When parents see their married children trying to create a home and a family of their own, they are often tempted to offer assistance. When that assistance takes the form something financial, it is important for everyone involved to understand the circumstances of the transaction.
Financial assistance can take two forms; a gift or a loan. But before the monies can be identified as one or the other, certain factors must be taken into consideration for each. This is relevant because in the event that a married couple finds themselves dissolving their union, the type of transaction that the parties engaged in for the transfer of the funds can become a legal issue and a point of contention for disbursement of communal assets.
A court will consider the following factors to be evidence of a gift to the couple:
- The gift was given sans any written agreement for repayment
- The monies were not specified to one party or the other
- There is no evidence of a repayment plan
- The transaction lacks any form of accumulated interest
- There is no evidence of any security for the loan
- The parties did not engage in any discussions identifying the monies as a loan
If the parents are truly entering into a loan oriented agreement with the couple, or with their individual offspring, then it is best if the following terms are contained in a writing which all parties ascribe to by signature.
- The terms of the agreement should be in writing
- The writing must state the amount being loaned and any interest being accumulated of the life of the loan
- The life of the loan must be defined
- The terms of the loan should indicate the expected payment to the loan holder via weekly/monthly/quarterly or yearly payments
- The expected interest rate calculated
- The characterisation of the interest rate as fixed or adjustable
- The expected end date of the loan
- The party who is taking the loan; either the child of the loaner or the couple as a whole
- Any securities that will be taken to protect the outstanding loan amount
- The signatures of all parties involved
From the beginning, it is crucial that the monies be defined as either a gift or a loan. However unfortunately most families are unaware of the need for this type of distinction. Oftentimes, the money starts out as a gift because the persons involved consider themselves to be family. The innocence of the situation, and the belief that the couple will remain united, creates a trust that the monies will be safe and used for the betterment of the couple. However, in the event that the couple dissolves the marriage, the issue of where this particular asset lies, will become imperative.
At this juncture, the parties may attempt to redefine what was originally intended as a gift, into a loan. The court will not simply accept this re-categorisation of the funds. The couple will then be left to address the above stated factors.
If the monies are found to be a gift then the court will define the monies as an equal community property asset. This will inherently categorise the funds as belonging equally to both spouses. The family court will then define and equally distribute the original gift amount, and any increase in community property value derived therefrom, as an asset that should be divided between the parties equally. When this happens one family can feel as if they have given a great deal of financial assistance to their own child, and in trust with a spouse, only to have lost half of the original investment to a person they may now perceive as having harmed their child.
However, if there is evidence that the original amount offered to the couple was actually a loan then the distribution will take a different course. In the event that the court finds that the monies were truly a loan, and there is evidence that the expectation is that the parties to the loan agreed the money is to be paid back, then the monies will not be categorised as an asset but rather as a debt for which the signing party remains responsible. Hence the non-party spouse will not be able to take the current amount as a portion of their community property distribution.