Recovering loans made by Parents to Adult Children if they Divorce

Many parents wish to help their adult children buy their first home by advancing money to them to help fund a deposit.  These advances are rarely documented.  But what happens to that money if the adult child subsequently separates or divorces?  If the advance is not properly legally documented, then there may be an argument about whether it was a gift or a loan.

If the money is advanced as a gift at the time, you cannot change your mind and say it was a loan if your child’s relationship deteriorates in years to come.  Because of the nature of the relationship between parent and child, there is a legal presumption, called a presumption of advancement, that any advance is a gift unless it can be proved that that the money was advanced by the parent to the adult child on the express condition that it should be repaid.  In a situation where a parent has made a loan to a child which the parent has failed to enforce the child’s repayment obligations and there is no certainty that repayment obligations will be enforced in the future, then the Court will probably decide not to take the loan into account when assessing the available net asset pool for division between the parties.

There are a number of ways to protect a loan advance made by parents and you should consider all of the following:

  • Enter into a properly drafted Loan Agreement with your adult child and his/her spouse/partner
    This Loan Agreement should set out in detail the terms of the loan, interest payable, and due dates for instalment payments.  The loan should not specify that it is repayable upon demand as this will trigger the operation of the Limitations of Actions Act 1958 and the legal right to demand payment will be extinguished if a demand for payment has not been made within six years.
  • Secure the Loan with a Mortgage over property
    The mortgage documentation should be executed by the borrowers and they should be required to obtain legal advice in relation to their obligations in relation to the loan and the mortgage. 
  • The adult child should enter into a Financial Agreement pursuant to the Family Law Act with his/her spouse/partner.
    The Financial Agreement will set out how assets are to be divided in the event of a separation and the terms should include reference to repayment of the loan from parents.

If all of the above steps are taken, then it is as much protection as you can get should your adult child separate in the future.

If you need help with the abover, telephone Melbourne Family Lawyers on +613 9670 9677 or click here to make an enquiry.

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