A Loan or a Gift - Documentation is Pivotal

Amid consistently rising house prices, more parents are helping their children with the initial investment to penetrate the housing market. It is often referred to as the “bank of Mum and Dad”. But what is often overlooked is the legal implications of advancing money without properly documenting whether it is a loan or a gift.

Presumptions of “Resulting Trust” and “Advancement”

Equity law carries ancient presumptions, notably the "resulting trust." This principle dictates that if an individual provides purchase funds for property registered under another's name, they likely intend to hold a beneficial interest in that property. In other words, the lender has an interest in the property based on a percentage of the contribution to the purchase.

However, there is an exception known as the "presumption of advancement." This presumption suggests that in certain relationships, such as between spouses or parents and children, transfers of funds are assumed to be gifts rather than transactions indicating beneficial interest.

The Legal Implications

Often in family law and deceased estate disputes, the question of whether the funds lent by the parents were a loan or gift becomes a controversial topic.

One party will allege it was a gift and therefore repayment is not required, whereas the other party will allege that the funds were advanced as a loan with an expectation of repayment. These can lead to costly disputes where the intention of the parties is not clear and supported by contemporaneous evidence.

The Importance of Documentation

The most effective way to rebut the presumption of advancement (the assumption that it was a gift) is to document the terms of the loan in a contemporaneous written agreement between the parties. The Court will often turn to the intention of the parties at the time of funds being advanced.

Below are some important things to consider:

1. Document the loan before the funds are advanced;

2. Provisions for repayment and interest (if applicable) should be included;

3. If a property is to be secured by a mortgage or a charge, document it; and

4. Both parties should obtain legal advice on the loan.
   

It is also important to consider the application of limitation periods concerning the loan agreement (i.e the time limit to enforce the loan agreement the other party). This can be affected by a variety of factors, such as the type of document (agreement or deed), the terms of repayment (payable on demand or specified term), and part payments of the debt as an affirmation of the loan agreement and/or debt.

How can we help?

If you are considering a loan to your children or borrowing funds from your parents, it would be prudent to seek legal advice on the best way to document and protect your legal interests.

We are experienced in drafting simple and complex loan agreements to document the intention of the parties when advancing or borrowing funds. If you require our assistance, please contact us by telephone on (02) 9525 4900 or by email: info@mtklawyers.com.au