Advances from Parents for a Property Purchase - A Gift or a Loan?
May 28, 2017
It is not uncommon for parents to advance money to their children to assist with a house purchase, without any clear plan as to how this will be dealt with in the future. Unfortunately this is often without consideration for the potential consequences that could result under relationship property laws if their child goes on to live with their spouse/partner in the home, and then separates or divorces. A recent case provides a good example of the issues that can arise.
In this case, a husband and wife purchased a house shortly after marrying and becoming pregnant. They funded the purchase using around $50,000 from their savings, a $40,000 bank loan and a little over $330,000 from the wife’s parents. The couple separated four years later.
The husband claimed that the funds from the wife’s parents were a gift, which meant that nothing had to be repaid to them and he would be entitled to a half-share under relationship property laws. The wife claimed that the funds were a loan, which needed to be repaid in full.
The Court heard evidence from the husband, the wife, the wife’s parents and an expert on Chinese culture (the wife and her parents were Chinese, and her parents still lived in China). The Judge found that the funds were a loan, for a variety of reasons including:
- When the wife’s parents learned their daughter had married and become pregnant, they realised that New Zealand was to be her permanent home. They decided to eventually emigrate to New Zealand, with the expectation being that they would live with the couple who would care for them.
- The funds the parents transferred to New Zealand made up a large proportion of their retirement savings. Their circumstances made it unlikely that they would give away such a large percentage of this.
- The parents saw it as their obligation to assist the couple into their first home, and the wife wished for them to eventually live with her and her husband. The wife pushed to buy a larger home which could comfortably house them all.
- Although the husband claimed that he was told the money was a gift, the Court accepted that the parents had made it clear it was a loan.
The Court ordered that the home was to be sold, and the parents repaid (without interest) from the proceeds of sale.
While the wife and her parents achieved their objective in the end, considerable legal costs and stress could have been avoided by signing proper loan documentation at the outset. The outcome could also have turned out differently, leaving the wife’s parents considerably out of pocket.
This case is a good reminder of the importance of proper documentation, and the need to get specific legal advice to ensure that the financial arrangements you make will meet your objectives.
For further information see our earlier article, Thinking of Advancing Money to Your Children to Assist with a House Purchase, or contact our Wellington based family lawyers:
- Debbie Dunbar, email email@example.com, phone (04) 495 9940
- Maretta Twentyman, email firstname.lastname@example.org, phone (04) 495 8918