Should you look a gift horse in the mouth?

Over the course of a marriage, or even prior to, a couple may receive funds from their respective parents, often to assist them to purchase a house. The status of these monies may come into contention pending a property settlement as the Family Court treats gifts and loans differently and the difference can have an impact on the final property pool available for distribution.

Gift or a loan?

When a relationship breaks down the party whose parents provided the money may claim it was as a loan and needs to be paid back while the other party may say it was a gift.

When the status of the money is in dispute, the parents from whom the monies came can be “joined” as third parties to Family Court proceedings and apply to have the loan repaid. However, in order to do so it must first be established that the money was indeed a loan.

A gift

The primary characteristic of a gift is that when disbursed there is no expectation that the money be repaid.

If the court finds that the money was a gift it will be treated as a contribution by the partner whose parent advanced the money. The significance or weight given to that contribution will depend on many factors, including the length of the relationship.

A loan

If the money is found to be a loan, it will be treated as a liability and deducted from the couple’s asset pool.

The establishment of a formal agreement at the time the money was disbursed is a good starting point to establish a loan. However, as in the case of Sulo & Colpetti [2010] FamCA 493 (18 June 2010) even if a loan document exists, unless there is evidence that the parents expected the money to be repaid it may still be characterised as a gift.

The Court will also consider whether the couple have made loan repayments or if it is secured by mortgage, caveat or registration on the Personal Property Securities Register.

The duration of the loan and when it was called in are also determining factors. In the event that demand for repayment corresponds with the commencement of Family Court proceedings, the monies may be deemed a gift as in the case of Maddock & Maddock & Anor (No.2) [2011] FMCAfam 1340.

In order to avoid uncertainty, distress and unnecessary cost it is important to clearly establish whether monies advanced to a couple from one party’s parents are a loan so that in the event that the marriage breaks down the other party will have no reason to claim in-laws bearing gifts.