The Bank of Mum and Dad: how are monies provided by parents dealt with in family law

By Christopher Ragozzino & Liam McCarthy, Senior Associates

In today’s property market, many Australians are dependent on their parents to assist them with buying a house.

Careful consideration is required when a parent provides their child with money or buys them a property.  While parents understandably want to support their children, if the child separates from their spouse or partner in the future and the parent wants the money repaid or their interest in the property recognised, they may not have legal grounds for that claim.

Legal Presumptions

Where a person purchases property in the name of someone else, the law presumes that the owner holds the property on a ‘resulting trust’ for the person who paid the cost of acquiring it.  This presumption of a resulting trust can be rebutted, or displaced, by evidence to the contrary, such as evidence in writing.

The presumption is different when parents give money to or buy property for their children.  A resulting trust does not arise, and instead the ‘presumption of advancement’ applies.  The presumption of advancement presumes that parents intend the money or property to be a gift; and it is up to the parents to prove otherwise.

While this ‘presumption of advancement’ has been abolished in other countries including the United Kingdom, Canada and New Zealand, it remains part of Australian law.  The High Court of Australia in Bosanac confirmed that the presumption of advancement remains good law in Australia, though it is not a strong presumption and can be rebutted by evidence of the parent’s intentions at the time of giving the money to or purchasing the property for their children.

Loan Agreement

A common way to avoid the presumption of advancement is to enter into a loan agreement between the parents their child.

It is critical that any loan agreement is signed before or at the time the money is advanced or the property is purchased, or, if this is not possible for practical reasons, as soon as possible afterwards.  The High Court of Australia in Charles Marshall Pty Ltd v Grimsley stated that:

…the only evidence that is relevant and admissible comprises the acts and declarations of the parties before or at the time of the purchase … or so immediately thereafter as to constitute a part of the transaction.

The Court will carefully consider the intention of the parties, at the time of the purchase or advance of monies, when determining whether the presumption of advancement is rebutted.

Claiming years later that the funds were loaned or that a property is held on a resulting trust, particularly after a relationship has broken down, is given little weight by the Court, as was the case in Wilkins.

Even when a signed loan agreement is in place, that is not the end of the enquiry.  In the marriage of Biltoft [1995] FamCA 45 the Court found that even if where a loan agreement is in place between a parent and child, if it is unlikely that the parent will ever genuinely expect the loan to be repaid, then it should not be taken into account.

Thus, having a loan agreement is in place is not enough.  The loan agreement needs to be on commercial terms, with interest being charged, and regular repayments made over the course of the loan.  Ideally, there should also be some form of security for repayment of the loan.

Loan agreements are also subject to limitation periods.  In Victoria, the Limitations of Actions Act prevents enforcement action being taken in relation to a contract after the expiration of six years.  Thus, if a loan agreement requires repayment upon demand, and no demand is issued for repayment within six years, the loan may no longer be recoverable.

A moral obligation?

The Full Court in Halstron & Halstron [2022] FedCFamC1A 65 confirmed that a moral obligation to repay a loan is not enough to establish a valid loan.  In that case the Full Court held that the trial judge was in error by recognising the husband’s claimed liability to repay his brother $330,000, because that liability was outside the limitation period and therefore unenforceable, and amounted to a mere ‘moral obligation’ to repay.

Financial Agreements (or BFA’s) under the Family Law Act?

A financial agreement or ’BFA’ can be used to quarantine monies advanced or property purchased by parents from Family Law claims.

A financial agreement requires each party to obtain independent legal advice as to the impact of the agreement on their rights, and the advantages and disadvantages of entering into the agreement.

Importantly, a financial agreement can be entered into at any time, whether prior to or during a marriage or de-facto relationship.  It does not need to be signed at or around the time that funds are advanced or property is purchased; though there may be advantages to signing it contemporaneously.

Points to consider

If you are considering giving money to your children, or considering borrowing money from your parents, it is impossible to rewrite history if there is a future marriage or relationship breakdown.  Seeking family law advice is imperative to ensure that your intentions are protected to the greatest extent possible.

Contact Kennedy Partners for advice before giving money to or buying property for your children, or before accepting your parents’ generosity.