Family Agreements: Is it a gift or a loan or something else?

Family Agreements: Is it a gift or a loan or something else?

Family agreements or social contracts are often entered into informally and based on trust to gain some type of benefit. For example, a parent may purchase a property for their child in exchange for care and somewhere to live during retirement.

Before entering into these types of agreements you should ask yourself:-

• do I intend this to be an absolute gift to be enjoyed by my children; or
• do I expect the funds advanced to be repaid?

Often each party to the arrangement has a different view on what their respective rights and obligations are as they not acted like they are dealing with an independent third party (where normal commercial considerations and processes would be undertaken).

The Presumption of Advancement

Generally, when someone (donor) purchases property in the name of another (donee), that person (the donee) is assumed to hold the property on trust for the donor. This is what  is known as a resulting trust.  However, in certain circumstances the law presumes that the donor intended to gift the property outright (and that it is not to be held on trust). This presumption can of course be rebutted (by taking part in an expensive and drawn out court fight).

Certain relationships will attract the presumption, such as a husband and wife or a parent and child (whether the intention is clear or not).

The Intention to Create Legal Relations

On the other hand, if one person enters into a transaction with another and does not intend the gift to be absolute, this person will have the intention to create legal relations with the other. Usually, the presence of consideration will reinforce this intention. For example, a parent who owns a property in their sole name decides to transfer their half share to their child for $50,000.00. The parent expects the money to be paid before the property is transferred.

There are five basic elements that need to be satisfied to for a contract to be properly formed:

1. offer and acceptance;
2. consideration;
3. capacity;
4. intention to create legal relations; and
5. Certainty.

The parties must intend for the agreement or contract to create a legal relationship between them. If the intention is not stated explicitly, the courts will consider the following factors:

• the consideration noted in the agreement or contract
• the capacity of the parties to the contract
• the relationship of the parties
• any conduct of the parties after the contract was formed
• the context of the formation of the contract

These types of agreements or contracts tend to be commercial in nature, ‘at arm’s length’ and the parties will intend for the agreement to have legal consequences.

What happens when it all goes wrong? Rebutting the presumption

The courts have started to move away from the presumption of advancement and the onus of proving a transaction has since shifted to the person seeking to enforce the agreement. Even if an husband/wife or parent/child relationship exists, the presumption may be rebutted by evidence of the donor’s actual intention which is inconsistent with the application of the presumption (i.e. evidence that, at the time of the purchase, the donor did not intend for the property to be a gift). The evidence must relate to the donor’s intention at the time of the purchase or the gift.

A change of heart may not be enough to rebut the presumption, however in the case of Peterson v Hottes [2012] QSC 50 where a mother provided $70,911.00 to her daughter to purchase a property, the advancement of funds was considered to be conditional upon the daughter providing a continuing right to reside in the property to her mother. Six years after moving into the property, the relationship between the mother and daughter broke down. The court ultimately decided that the presumption of advancement did not apply in this situation and that it was unconscionable of daughter to assert a beneficial ownership in the property against her mother without acknowledging that the payment was a conditional gift in respect of which the condition had failed.

How to ensure your intention is clear and avoid unnecessary litigation

Obtaining proper legal advice before entering into family agreements can save a whole lot of heartache in the long run. If you intend to gift property or money to a family member for their full use and enjoyment you should record this in a Deed of Gift. If you intend to create legal intentions with a family member and intend to be repaid you should record the transaction in a Contract or a Deed of Loan, in cases of purchasing property, a donor should also consider taking a mortgage over the property to secure their interests and protect their rights.