In the current financial climate, it is harder than ever for young people to purchase their first home. It is increasingly the case that funds are advanced by a parent to give a helping hand to their children.
By law, funds advanced by a parent to children is presumed to be a gift, under the doctrine of the 'presumption of advancement'.
It is not uncommon, however, when parties separate, that parents demand a return of the funds they advanced, to ensure the funds are not taken by their former son or daughter-in-law. When this occurs, parents are often surprised to be advised about the "presumption of advancement" and that their funds will not likely be required to be repaid.
To avoid this, it must be clearly demonstrated, that at the time the funds were advanced, there was an intention for the funds to be repaid, by ensuring the following:
1. Loan agreement
There is a written loan agreement which includes:
- The loan amount;
- The term of the loan;
- A trigger for repayment of the loan;
- Inclusion of requirement for regular repayments;
- Interest payable on the loan;
- Default provisions, if the loan is not repaid;
- Security for the loan;
- The parents and children have separate legal advice about the loan agreement.
2. Terms
If there is no term specified, and repayment has not been requested within six years, the "loan" may then be unenforceable, and even if all steps have been taken, the lack of ability to take steps to enforce repayment of the loan could result in the loan not being recognised.
3. Security
The security for the loan should be clear and specific, and steps should be taken to lodge the security such as a caveat over a property or registration of a security interest on the Personal Property Securities Register.
4. Demand for repayment
A demand for repayment should not be made solely as a result of a separation, as depending on the terms of the loan, this will be seen as not a legitimate demand. Courts will often take the approach that if the loan was not likely to have been repaid, other than because of the separation, then it would be treated as an asset of the parties and not required to be paid from matrimonial assets.
5. Future inheritance
Loan agreements should not provide that funds will be deducted from a future inheritance if not repaid, as this could result in the funds being classified as an early inheritance.
Many families attempt to save costs by preparing their own loan agreements, considering this will later ensure that they will be able to rely on this to claim repayment of funds from their child in the event of separation. To ensure a loan agreement is properly prepared and maximise the prospect of it being upheld, the agreement should be prepared with the input of a specialised family lawyer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.