One common scenario we come across increasingly is when parents provide financial assistance to their adult children in the form of loans. While these loans can be a valuable resource for achieving personal or professional goals, for example, to put down as a deposit on a family home, they can also present legal and emotional challenges.
It all makes perfect sense. The parents want to help and it can provide financial security to the couple. However, what happens if the couple separate divorce or separate?
Abigail Reynolds, specialist family solicitor, explains more about the issues surrounding family loans in this video.
In our experience the parents want to call in the “loan”. But was it ever a loan? The party usually replies to say it was always a ‘gift’ and should not be repaid.
The common dominator in 80-90% of cases I see is that all parties (the parents and adult children) go into these financial arrangements blind.
The purpose of this blog is to flag some issues that come up in divorce and financial cases; and what steps could be taken in advance to avoid disputes in the future or at least to provide certainty as far as possible. This in turn would help avoid family litigation and the legal costs that go with it.
Understanding family loans on divorce
Loans from parents to children can take various forms, from helping with education expenses to supporting the purchase of a home or starting a business. Unlike loans from banks, family loans often come with flexible terms, no real basis for repayment and may even be interest-free. However, the informality of these arrangements can sometimes lead to misunderstandings or them being labelled a ‘soft’ loan and then disputes down the line.
Legal Implications
From a divorce and family law legal perspective, if a payment from parents is truly a loan then it’s essential to treat such loans from parents with the same level of seriousness as loans from any other source. Even if the agreement is made within the family circle, documenting the loan terms can help prevent future conflicts. This documentation should include details such as the loan amount, repayment schedule, and any interest rates or security involved; and ideally with separate legal advice from a solicitor.
To do otherwise could allow you to fall into the evidential trap in family law proceedings that it was not a loan but instead a gift; and if it is deemed a gift then it will not be repaid. That is the risk.
Family Law Considerations
In the event of a family dispute or divorce, loans from parents can become a contentious issue. Family law typically considers loans made during a marriage as relevant as to how the net assets (after considering any loans) are to be divided between the parties. Therefore, it’s crucial for couples to address any outstanding loans from parents as part of their financial discussions and, if necessary, include provisions for repayment in a prenuptial or postnuptial agreement.
Conversely if the payment from the parents was a gift and not a loan, then that gift would form part of the ‘matrimonial pot’ and form part of the assets to be divided between the parties, at least as a starting as a starting point. There are a number of factors a family court needs to take into account, financial contributions being one of them.
Preserving Family Relationships
While financial transactions within the family can be sensitive, open communication is key to preserving relationships. Parents should be transparent about their expectations regarding loan repayment, making it clear whether they view the loan as a gift or expect full repayment. Similarly, adult children should be honest about their ability to repay the loan and any challenges they may face along the way. Equally if it is really intended to be a gift then be clear.
Mediation and resolution or court
If disagreements arise regarding the terms or repayment of a family loan, mediation can be a helpful tool for resolving conflicts amicably. A trained mediator can facilitate productive discussions and help both parties reach a mutually acceptable solution. In some cases, seeking legal advice from a specialist family law solicitor may also be necessary to ensure that everyone’s rights and interests are protected.
Court is the last resort but sometimes it can be the only way to resolve the contentious issue of whether a payment from parents to adult children represented a loan or a gift. In some cases the parents need to intervene in the divorce proceedings so that they can be heard and to attempt to claim any loaned money back.
Conclusion
Loans from parents can be a valuable lifeline for individuals navigating major life events or financial challenges. However, it’s essential to approach these arrangements with care and foresight, considering both the family law implications and the potential impact on family relationships. By documenting loan agreements, communicating openly, and seeking separate legal advice and also mediation when needed, families can promote certainty of what is intended and maintain respect.
For specialist advice on any family law related issue contact Maguire Family Law by email: james.maguire@family-law.co.uk or telephone:
