Preventing Family Disputes: Gift or Loan?

By 31 May 2018Family Law
family disputes lawyer at Pavuk Legal

Parents of adult children often find themselves in a situation where their adult child may require financial assistance. Parents are sometimes the only ones able to provide for deposit for a property, finance a renovation or construction of a family home or purchase of a car.

Whilst parents may have good intentions to provide financial assistance to their children so called good intentions may turn into a family feud for no other reason than for lack of clarity as to what the arrangement – Was – A gift or a Loan?

Whatever the arrangement in many instances the arrangement may provoke a family dispute due lack of clarity and formalities that were not followed.

Furthermore there maybe unintended consequences that may arise in the context of Family Law or in the event of the death of either the Lender/ Donor – Parents or Borrower/Done – Child

What follows is an overview of the issues to be considered before you make a gift or loan or accept a gift or a loan from a family member.

  1. Loan v. Gift

The first and critical issue to determine is whether you wish to provide accept or accept a loan or gift. Is it intended to have the loan repaid under an enforceable contract to pursue your rights as a lender in the event of default or as a result of changing circumstances? Alternatively would you rather advance the money as a gift and forget about it. If your intention is the former then you should have a loan agreement correctly documented and executed.  If your intention is the latter then it will be a gift never to be repaid. Furthermore, this issue needs to be determined before the money has been advanced.

If the money was given over with no agreed understanding that it was a loan to be repaid then the. The recipient is entitled to retain the benefit without consequences. For it to be a loan there must be an agreement that the money has to be repaid. In any case, it is strongly recommended to record your agreement in writing before or at the time the money is handed over. A retrospective agreement can also be executed at a later stage when the money is already in hand, setting out terms and conditions of the advance. However, the recipient may not be motivated to signThis visa also has three categories

  1. Terms and conditions of the loan

You should expressly agree with the borrower in writing when the loan has to be repaid, where and how, whether there be charged on the outstanding amount of the debt and at what rate, penalty interest rate in the event of late payment, whether the loan  is secured by a charge over the borrower’s property. If there is no mutual agreement on these matters then the loan assuming the arrangement can be established as a loan may be taken to be repayable on demand, interest free and unsecured.

  1. Allegations of forgiveness or set-off

A legally binding loan can be extinguished if the parties subsequently agree to do so. The borrower may make payments or provided benefits to the lender, e.g. paying the lender’s phone bill, which may be accepted in set-off against the debt. Where there are benefits passing between the two parties or the loan may have been forgiven, it is essential to have written records to establish whether obligations for repayment of the debt have indeed been forgiven or set off by something done in exchange.

  1. Partial repayment of the debt

You should also keep written records to indicate that the money has been paid repaid by the borrower or accepted as partial payment of the debt. Otherwise, there is a ground for potential dispute as to whether the debt has been repaid and how much has been repaid.

  1. How the loan may be treated under your Will

When you prepare your Will, it is important to clearly set out your wishes and instructions to your executor as what shall happen with the outstanding loan upon your demise. You may choose to:

  • forgive the loan – the borrower (beneficiary) will not have to repay the estate and will keep it as a gift;
  • direct your executor to account for the outstanding loan as an asset of your estate and collect it from the borrower;
  • offset the outstanding loan against the borrower’s full estate entitlements under your Will;
  • if the outstanding loan amount exceeds the borrower’s full estate entitlements, collect the balance of the debt from the borrower or even sue them to recoup the balance if they refuse to repay the loan
  • put the outstanding loan, including all entitlements and rights to collect it, into a testamentary trust to be established under your Will and let your trustee to deal with it as an asset of that trust in the interests of its beneficiaries chosen by you.
  1. Time between the date of advance and the date of repayment

Any advanced loan which date of repayment was not specified is likely to be treated as a debt repayable on demand. Importantly, Limitation Acts in various states place time limitations or bars on a plaintiff to bringing  action against a defendant in contract, eg recovery of a loan repayable under a contract. In New South Wales, it is 6 years as per section 14(1)(a) of the Limitations Act 1969 (NSW).

Furthermore, in the long established case of Young v Queensland Trustees Limited 1956, the High Court found that where the repayment date is not specified or a loan is repayable on demand, the cause of action for the lender to seek recovery of the outstanding loan first accrues on the date the loan is first made, not when demand is made on the borrower. Therefore, a loan repayable on demand will essentially be unenforceable after 6 years from the date it was first made.

The aforementioned law however does not extinguish the debt and therefore it can still be counted as an asset of your estate and offset against the borrower’s estate entitlements under your Will.

To avoid any such issues, it is strongly recommended to specify the date of repayment or at least include a pre-condition to be met before demand to repay can be made, eg a reasonable prior notice to repay the loan to be given to the borrower before the lender can enforce the demand. Otherwise, every 6 years you will need to make the borrower sign a new agreement acknowledging the debt to be repaid which is not practical and may not be a feasible option.

  1. Executor’s discretion to forgive the debt

The Will can be drafted to give your executor the power to forgive a client however such a power should be carefully considered before being granted.

  1. Resolution of issues between the debtor and the executor in the context of a family

If there is a dispute about how much is actually owed and the parties cannot resolve their disagreement, the matter in a commercial context may need to be resolved by litigation. In the family context litigation may not come to pass. Never the less the result at lack of formalities in correctly documenting. The arrangement maybe an unhappy family of its own making. Avoid the temptation not to correctly document your intention are whether you are providing a gift or a loan.

Family Lawyers Sydney at Pavuk Legal we can assist you to structure an advance to your family member, prepare a Loan Agreement and corresponding Will, as well as provide assistance and advice on other issues of family and succession law.

Pavuk Legal can assist with the above and many other legal aspects.

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