Is it a gift or a loan?

There is some confusion around money given to people by family members as gifts or loans…

Some people believe that these funds cannot be touched in the family law property settlement context. However, depending on how the money is classified, it can form part of the parties’ combined asset pool or as a liability of the relationship.

In the case of Tyler & Tyler the husband received $1,130,000.00 from his parents. This money was the result of his parents selling their business. The husband said he was given this money by his parents and told “to invest in the share market” as they wanted him to “learn how to invest in the share market”.

The husband states that his parents always categorized this money as a loan even though they never discussed or agreed what terms they would expect it to be repaid to them in. The husband asserted that his parents had always been explicit as they expected the initial capital to be preserved.

The trial judge did not think that it was believable that a sum of more than $1 million could be given to a person with no significant experience of share market investment with the expectation that the capital sum would be preserved. The trial judge said that the arrangement was inconsistent with the nature of an unsecured loan as the share market is risky and there cannot be a reasonable expectation that the fund would not be subject to loss. Therefore, the monies were characterized as a gift from the parents to the husband.

It is important to decipher between funds given from family members as either a gift or a loan. The main characteristic of a gift is that there is no expectation that the money be repaid. If the money is considered a gift it will be considered to be a contribution on the part of the spouse on who’s behalf it was made. In relation to loans, the Family Court will consider:

• Whether the funds that have been given are documented as a loan;
• Whether this documentation provides for repayment within a specified period;
• The likelihood of the debt being enforced;
• Whether the loan is secured; and
• Whether the loan has previously been treated as an obligation to be fulfilled.

If classified as a loan, it will be a liability of the relationship and will decrease the asset pool of the parties at the time of distribution for property settlement. The court can also make orders for the loan/debt to be repaid out of the marital assets.

What is clear is that proper legal advice needs to be provided before the money is provided and if it is a loan, formal documentation is needed.