In today’s landscape, it is becoming more and more common for loans to be given between family members. It may be that parents want to assist their children in buying their first home (when banks are increasingly strict on their lending behaviour, especially in the light of the recent Royal Commission recommendations), children are purchasing property on behalf of their parents who reside overseas, or even family members injecting funds into an estate to settle claims or assist other family members in purchasing estate assets.

In any situation where funds are borrowed between family members, it is imperative for the loan to be properly documented and adequately secured. Whilst at the outset, everyone may be happy and perfectly understand their obligations regarding the loan, it is too often the case that relationships between family members deteriorate and the loan becomes increasingly hard to recover. This can have devastating effects not only on the family as a unit, but, by way of example, can also result in parents being unable to retire comfortably as planned.

‘Family loans’ have a natural resonance with Family Law and the Family Court, as it often falls to Family Court, when relationships between spouses (or de facto) break down, to determine how these debts should be dealt with, or even if the debt is in fact legitimate. It goes without saying that when one person gives another a ‘loan’ and not a ‘gift’, the intention is that the loan will be repaid, either by instalments over time or on a certain triggering event, such as the sale of a property. Without some document fully recording the intention of the parties, it is easy to assert that the funds advanced were a gift and it was never intended that it would be repaid, especially when no repayments have been made.

I often receive referrals from Family Lawyers wanting to ensure that debts of their clients are legitimised in the eyes of the Family Court. I am forever grateful for the years I spent learning the extensive powers of the Family Court, and learning to navigate the various issues and complexities that challenging family situations present. Every day in my practice I see how Family Law intersects with so many other areas of law, which is especially true when it comes to family loans. Determining the value of the asset pool for division is one of the first steps in coming to a resolution in property proceedings, and obviously being able to show you have a legitimate debt which must be repaid is imperative to this exercise.

Of course, it is not only important to document family loans for the purposes of the Family Court. It is also a very useful tool in Estate Planning to ensure that there is equality between your beneficiaries when you pass away. For instance, many people do not realise that loans you give to your children or other beneficiaries during your lifetime can be forgiven via your Will. A Loan Agreement (and a mortgage or some other form of security) can be used to protect your interests during your lifetime, and if not repaid during your lifetime, this loan can form part of your beneficiary’s share of your estate on your passing.

Loans between family members should be treated as any other commercial loan – they are not to be taken lightly. It is not pessimistic to hope for the best but plan for the worst, it is sensible. If you have, or are planning to make a significant loan to a family member, take advice on how best to protect yourself and fully document the terms of the loan, so that there are no surprises about what is expected and everyone involved is fully aware of their obligations.