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Importance of Documenting Loans

Why Documenting Loans, Gifts and Debts Between Family Members Matters

It’s common for family members to provide financial support to one another in times of need or as a means of helping younger family members establish themselves. 

Unfortunately, these financial arrangements are very rarely documented, usually because, given family ties, documentation is viewed as unnecessary. However, this can create significant problems when third parties are trying to piece together the true intention of a transaction after one or both of the parties have passed away. 

What was initially intended as a bona fide demonstration of love can quickly become the catalyst for an ugly (and sometimes public) family feud.

The recent decision of Russell and Dunphy v Dunphy [2023] NSWSC 282 (‘Russell and Dunphy’) is but one of a raft of cases that illustrate how poorly documented intergenerational gifts and loans can create conflict within families.

Russell and Dunphy: Factual Background

Over a period of eight years leading up to the death of Mr Dunphy, the deceased lent monies to one of his adult sons, Adam (the defendant).

The executors of the deceased’s estate (being the defendant’s brother and sister) brought a claim against their sibling to attempt to recover the monies which had allegedly been lent, the total of which amounted to $126,913. The plaintiffs sought a declaration that this amount should be offset against the defendant’s inheritance from the estate.

The main basis for arguing the existence of the loans was the discovery of various Post-it® notes found in the deceased’s office, which provided details of funds that the deceased had advanced to the defendant, which the deceased was arguably attempting to characterise as loans based on the language used. For example, a green Post-it note from 2016 titled ‘Adam’ included the words “car purchase black commodore” and then proceeded to list various repayments made. 

The matter considered whether the deceased and the defendant intended to enter into a legally binding contract in each instance where funds were advanced. 

An objective assessment of the situation between the deceased and the defendant was carried out to determine what could be constructed by what was said or done. This largely relied on whether a reasonable bystander would regard the conduct of the offeree (the defendant) as signalling to the offeror (the deceased) that his offer had been accepted. 

Russell and Dunphy: the Court’s Decision

The Court viewed the documents as an “uncommunicated, subjective intention harboured by the Deceased [that] therefore can play no part in the objective assessment”. Importantly, all documentation appeared to be unilaterally prepared by the deceased, which made it difficult to establish that the basic contractual elements of offer and acceptance had been satisfied. Merely making notes or keeping a log of loaned amounts is not adequate evidence of the intention to enter into a loan contract. 

There were also timing issues in that, even if a loan could be established, many of the advances had taken place more than six years before the death of the deceased, which meant that they would have been statute-barred for debt recovery purposes.

The matter was dismissed.

Key Takeaways

This case demonstrates the importance of vigilantly documenting advances between family members and seeking legal advice before doing so. Regardless of whether an advance is intended to be a gift or a loan, it needs to be documented in writing. 

If a loan is agreed upon, consider whether the parent genuinely intends for the child to repay the monies, particularly in terms of the impact this would have on their Wills and estate planning arrangements. It may be preferable that the debt is forgiven as a term of the parent’s Will, or, alternatively, it may be more equitable for the loan to be taken into account as a form of early inheritance that is ultimately adjusted under the Will for equality purposes.

The time and cost of resolving a gift/loan dispute after the fact far outweigh the price of engaging a legal professional to prepare a simple loan agreement or deed of gift at the time the funds are advanced.

Any agreements around advances should also be regularly reviewed to ensure that limitation periods do not get overlooked. An exceeded limitation period will normally convert a valid loan into a gift, which has a drastically different outcome for all parties (and is usually unbeknown to family members).

For personalised advice about preparing loan agreements that will align with your wishes after your death, get in touch with our experienced Wills and estates team. Bell Legal Group has helped lenders and borrowers since 1955 – book a consultation to find out how we can support you.

The content of this page is for information only. The content does not constitute legal advice and should not be relied upon as such. You should obtain advice that is specific to your circumstances before taking any action.