What to do When Loaning Money to Your Child in a Relationship

Loaning money to your child can sometimes feel like you are effectively lending money to your child’s partner as well. Your child may be single at the time of receiving the money but later enter into a de facto or married relationship. Alternatively, they might be in a relationship when you transfer the money.

Either way, you will need to consider how you feel about repayment of the loan if your child separates from their partner. This article considers loans provided at different stages of your child’s relationship, including when a relationship ends.

Loaning Money to Your Single Child

If you transfer money to your single child, and they later enter into a legally recognised relationship, you will want to ensure that your intention behind the transfer is clear. If you want your child to repay you, you should have a formal loan agreement in place.

When your child enters into a relationship, you should get them to confirm that they must repay the loan. If you have no formal written agreement in place when your child enters into a relationship, formalise your agreement at this stage. Getting a lawyer to draft a loan agreement that addresses when funds were loaned may help you down the track. However, you will have a stronger case for repayment if you draft and sign the agreement before transferring the money.

If you have no written evidence that the money was a loan, the court may deem it a gift. In this situation, your child will not need to legally repay you.

If your child separates from their partner, the court would most likely consider the money a financial contribution your child made to the relationship. The court will consider this in the division of assets. Unlike a loan, payable out of the pool of assets, a financial contribution is not necessarily repayable.

Therefore, if you want the amount to be considered a loan, have a lawyer draft a comprehensive loan agreement. An agreement tailored to your arrangement will mean it is more easily recognisable as loan. It also means that, if your child separates with their partner, the loan will more likely be a liability the couple has to repay.

Loaning Money to Your Child in a Relationship

You may be loaning money to your child when they are already in a relationship. You should make the loan agreement out to your child and their partner. Have all parties sign the agreement, with a witness. This will help to show the loan is a liability that continues to require repayment by both parties, even if they separate.

Many parents feel that their child does not need to repay them unless they separate from their partner. In this scenario, you may want to have a loan agreement drafted with the stipulation that it is payable on demand. If your child separates from their partner, you can demand repayment. There are a few things to note about this arrangement:

1. The court may not consider the money a loan if significant time has passed. They may also not consider it a loan if you have said you do not care about repayment. It may look like a loan by name, but not in practice.
2. If too much time has passed, you may no longer have grounds to demand payment due to the statute of limitations. If you get all parties to reaffirm the loan with a legal document, you may be able to get around this time restriction.
3. Repayment on demand will mean repayment by both parties (the separating partner and your child). Of course, following repayment, you may choose to advance a new loan or a gift to your child.

Loaning Money to Your Child After a Separation

Once your child and their partner have separated, your child may need monetary assistance. You need to be wary of providing money to your child between their separation and any property settlement. Until the legal process of property settlement ends, any payment to your child may still form part of the couple’s joint asset pool.

If the money is a formal loan, made out to your child specifically, this may show it is a liability and not an asset. However, there can be no assurance this will be effective.

The court will consider all relevant circumstances when making a decision about assets and liabilities and how to split these between your child and their ex-partner.

Gifting Money To Your Child

If the money is a gift, it is best to set this out in a legal document. The document should state that your intention is to gift this money. The document should also specify exactly who you are gifting the money to. If your child is in a relationship at the time you give the gift, or later enters into a relationship, the court will likely consider the money a financial contribution your child has made to the relationship.

If your child and their partner separate, a document which states that the money is a gift to your child and not to the couple will assist your child. During the division of assets, this document will show that this is one of the financial contributions to the relationship. This will impact the negotiation of assets and any court proceedings.

Key Takeaways

When you are loaning money to your child, your child’s partner becomes involved in the transaction. If you provide a loan, have a lawyer draft a formalised loan agreement. This agreement should include your child’s partner. If your child enters into a relationship after you have transferred the money, you should amend the loan agreement to include their partner. Be careful about providing money after the couple separates but before property settlement has occurred.

Finally, even if you do not want your child to repay you, get a lawyer to draft a document stating the money is a gift to your child. That way, if your child separates, it can be considered a financial contribution made by your child.

If you have any questions about loaning or giving money to your child, call LegalVision’s banking and finance lawyers on 1300 544 755 or fill out the form on this page.