How safe is a gift or loan to a child when challenged in a family law property claim?
Parents are often asked to fund a child’s new home or other project. What is the risk their hard-earned cash may be lost to the child’s spouse/de facto in a family law dispute? Hint: close to 50% of marriages end in divorce.
A gift of the money is definitely exposed to such claims. Once the child owns the money it is their property and anyone who has a claim on their property has a claim on the gift.
Does lending the money protect it? Answer: it can – but only if done properly.
Many attempts to protect money by lending it fail. Why? Simple. Lenders don’t take the few, but critical precautions, to ensure their funds are legally protected. The trick lies in how it is done and documented.
So here are a few tips:
1. Lend the money, don’t gift it, and
2. Document the loan and ensure the document clearly states that there is an intention that the money is to be repaid and the other terms of the loan, and
3. Don’t simply make the loan repayable on demand. Why? There is a limitation period: once six ((6) years passes by, if no demand has been made for repayment or no action taken to seek repayment, then the law provides that the loan agreement becomes unenforceable. You can’t even call back a genuine loan (see note below).
4. Solutions: ensure the loan documents record that;
a. The money is repayable on the happening of an event such as ‘the expiration of 3 months after notice is given’, in which case the limitation period doesn’t commence to run until the notice is given and the notice period expires, and/or
b. Specify a date or period when the loan is due (eg; 10 year), and extend that time in writing if the loan isn’t going to be repaid when due, and
c. Whenever possible, take security to secure repayment of the loan, even if only an unregistered mortgage protected by caveat.
The term of the loan however is not the only issue that has to be managed carefully. It is common for related party loan documents to require the payment of interest which accrues year on year but only becomes payable on the happening of certain events such as the sale of a property, or upon demand for payment of the interest or upon a marriage break down, and so on. Aside from raising doubts about whether the loan is genuine, such clauses often result in the ATO demanding the lender to pay tax on the accrued but unpaid interest income. Ouch!
Assume the Courts and the ATO will view loans between related parties with great suspicion and examine the evidence thoroughly. Get the loan documented by an experienced commercial lawyer who understands the pitfalls and can give you appropriate advice. It is not a task for ‘bush lawyers’.
(Note: Each State in Australia has legislation which imposes strict time limits (called ‘limitation periods’) on when you can commence action to claim moneys that have become due. A person has six years from the date on which a cause of action arises to commence court proceedings (only 3 years in the Northern Territory). In the case of an ‘on demand’ loan, the right to commence action doesn’t arise until you make demand for the repayment. Fail to make the demand within six years of the date of the loan and your right to demand repayment will be statute barred.)