margery $250,000.00 for the purchase of a property. Homer was about to ask Margery to marry him and Jerry was excited for the possibility of a grandchild.

Years passed and Jerry didn’t request any payment of interest or repayment of any of the principal. Seven years had now passed and Margery commenced property proceedings against Homer. Jerry tried to make an application to the court that his loan was a genuine loan and he expected it paid to help him fund his retirement. The court found that the money was at best a financial resource of Homer and not a genuine loan, as no repayments had been made or requested until the relationship was in difficulty.

Ideally, Jerry should have had a secured loan over the property so that it would have been recognised by the Family Court as a genuine loan and therefore not an asset of Homer.

The take home message …

It is always advisable to have any loans documented in writing to avoid any doubt about the intentions of the parties. As well as a Loan Agreement, you may wish to secure the loan by a registered Mortgage over the child’s property (or have at least an unregistered Mortgage protected by a registered Caveat on the child’s property).

If you are considering lending money to a child, please come in and see one of our friendly and experienced property or estate planning lawyers who can assist you secure such a loan to better protect you against the reach of the Family Court.

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