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Insight | For Individuals

The potential effects of gifts, loans & trust on financial settlements between separating couples

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A gift is something given willingly to someone without payment or an expectation that it should be returned. A gift is essentially a present.

A loan, on the other hand, is something that is borrowed, especially a sum of money that is expected to be paid back on occasions. The original sum loaned usually also attracts an agreed level of interest.

What is the risk when handing money over to your adult children?

To gift or to loan?

Gift

If you gift or are gifted money for a specific purpose, and it is made clear in some way that the funds were gifted, then it is a gift. One of the most common examples in family financial proceedings is when parents gift their children deposits to purchase their first home. Banks will often ask parties to confirm whether or not the people making the contribution are to have a financial interest in the property as this may affect the way a mortgage provider enters into an agreement with the purchaser.

Therefore, if you are making a large gift, it is important that you receive proper independent financial advice and consider preparing a Deed of Gift. It is also important to note that gifts may still have tax implications for you and the person receiving it.

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Loan

It is common practice following the breakdown of a relationship for one party to argue that the money he/she received from his/her parents was a loan rather than a gift. The ex-partner will, in turn, want to argue it was a gift and it is sometimes difficult to decipher between the two.

The parents saying that they loaned their child money is not necessarily enough to convince a court that the money was a loan. The court will have regard to all of the evidence surrounding the giving of money, including:-

  • Conversations between the child, the ex-partner and the parents
  • The subject of the transaction, was it titled a gift or a loan?
  • If it is said to be a loan, have any repayments been made?
  • Is there a formal loan agreement?
  • If the money being loaned is to purchase a property, is there a declaration of trust in place?
  • If there is no solid evidence to corroborate your assertions that the money was indeed a loan, then it is likely that the court will take the view that money received was a gift.

Whether money given by one’s parents, other family members or friends is treated as either a gift or a loan can significantly affect the outcome of a settlement following separation. It is most common for parents to give their children money. It is therefore important that if parents wish to loan money to their children who are married or in a cohabiting relationship, they draft a formal loan agreement which is signed by the parents and the child to whom the money is being loaned. It is also advisable that all parties take independent legal advice from the outset.

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Trusts

A trust is a legal means of giving something you own to somebody. It is a legal contract which gives responsibility to a group of people or a company to take care of a particular asset. A trust is often used amongst families who are wealthy where the main aim is to protect the family assets. Within the context of a divorce or civil partnership dissolution, if one of the spouses is a beneficiary under a trust where there are a number of other beneficiaries, the Court is less likely to make direct Orders against the Trust. However, the trust will still have to be disclosed in the financial proceedings arising from the divorce/civil partnership dissolution.

There are three main groups of people involved in family trusts, namely:-

  • Settlor: this is the person who originally owns the asset
  • Trustees: these are people who have been chosen by the settlor to manage the trust and ensure that all the terms and conditions, which are set out in a legal document known as deeds, are adhered to
  • Beneficiaries: these are the people who are going to benefit from the trust
  • In many cases there are conditions attached and these are listed in a document known as a deed. The deeds may state:

When the beneficiary can access the benefits from the funds;

  • What benefits can actually be received;
  • Who can receive the benefits;
  • How the assets may be used.
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The most effective way to protect trust assets in these circumstances is for parties to enter a prenuptial agreement before marriage. This determines how the parties’ assets are to be divided in the event of divorce or civil partnership dissolution. Although not strictly legally binding, a pre-nuptial is very likely to be upheld by an English court on a divorce provided that various steps are taken, such as both parties taking independent legal advice and the agreement being entered into more than 28 days before the marriage. If the parties are already married, a post-nuptial agreement can be entered into which has the same aim.

Anyone concerned about a family trust in the context of a divorce should seek specialist legal advice. Similarly, if you are a parent considering gifting or lending your child a substantial amount of money, it is a good idea to obtain legal advice to discuss what outcomes and options are available for you and your child.

If you are in a situation where your relationship has broken down and you require specialist family law advice, please do not hesitate to contact us.

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