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The Bank of Mum and Dad in Family Law Property Settlements

If you contributed money towards the purchase of a property for an adult child who is now separating from their partner, the Federal Circuit and Family Court of Australia (“the Court”) can class these funds as either a gift, a loan, or trust (aka joint ownership). Each class, once established by the Court, will typically result in distinct legal consequences.

The consequences of a “gift” from parents

If the funds are classed as “a gift” and your adult child is going through a family law property settlement, they will often be considered a contribution made by your child to their marital or de facto relationship. This can result in an adjustment in favour of your child, and the amount of this adjustment is determined by the extensive and discretionary provisions of the Family Law Act and relevant case law.

However, the Court may also find evidence that demonstrates you intended the funds to be a “joint gift” to benefit both your child and your child’s spouse equally. In this case, the Court will likely find that your child and their partner contributed equally to the relationship by way of this gift, and therefore neither should be entitled to an adjustment in their favour.

The consequences of a “loan” from parents

If the funds are classed as “a loan” they may be protected from a claim by the estranged spouse (whether married or de facto). This means the Court will likely view the funds as another joint loan of the relationship and would typically (but not always) find that both parties are liable for this “joint loan”. All joint liabilities must be paid before a property settlement can be reached and before a settlement split can be determined and distributed to the parties.

The consequences of property held by a child “on trust” for a parent

If the Court is satisfied there is evidence that proves that the intention, at the time the transfer of funds occurred, was for the parents to be “joint owners” of the property, these funds may also be protected from an estranged spouse’s claim under the Family Law Act. This is irrespective of whether the parents are registered as an owner on the title search. If they are registered on title they are called a “legal owner” or “registered owner”, if not, they can be “equitable owner”.

If a trust is declared by the Court, and joint ownership is therefore established, the parent could also be entitled to a proportion of the capital growth in the property that is reflective of their share of ownership. This could potentially exclude an even higher proportion of assets from forming part of the pool of property available for division between the parties to the relationship.

The presumption of advancement

Traditionally, when a parent contributed funds to their child the Court presumed (without evidence to the contrary) that such funds were first and foremost “a gift”. Now the Court is also prepared to find the funds are “a conditional gift”. For example, a gift that is conditional on a child providing the continuing right for their parent to reside in the property.

To rebut this presumption, evidence is required to prove that the funds were not intended as “a gift” and rather to be “a repayable loan” or “a trust” held by the child for the benefit of the parent.

Always obtain legal advice

Before opening the bank of Mum and Dad, it is important to obtain legal advice to ensure the funds handed over are treated as you intended. Particularly, in the event that your child has the displeasure of being a party to a future family law property settlement.

If funds have been provided either:-
(a) by you to your child;
(b) to you by your parents; or
(c) to your spouse by their parents,
we strongly recommend you obtain legal advice with respect to how these funds will be classed and treated by the Federal Circuit and Family Court of Australia.

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This article is for your information and interest only. It is not intended to be comprehensive, and it does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

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