Protecting intergenerational loans and family wealth in family law
With the dramatic rise in interest rates and continued growth in house prices, weighed against the slow rate of wage growth, it is now frequently reported in the news cycle that the ability of young people to buy their first home has become more difficult.
The Productivity Commission reported that 25–34 year olds experienced a real decline in wages over past decades. It is also notable that less than 5% of total inheritance income is received by people aged under 40, while more than 80% is received by people aged 50 and over.
It is therefore not surprising that young households have grown reliant on the ‘bank of mum and dad’ to bridge the ever-widening gap between house prices and stagnant salaries. A recent study conducted by the Australian Housing and Urban Research Institute reported that:
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‘Accessing intergenerational wealth transfers, whether direct or in-kind, is becoming a condition of home ownership in Australia. The ability to access such family support was found to be the single biggest factor in supporting entry into home ownership.’
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The issue often crystalises in family law disputes where one party asserts that a contribution from his or her family to assist a couple in buying their first home is in fact an enforceable loan, and the other denies the loan.
If the intent of the lending family is to ensure that the contribution is treated as an enforceable loan, and they wish to protect the advancement from a potential future claim in family law, it is important that both the lending parent, and the party in receipt of the loan, receive the advice of an experienced family lawyer.
Proving an enforceable loan at the dispute stage of a family law separation can be difficult where there is no written loan agreement, and the evidence of the parties and the lending parent might be inconsistent and, at times, untruthful. The case law demonstrates that even if an inter-family loan meets the technical requirements of a loan on paper, whether it will be characterised as a loan in a family law dispute is contingent upon the broader evidence. Some of the factors that have been considered by the Court as giving rise to an enforceable inter-family loan have included:
- an express intention held by both the lender and borrower to create legal relations and that the loan is repayable;
- where there is a written loan agreement, which includes express terms for the amount loaned, the duration of the loan, a time set for capital repayment, the required repayments and interest payable;
- the timing of the construction of the loan (namely, whether there is a temporal connection between when the loan agreement is made and the advance of funds);
- where interest has been applied and accrued; and
- where there have been repayments made by the recipient party in accordance with the loan terms, and where there have been repayments made by the recipient party in accordance with the loan terms.
Should the evidence weigh in favour of a family contribution amounting to a gift rather than a loan, then the party in receipt of the gift will need to seek that they be given credit for the gift when the financial contributions of each of the parties to the separation are assessed and adjusted for.
To avoid the complexities associated with the characterisation of an inter-family loan at the time when parties are separating, the prudent approach is to deal with the issue preemptively. This is best achieved by the recipient party and their partner entering into a carefully crafted financial agreement pursuant to one of the following sections of the Family Law Act 1975 (Cth) – section 90B (pre-marriage), section 90C (during a marriage), section 90UB (pre de facto relationship) or section 90UC (during de facto relationship). Through the preparation of an expertly drafted financial agreement then, should the parties separate, the inter-family loan can be better protected, as well as the family’s wealth more broadly.
If you require advice on inter-family loans or the preparation of a financial agreement, we invite you to speak with one of our highly experienced family lawyers.
Reference sources from the following publications:
- Productivity Commission (2020) ‘Why did young people’s incomes decline?’, Commission Research Paper, Productivity Commission, Canberra, link here
- Wood, D and Griffiths, K (2019) ‘Generation gap: ensuring a fair go for younger Australians’, Grattan Institute, Melbourne.
- Australian Housing and Urban Research Institute Limited Melbourne (March 2023) ‘Pathways to home ownership in an age of uncertainty’, AHURI Final Report, 395, 1834-7223, link here
- See eg Simon & Ors [2013] FCCA 432; Vadisanis & Vadisanis [2015] FamCA 161; Doran & Keyes & Anor [2017] FCCA 72.
- See eg Pelly & Nolan [2011] FMCAfam 530; Alcorta & Badami [2020] FCCA 3427.
- See eg Maddock & Anor (No 2) [2011] FMCAfam 1340; C & B [2005] FamCA 94.
- See eg Belasco & Belasco & Anor [2020] FCCA 3078.
- See eg T & T (Pension Splitting) [2006] Fam CA 207 at [75]-[83]. Watts J accepted the evidence of the husband and his brother regarding a repayable loan in circumstances where the loan was documented in a loan account, there were interest payments and evidence was called from the creditor that the ‘at call’ debt was being called in.
