Resulting Trusts: When and how they may not result in your favour
It was noted by Acting Justice Sackville in Chaudhary v Chaudhary that the rising unaffordability of housing for young adults means that financial assistance is increasingly being sought by young adults from their parents in order to enter the housing market.
However, when parents advance money to their adult children, or co-purchase property with them, they can be left disadvantaged and without legal protection should they wish to retrieve the funds later in life. This is because when money is given from parent to child without independent legal advice and without the proper legal documentation, it is likely the presumption of advancement will apply, and the money deemed to be a gift which cannot be recalled by the operation of a resulting trust.
What is a resulting trust and how does it arise?
A resulting trust is a form of equitable relief in which property is deemed to ‘result’ back to the original party. That is, one person confers title to property to another person but retains beneficial ownership of the property in whole or in part.
For example, resulting trusts typically arise in respect to elder law when a parent’s financial contribution to the purchasing of a property exceeds their legal interest in it. That is, if a parent contributes the majority of the purchase money for a property while the child is the sole owner appearing on the certificate of title. In this situation, the court can deem that a resulting trust was intended and adjust the legal title to match the financial contribution of the parent. The Court may decide that the parent contributed 75% of the purchase price and so the legal title should be adjusted so the parent owns 75% of the property.
The subject of adjustment is generally limited to contributions to the purchase price and associated costs such as stamp duty and conveyancing costs.
What is the presumption of advancement and how does it impact a resulting trust?
There are certain relationships in which the law presumes that when money was advanced by one party to another, it was intended to be a gift, such as a parent-child relationship. This means a resulting trust cannot arise and the money cannot be recovered, unless, there is evidence proving a gift was not intended.
Evidence of intention is limited to the timeframe leading up to and including, but not beyond, the time of the advance of funds or transfer of property and can be inferred from the conduct of the parties during this timeframe.
What can I do to protect myself when giving money to my children?
A loan is a simple, and relatively inexpensive tool to rebut the presumption of advancement. The usual elements of a loan must be documented and include the parties, principal, interest, term, and a covenant to repay, however, in the context of family loans these elements can be modified. For example, it is common for a family loan to be ‘interest-free’, however, a default rate should still be specified so there is some leverage if the loan is not repaid when recalled.
It should be noted that a loan can be deemed as a financial asset that can impact pension entitlements. We are unable to advise as to what the financial effect of making such gifts would be, however, we advise that you instead speak with the Centrelink office or your accountant or financial planner.
The main advantage of executing a loan document is that it provides the lender protection in case they wish to recall the money. While family members can be reluctant to engage lawyers and legal protection when lending to other family members, it is an important tool to safeguard against unforeseen financial and relationship difficulties.
When advances of money or transfers of property are made by a parent to a child, it is advisable to use a loan to prove the advance is not intended to be a gift. The cost of doing so is small compared to potential litigation costs required in the case of misunderstandings, disagreements, faded recollections, and testamentary claims.
For more information on estate planning options or other legal matters, contact us today.
DISCLAIMER: The information contained in this article is general and is not intended to be advice on any matter. It is for information only and is not legal advice. In the event of a legal problem, you should seek legal advice