Mum and Dad Loans: Protecting Assets in Separation

As house prices, interest rates, and the cost of living continue to rise, many people are turning to their loved ones for support when entering the property market. In fact, according to the Australian Financial Review, “the Bank of Mum and Dad” was the ninth-largest lender in Australia in 2021, based on the value of loans. However, what happens to these funds in the event of a separation?

 

In family law matters, disputes often arise over whether money advanced during a relationship by family or friends was a gift or a loan. This seemingly small matter can significantly impact the distribution of assets and the entitlements of each party after separation. Generally, a loan must be repaid before any distributions are made, whereas a gift can be considered a contribution on behalf of one party, increasing their entitlements to the asset pool.

 

In Australia, it is presumed that money given by a parent to their child, regardless of age, is a gift, unless that presumption is rebutted. Parents are not entitled to be repaid funds that they have advanced to the parties as part of the separation (referred to as “the presumption of advancement”). To rebut this presumption, the person/s who gave the money must prove that the money was intended as a loan at the time it was advanced, and that the parties who benefited from the funds understood it was not a gift.

 

To protect family members when borrowing funds from the Bank of Mum and Dad, several steps can be taken to minimize the risk of disputes, including:

 

• Properly documenting the terms of the loan agreement, including interest rates, repayment schedules, the loan duration, default provisions, and security details before the funds are advanced;
• Ensuring that all parties to the agreement have independent legal advice before signing;
• Complying with the terms and conditions of the agreement, including interest rates and default provisions;
• Having a Financial Agreement between the parties, which provides for the repayment of the money in the event of separation.

At Umbrella Family Law, our highly experienced team can assist you with protecting funds borrowed from family members in the event of a separation. If you’re considering borrowing money from the Bank of Mum and Dad to assist with your next purchase.

 

Contact us today for expert advice.