My parents gave me money – is it a gift or a loan during my divorce?
In a booming real estate market, parents are increasingly helping to finance their child’s deposit for their first home. Many families also continue to fully or partially finance the lives of their adult children indefinitely; by buying them successive houses, businesses or cars, by paying off their debts or by saving them in some other way from the financial crisis.
Such generosity is rarely documented.
Parents can expect a refund, but naturally they are confident that their child will reimburse them when they are financially able to do so.
Alternatively, money may have been advanced to an adult child without (many ?!) conditions attached to that child’s marriage or relationship, but that relationship begins to fail and the parents want to act protectively.
What happens in these circumstances if the adult child separates from their spouse before reimbursing their parents, assuming they were never intended to do so?
There are two ways family courts can deal with a payment made by a parent to their child in a real estate settlement:
- The court can accept that the payment be a loan that must be repaid in full to the parent. The loan will be included in the real estate pool.
- Alternatively, the court may determine that the payment was a gift to the child, with the parent having no expectation of repayment. This would usually be a contribution on behalf of the spouse who received the payment from their parent. Such a contribution (in the absence of other evidence) will increase the percentage weight given to the child’s contributions.
The “mom and dad bank” should act like any other bank when advancing money to its children. Indeed, family law courts are reluctant to accept that a child owes a loan to their parents unless there is clear evidence that their parents are expecting repayment. This requires for example:
- A written loan agreement was made when the money was advanced, or at least during the relationship. It is not that binding to produce a loan agreement that was made after separation. Informally written “acknowledgment of debt” that has not been properly drafted by a lawyer may also not be sufficient.
- The loan agreement was on arm’s length terms, including, for example, a commercial interest rate, a repayment schedule and call-for-repayment clauses.
- A security was taken for the loan, such as a second registered mortgage on the child’s house.
- A record was kept of loan repayment in accordance with the loan agreement.
After separation, it is common for the other spouse to argue that the money advanced by their ex-spouse’s parents was a gift and not a loan, despite any unwritten agreements that existed during the relationship.
If you are offering money to children and expecting repayment, it is imperative to make sure that the loan is properly documented and that the collateral is taken, in case you find yourself in the unenviable position of ‘being caught in the middle of a marital dispute.