“The Bank of Mum and Dad”: Financial Assistance by Parents of Parties to a Relationship
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It has become increasingly common for the parents (or family members) of one or both of the parties to a relationship to provide financial assistance to their children, including to assist their children to purchase property. But how is this ‘financial assistance’ regarded when the relationship breaks down?
When dividing assets (or ‘property’) following the breakdown of a relationship, one of the first steps is to identify the net “pool” of property that is available to divide. This means, the parties’ equitable and legal interests in property and includes all assets, liabilities, superannuation and financial resources of both parties. For family law purposes, these items are recorded on a Balance Sheet, and provide a net total of assets that is available to be divided between the parties.
If financial assistance is provided by parents to their children, it is important to consider whether the parents intend to be repaid that money if their child’s relationship with his/her partner breaks down. This should be considered before financial assistance is provided.
If it is intended that the money be repaid, it is important to consider documenting the arrangement, for example in the form of a Loan Agreement, between the parents and their child (or even the parties to the relationship). Should the relationship break down, the loan will be included in the Balance Sheet as a “liability” and will usually be required to be repaid out of the asset pool before distributing the total net assets between the parties to the relationship.
If the financial assistance is not documented as a “loan”, it is likely that it will be regarded as a “gift” to the parties of the relationship. In this event, it is unlikely that it will be required to be repaid out of the assets of the parties. That is not to say that the “gift” will not be taken into account, however it will likely be regarded as a “contribution” to the assets of the relationship by the person whose parents provided the gift. Further, that “gift” is unlikely to be attributed to that party in the dollar amount of the gift, but is more likely to be considered as a percentage of the overall contributions by that party to the relationship.
TIP: Ideally the loan should be documented prior to the financial assistance being provided. However, in certain circumstances it is possible to document the loan after the financial assistance has been provided. It is also possible for parties to the relationship to enter into an Agreement before, during or after the breakdown of the relationship in relation to financial assistance provided by one’s family members.
The important message is that, if you are providing financial assistance to your child (and to his/her partner as a couple) or if you are intending to receive financial assistance from your parents, you should consider whether that financial assistance is to be regarded as a “loan”, to be repaid in the event the relationship breaks down, or whether it is a “gift”.
Contact the experienced Family Law Team at Clinch Long Woodbridge for further information in relation to gifts and loans in the context of family law. We can assist to draft Loan Agreements and provide you with further advice as to how these matters are considered in family law proceedings.