Parental property gifts and divorce

Whether it is in the mainstream media, at a dinner party, or even during small talk with a brief acquaintance – barely a day goes by when we aren’t reminded about the prohibitive cost of housing in Australia. Add recent interest rate rises to the equation and the prospect of purchasing a house can seem like a pipe dream for many young Australians.
Parents understand their children face a much, much tougher task to buy a property than any previous generation. In many cases, their accumulated wealth is the only hope of breaking-in.
So more regularly, parents are providing financial assistance for their children to purchase. And if their child happens to be in or enters a de facto relationship or a marriage, that act of generosity can turn into a headache should the couple split.
Let’s use a hypothetical example to illustrate the risks: the husband’s parents provide $50,000 toward a house deposit. Five years later, the house is still being paid off and subject to a mortgage from the principal lender, a bank, and the marriage breaks down.
Because the couple have only made a small portion of bank loan repayments, the initial $50,000 deposit makes up the majority of their equity in the property.
But who does it belong to? The husband, whose parents provided the money? Both parties equally? Or the parents?
The first step in addressing that question is classifying whether the $50,000 contribution was a gift or a loan.
If it was a loan, to be deemed a regular liability and subtracted from the overall asset pool firstly. it has to be a genuine loan. In other words, there needs to be evidence of a loan agreement containing terms such as time frame for repayment and interest rates. Secondly, the Court will consider whether a genuine loan agreement is to be treated as a loan for property settlement purposes.
Actual repayments from the couple, or evidence of attempts from the parents to recall the debt weigh in favour of a loan classification. As would some type of security, in the form of a mortgage or caveat over the property.
While Baby Boomers are generally better-off than their offspring, not all parents have enough spare cash to simply spring for an unsecured loan, or a gift. And even parents who can afford to do so might wish to protect their family’s wealth from a subsequent breakdown in their child’s relationship.
In these cases, the parents would be wise to formalise their assistance as a loan. That’s where Tonkin Drysdale Partners can assist. More and more regularly, we are witnessing parents – and their children – being blindsided by unexpected financial consequences from what was intended to be an act of support. And with the rate of divorce and the cost of housing both sitting at historically high levels, this is a situation fraught with unforeseen risk.
But what about the alternative? What if the $50,000 is deemed a gift? Generally the Family Court allocates the gift as a contribution by the child of the donor. However, if it can be established that there was an intention from the parents to benefit both parties; then the contribution would be split between the parties, when the court determines the matter.
In many of these cases, nothing will be certain until the matter is ruled upon by the court. A proper loan agreement, constructed by our experts at Tonkin Drysdale Partners, will assist with that uncertainty. Equally, if a matter arises with a family loan involved, good early family law advice will assist you to make the right decisions about how the money should be treated in a property settlement.
Please contact Partner and Accredited Specialist, Lee Pawlak, Partner, Paul Quinn or Solicitor, Nicholas Fagan to discuss any of the issues raised in this article in more detail.