When the manner of giving matters: To gift or to loan

With the festive season fast approaching, we are reminded of the "gift of giving".

When substantial funds are the gift of choice, how can you be sure that such a gift remains with its intended recipient in the event of a separation? Can you "convert" a gift into a loan upon separation?

When a separation occurs, it is all too common for a party to insist that funds received from family members (or related entities) should be considered a loan and therefore returned/repaid at the time the parties divide property between them. However, unless there is evidence of a legal obligation for the funds to be repaid at the time they were provided, the Court is entitled to find that such funds constitute a gift to the relevant party.

It is a gift!

If a party is gifted funds during the relationship or marriage, that gift is usually included in the assets available for division upon separation. The party whose family gifted the funds may receive an adjustment in their favour for that financial contribution.

However, not all contributions are created equal and each contribution must be weighed and balanced against others – including parent and home maker contributions.

When funds are considered a gift, it is only in very limited circumstances that the party who received the gift will keep it on a dollar-for-dollar basis as part of a property settlement.

How do I make sure a gift does not become a gift to the recipient's spouse in the event of a separation?

Quite often, this is the million-dollar question.

In short, a Financial Agreement between parties in a relationship or marriage is a good way to ensure that gifts (and any assets that may be acquired from those gifts) remain separate property of the recipient in the event of separation and therefore not divided for the benefit of the other party.

Or is it a loan?

Funds that are determined to have been received by way of loan are treated as a liability of the parties and repaid to the lender/s.

A Court can characterise the advancement of funds as a loan where a genuine loan agreement specifying terms of repayment exists¹ and which includes, for example:

1. the parties to the loan agreement and date of the loan;
2. the amount of the loan;
3. the interest to be paid on the loan;
4. the frequency of repayments (it is preferable that periodic payments are made rather than one lump sum in the future).

How do I make sure an advancement of funds is treated as a genuine loan?

Even though a loan agreement exists, it does not necessarily follow that the liability will be taken into account by the Court at the time of property settlement. The Court may determine that an unsecured albeit documented loan is vague or uncertain or unlikely to be enforced.² Simply put, there must be a genuine, legal obligation for the monies to be repaid.

It is important that the terms of the loan agreement are performed by the borrower and the lender should also obtain advice regarding securing their interest, for example, registering a caveat or mortgage, or securing their interest on the Personal Property Securities Register, depending on the circumstances.

Protecting the intended gift recipient or the lender

Ultimately, the characterisation of funds from family members or related entities as being a gift or loan may have a significant impact on the division of property at separation.

It is therefore important that the circumstances surrounding the advancement of funds have been properly considered and protected by proper documentation, prior to the advancement being made.

If you have questions regarding advancement of funds to a party in a relationship or financial disputes during a relationship breakdown, please contact a member of the Family & Relationship Law team for further information.

[1] Masoud & Masoud [2016] FamCAFC 24

[2] Strand & Strand (No.2) [2018] FamCAFC 247; Biltoft & Biltoft [1995] FamCA 45.