With the financial pressures of the COVID-19 pandemic and a booming housing market, the number of parents providing money to their children for financial assistance is at an all time high. The big question in these situations is – is the money a gift, or is it a loan that must be repaid?
How to determine if money was given by way of loan or as a gift
While many people may assume that it would be easy to determine whether money provided by a parent to a child is either a gift or a loan, the answer can be surprisingly complex, particularly when there’s only a payment of money made and no other evidence apart from a “he said, she said” situation.
What many people don’t know is that there is a legal presumption that says that money provided to children by a parent is classed as a gift, unless there is clear evidence that demonstrates that the money was given by way of a loan. This is called the ‘presumption of advancement’.
Therefore, our advice to parents wishing to help out their children financially, but with the express intention that any money given will be repaid, is to clearly document that is the case. It is best that any such intention is documented formally in a loan agreement prepared by a lawyer. This document will deal not only with the fact that the money was given by way of loan, but other important details such as when the loan is to be repaid and if there is any interest payable. If nothing else, we recommend that people ensure that any discussions about the loaning of money is kept in writing as evidence for later. Oral discussion can be difficult to prove in Court.
Our advice for children receiving money by way of a gift is the same – ensure that you have clear evidence that the money was gifted to you at the time, to avoid any arguments that you must repay the money later.
What issues could arise from not documenting our intentions?
Aside from the obvious issue of either being met with demands for repayment when you thought money was given to you as a gift, or from being met with resistance when you ask for your money to be repaid, there are many other issues that can arise if a payment of money is not clearly identifiable as a gift or loan.
One of the main times the issue arises is when a parent dies and the family members and estate administrators are not sure whether the monies need to be repaid or not. This can hold up estate administration and significantly dwindle estate funds if the matter becomes contested.
Another time the issue arises is when the child who was provided the money separates from their partner. Whether the money was provided to the couple as a joint loan that must be repaid or not can become a major issue in a family law property settlement.