Family loans, gifts, and breakups: protecting family contributions

Gift or loan?

Financial support from parents can provide an invaluable head start for their adult children. Parents often help their adult children with major milestones by advancing a significant sum of money, most commonly to assist with a first-home deposit. It is also common for the funds to support the child and their partner or spouse as they start life together. While these arrangements are usually made with the best intentions, problems can arise later if their child’s marriage or relationship breaks down and there is disagreement about the legal status of that contribution.

Whether an advancement made by the parents is characterised as a gift or a loan can materially affect the outcome of a relationship property settlement. If the contribution was a gift, there is generally no expectation of repayment. The money may become part of the couple’s relationship property and be divided accordingly if they separate. If the contribution was a loan, the amount may be treated as a debt owed to the parents. Depending on the circumstances, that debt may be repaid from the relationship property pool before the remaining assets are divided between the parties.

Evidence is key

In New Zealand, when money is transferred from a parent to a child, the usual starting point is the presumption of advancement. In other words, the law may presume the payment was intended as a gift. That presumption can be rebutted, but generally only with evidence showing there was no intention to gift the money at the time it was advanced.

Courts usually want proof from around the time the money was given. Documents created retrospectively may carry little weight.

Helpful evidence can include written communications exchanged between the parents and their child, whether through text messages or emails at the time of the advance, bank records or payment references, notes recording discussions about repayment, evidence of repayments having been made, or the conduct of the parties after the funds were advanced. A formal loan agreement is not always required for a court to accept that a loan exists. The courts recognise that families often rely on informal arrangements.

Cultural context

Cultural context may also be relevant. For example, some families prefer verbal understandings and may view written documentation between relatives as a sign of mistrust. That said, cultural practices are not assumed to apply generally to everyone of a certain culture, and each case turns on its own facts.

Ultimately, disputes of this kind are fact-specific. The court will assess the credibility of the evidence and the reliability of any documents relied on.

Take legal advice on the best approach

Parents considering a substantial contribution should seek independent legal advice early, so the arrangement accurately reflects their wishes and is properly protected. Parents are sometimes asked to sign “gift certificates” or similar documents to satisfy bank lending requirements for a home purchase. Care should be taken before signing these documents. If the parents’ true intention is that the funds are to be repaid, describing the contribution as a gift may later undermine any argument that the money was a loan. Independent legal advice should be obtained before signing any documentation that could affect the legal characterisation of the contribution.

For parties expecting a significant financial contribution from their parents towards the purchase of a home with a partner or spouse, it is essential to address how that contribution will be treated if the relationship ends or the property is sold. Entering into a contracting out agreement at the outset can provide certainty, protect family contributions, and help avoid costly disputes in the future.

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