WHEN BLOOD BECOMES THICKER THAN WATER – PROTECTING GIFTS AND LOANS TO CHILDREN AFTER DIVORCE

Family lawyers really do see it all. Because we act for people who are embarking on new relationships, and we act for people who are enduring relationship breakdown, we see the good times, and we see the bad times.

One situation which has this dynamic is when parents or relatives pay funds to their adult child or relation for some specific purpose, often to purchase a home, to complete renovations to a home, or to acquire a business. They do so as part of that inherent and understandable wish to help loved ones, and see them get ahead in life.

All is well, and that generosity has its intended purpose in the life of that relative. That is, until the unexpected happens, and their relationship breaks down. That’s when families often ‘circle the wagons’, and go into self-preservation mode – wanting to ensure that their blood relative, and not their soon to be ‘ex’ relation-in-law, gets the benefit of their generosity. Often the thinking is that the family will get the loan ‘repaid’, only to then ‘re-advance’ it to their blood relative (so that they alone have the benefit of it) after the property settlement is signed off.

If there is an agreement characterising the transaction (for example, as a loan), sometimes that situation is clear enough, and impending familial war is de-fused.

However, a lack of documentary evidence of what was agreed about ‘the money’ is the stuff ‘Montague and Capulet’ feuds are made off. Inevitably the lender family wants its money back. The party who is no longer ‘family’ disputes the obligation to repay. A battle royal ensues, in which picking a clear ‘winner’ is tough.

Why is there so much uncertainty? Because typically intra family arrangements are entirely undocumented – they are completed over a barbecue, and on a handshake. After separation, battle lines are drawn, and it becomes a case of one party contending for one thing (a loan, repayable in full, and on demand), and the other a different outcome entirely (a gift, not repayable). With no documentary support for either version of events, it often falls to a Judge to determine what should occur to achieve justice and equity.

So, what is the range of possible outcomes where things are a bit murky?

Behind door number 1 we have a loan – a Judge decides that the advance from family was a loan, which had been agreed to be repaid. The loan is then taken into account when calculating the asset pool available for division between the separated spouses. Often this finding is supported by some documentary evidence – some (but not all) terms and conditions jotted down, or a ‘thank you’ card acknowledging that the money would be repaid. Sometimes it is supported by conduct – there have been a few repayments of principal or interest. To get to that point, often the parties, and the relatives who paid the money, are cross-examined in a trial, and the Judge is left with the difficult task of distilling facts from the evidence of several different players.

If the Judge is able to make a finding of fact that there was a loan, and about the terms of that loan, then the Judge can order it to be repaid in part or in full, whether by one party, or via the sale of the asset purchased in connection with it.

After having been dragged through a trial, any hope of a courteous post-separation relationship between family members has been dashed, and everyone has incurred significant legal costs. It is sometimes difficult to declare that a victory has been had on any side in such situations.

Behind door number 2 we have a loan, but which is found to have been forgiven – a Judge decides that, when the advance of funds initially occurred, it was intended as a loan, but the borrower has since then been relieved from the obligation to repay it. It is then not taken into account at all when calculating the asset pool.

This situation might arise if:-

– The advance of funds was made very early in what has been a long marriage, with no later step being taken in relation to the loan (no registration of security, no call for repayment);

– The initial agreement as to repayment of the loan has never been enforced (for example, the loan was advanced on the basis that it was repayable in 10 years, which has long since passed by, or upon the sale of the family home, which was sold many years ago, the funds being later ‘rolled into’ the purchase of other properties, with no hint of any requirement to repay);

– There have never been any repayments of the loan (whether principal or interest), over many years;

– The ‘lender’ has said that the loan need not be repaid, or has, through their conduct, led the borrowers to believe that the loan need not be repaid;

– The first time the notion of repayment of any loan is raised is after separation.

In short, the facts suggest that what might have initially been a loan, has never really been treated as a loan, and was therefore, at some point, forgiven by the lenders.

The lenders can feel devastated by this result. But all is not lost here, as the ‘forgiven’ loan is sometimes, when the property of the relationship is being adjusted, instead treated as a contribution made by the lender’s relative on behalf of the relative (and not the relative’s spouse), who then receives a larger share of the pool of property as a result. That may not put that relative in the same position as had the loan been reduced from the asset pool as a liability, but it can mean that the contributor’s relative is benefiting in some way.

Behind door number 3, we have a gift. A Judge is unable to make findings sufficient to determine that the advance of funds was by way of loan, or of the terms of that loan. All that is left for the Judge is to conclude that, absent any other credible evidence, the funds were always intended as a gift.

In these cases, there is often a clear record of the money being paid, but not the basis on which it was paid. One party says that it was a loan, the other says it was a gift. Due to the absence of any written loan agreement, or other corroboration of the nature and terms of the payment, a Judge cannot safely determine that there was ever any agreement to repay the funds.

Again, that may not be the end of the world, and depending on the timing of receipt of the funds, and the way those funds were then applied, the relative of the donor of the funds may receive ‘credit’ for them in the property settlement (in cases where the payment was recent, the credit received by the relative may even be more or less the dollar equivalent of the gift).

Results in cases like this are notoriously difficult to predict. Tensions are high because family pride is at stake. Time is added to the litigation which, but for the family feud, might have settled long ago. To have a trial to determine the matter is expensive for all concerned.

Ultimately, that is a situation in which no parent wishes to find themselves, as results are by no means certain, and it is often to ‘throw good money after bad’.

How, then, to avoid it?

1. Get it in writing – if a payment of funds is intended to be by way of loan, document that loan in the form of a loan agreement. That way there is a clear record of its terms (who is the lender, who is the borrower, how much is being loaned, what payments are required, and so on), and a document on which a Court can rely in the property settlement exercise if family breakdown situations ever raise their head down the track;

2. Take security – if you agree that your provision is a loan, take your own advice about securing it. That might be, for example, by way of Mortgage registered over the title of the home purchased with your loan funds. As a general proposition, it would be hard to argue against a loan if there is a signed loan agreement, secured in a formal way;

3. Live by the arrangements you make – do not put your loan agreement in a drawer and forget about it. If your loan agreement provides that the loan balance must be reduced by a certain amount every year, insist on that. If you want to be able to demonstrate that the loan agreement remains binding and enforceable, show that you have required compliance with its terms. Failure to do so leads to a possible conclusion that the loan has been forgiven (or that the terms of the loan have been varied);

4. Keep up to date – if an alternative outcome is agreed along the way (for example, that the loan funds can be used to, after the sale of property A, purchase property B, contrary to the terms of the initial agreement), get that in writing too, in the form of a fresh loan agreement;

5. Be clear – if you intend that your payment is a gift (rather than a loan), who do you intend is the beneficiary of the funds? If you intend that it is your blood relative is the donee (and not the donee and their partner), make that crystal clear. While certain things can be assumed, always put your intentions beyond doubt (as, in the absence of clarity, a Judge may need to decide the matter, a process which introduces the risks that your intentions may be ignored);

6. Set compulsory conditions – if you are going to make a gift of money, and you are doing so to specifically benefit your relative, do so on the basis that this is acknowledged by all involved – confirm that the gift will only be paid when:-

a. A family lawyer has prepared a Financial Agreement as between your relative and their spouse, recording what is to become of the gift in the event of family breakdown. That Agreement can recite the existence of the gift, and its application, and specify what is to occur in the event of relationship breakdown. That might be, for example, that your relative has the gift (or a proportion of it) reinstated to them before any property division between the spouses;

b. An estate planning lawyer has prepared a Will and other associated testamentary documents specifying the fate of the property purchased with your gift if your relative were to pass away (prior to any family breakdown situation). This might specify that the gift effectively passes to other blood relatives (and not to your relative’s spouse).

As with all things, prevention is better than cure when it comes to family arrangements. While to plan for the worst by discussing such things as relationship breakdown is a challenge requiring a thoughtful approach, taking care to make those arrangements certain, from day one, can avoid a future family dispute becoming truly Shakespearean.

www.danbottrell.com
Facebook: @DanBottrellLawyer
Instagram: @bottrelldan

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