Lending For Love (Not Money)
The 21st century has brought many things now seemingly inescapable; smart phones, social networking…Justin Bieber. However perhaps one of life's most inescapable things, particularly for young adults, is the increased cost of living in the face of stagnant wage increases.
Not only are adult children staying at home longer, but it is becoming more common for them to borrow from the 'Bank of Mum and Dad' to get a foot in the door of the property market. But what happens when those adult children separate from their partner, and mum and dad want their money back as part of the divorce settlement?
As a general rule, when money is advanced by a parent to their child, it is presumed to be a gift unless there is evidence, such as a Prenuptial or other financial agreement, to suggest otherwise. This is called the presumption of advancement.
The best way to prove that funds advanced by parents are intended to be loans (not gifts) is the existence of a document confirming the loan and the terms of repayment.
In NSW, if the loan was recorded as a contract (i.e. a loan agreement), parents have 6 years to sue their child for repayment. If recorded as a deed, that time limit is extended to 12 years. Whether it is 6 or 12 years, once the time period expires the loan becomes 'statute barred' and is extinguished, meaning the parent cannot sue the child to recover it.
When does the time limit start?
If a date for repayment is specified (for example 5 October), the parent can first sue on the following day (6 October).
If a condition for repayment is specified, for example, the child selling their house or separating from their spouse, the parent can sue once that condition has been satisfied.
If repayment is required 'on demand' or 'at call', an action can usually be brought for recovery of the debt immediately after the funds are advanced.
Loans without any agreed terms are generally treated as being immediately due and payable and accordingly, the limitation period commences from the date the loan was made - not when payment is requested.
How does this impact Family Law proceedings?
When adult children separate from their spouse they usually say that the loan to their parent needs to be repaid and that the liability should be taken into account as a debt on the balance sheet, and ultimately shared by their spouse. This can be a difficult argument where the loan was not documented and was made repayable upon demand. In response, the other spouse often argues one of three things:
that the funds were advanced by way of gift rather than loan, and so there is no obligation of repayment;
that if they were advanced by way of loan, that the loan is now "statute barred", in that the debt cannot be sued upon because the time period in which that must have occurred has now expired; or
that if the funds were advanced by way of loan, that the Court might not take that liability into account, on account of there ultimately being no expectation that it will be repaid, for example.
If the adult child cannot establish that the funds were intended to be repaid or the loan is not "statute-barred", all is not lost.
In those circumstances it is far more likely that the Court will treat the funds as a gift and recognise them as a financial contribution made solely by the adult child, which is an important factor to be considered when assessing their contributions to the asset pool.
Pearson Emerson Family Lawyers have assisted both parents and their adult children to successfully prove the existence of inter-familial loans in the Family Court. Contact us to discuss your matter.
