How parents can prevent financial support from falling into the wrong hands

It is no secret that the importance of financial support from parents has increased over the last few years.

Whether it is purchasing a home, starting a family, or launching a business, it is increasingly common for individuals and couples to receive financial support from parents and grandparents to help them achieve their life goals.

Parents and grandparents who give financial support often want to know whether it could be subject to property settlement negotiations if their adult child separates.

It all comes down to how financial support is given.

Broadly, there are three ways funds can be given – as a gift, loan, or as part of a Binding Financial Agreement (BFA).

Gifts – Included in the asset pool and treated as contributions

The simplest and most common way for parents to provide financial support to is without any formal conditions. In these cases, the law typically regards the transfer as a gift.

In family law, gifts are likely to be included in the pool of assets available for division upon separation. The party who “brought in” the gift is treated as having made a greater contribution to the relationship because of it.

Simply put – the asset pool is larger, and the party who received the gift will probably receive a larger part of it.

The size and the timing of the gift are important when determining the scale of the contribution.

The Court may give less weight to gifts which are received early in a long relationship, if their importance has been “eroded” by the subsequent contributions of the other party.

For example, a gift given shortly before parties separate might have the effect of increasing a party’s contributions (as a percentage) by a level that is nearly equal to the value of the gift. A gift given at the start of a long relationship where the parties had children might be given much less weight.

This can mean, the Court might decide that an adult child who received a gift at the start of a long relationship with children should receive a much smaller increase in their share of the assets than an adult child who only received that same gift recently. This outcome can be difficult for parents who intended their financial support to stay within their family.

Loans: Potential protection – if well documented

Some parents choose to structure their support as a loan.

If funds are treated as a loan, they will not be included in the pool of assets for division, and the party who received them will not receive any increase in the assessment of their contributions.

While this can provide greater legal protection, the Courts usually scrutinise loan arrangements with parents closely to determine whether they are genuine, enforceable loans or simply a gifts in disguise.

The factors which the Court will consider include:

• Whether there is a formal, written loan agreement;
• The repayment terms, including due dates and whether interest accrues;
• Whether repayment terms have been complied with; and/or
• Whether the funds were treated as a loan by the recipient (including whether the loan was secured against property or disclosed to banks or lenders).

Generally, loans which are more similar to commercial loans are more likely to be accepted as being genuinely repayable.

Informal, verbal or non-commercial “loans” (such as zero interest loans with no defined repayment term) often fail this test and are treated as gifts.

Binding Financial Agreements – contractual certainty

For parents who want certainty that their financial support will be protected from the breakdown of a relationship, a Binding Financial Agreement (BFA) can be a powerful legal tool.

These agreements, made under the Family Law Act 1975 (or Family Court Act 1997 for de facto couples in WA) allow couples to determine how their property and finances will be handled if they separate.

They can be useful when large amount of financial support is involved, or where there are concerns about the long-term stability of the adult child’s relationship.

Usually, a BFA to protect financial support can:

• provide that financial support is to be repaid to the parent if the couple separates or is to be entirely retained by the adult child who received the gift;
• be entered into before the financial support is given; and
• provide that if the couple separates, the remainder of their property settlement will be dealt with under the relevant legislation – the same as it would be if there was no BFA.

BFAs must comply with strict legal requirements to be enforceable. Both parties must receive independent legal advice about the BFA before they enter into it.

While they can be challenged in limited circumstances (e.g. for fraud or duress), they are generally upheld where proper procedure has been followed.

Proposing that your child and their partner enter into a BFA can be a delicate task, and it is important to ensure that an offer of financial support does not become a cause of family division.

Key takeaways for parents

When parents provide financial assistance to their adult children, it is essential to consider the legal implications—especially if the child is in a relationship.

In the absence of proper planning and legal structure, well-meaning generosity can result in unintended financial loss.

At O’Sullivan Davies, we regularly assist our clients with structuring financial arrangements to ensure that their intentions are respected by the Court.

Whether drafting a formal loan agreement, preparing a Binding Financial Agreement, or advising on asset protection strategies, we are here to help.

If you are considering giving money to a child or have concerns about how past contributions may be treated in a family law context, we recommend that you contact us for tailored legal advice.

Disclaimer

This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

If you would like to republish this article, please contact us prior to doing so at info@osullivandavies.com.au.

At O’Sullivan Davies, our experienced family lawyers can guide you through the property settlement process and ensure your rights are protected.

Contact us today to arrange an initial consultation.