During the course of a relationship, it is common for a couple to receive money from one or both parents. Such funds are often then collectively used to purchase the family home.

When a relationship ends, parties look to divide the net relationship property pool (assets less debts). It becomes important to distinguish whether parental advances (at the time) were in fact a gift or a loan and many disputes are beginning to arise in this area.

The distinction between a loan and a gift can drastically alter the share each party receives from the relationship property pool.

If the transfer of funds from a parent is gratuitous, the money is not normally considered relationship property.

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As a general rule, gifts are one of the few exemptions to the presumption of equal division. If money has therefore been advanced to one of the parties it can be ring fenced and singled out of relationship property division.

However, this becomes difficult if the gifted funds are intermingled with relationship property.

If the gifted funds are applied to the joint family home, it may be difficult to carve the gift back out and, absent any paperwork to the contrary, it will be difficult to carve this gift back out as separate property.

If a gift is being applied to relationship property but it intended to stay separate it is essential that a contracting out agreement is entered into to protect the gift as separate property.

On the other hand, if the advance is recorded as a debt owing to the parents, this debt is taken into account in the relationship property pool even if the debt is only owed by one of the parties.

If one party in the relationship owes a debt to his or her parents and the sum of this debt is greater than the value of the relationship property assets, the son or daughter in law may find themselves in deficit and owing money to their now ex-parents-in-law.

Again, in order to isolate this debt as separate property and protect the non-familial party a contracting out agreement is vital.

It can make a critical difference to the relationship property pool when determining whether a sum is gifted or loaned to children. Accurately recording the intention of the advancement at the beginning is crucial.

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Trying to argue the point one way or the other years down the track will be a costly and time consuming exercise for all parties involved.

Petra Allen Photo / File
Petra Allen Photo / File

Petra Allen, Solicitor at Treadwell Gordon, Whanganui