Why Should a Parent Document a Loan to a Family Member?

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In today’s housing market, it is increasingly common for parents to help their children financially when buying a home. Although the parent’s intention—whether the funds are meant as a gift or a loan—may be clear at the outset, circumstances such as death or changing family relationships can create uncertainty over time. This is why proper documentation is essential. Clear records protect all involved and preserve family relationships by preventing misunderstandings down the road.

Understanding the Legal Presumption

When a parent transfers money to an adult child without receiving anything in return, the law generally presumes that the transfer is not a gift but is instead held on trust by the child for the parent.

This is because the law presumes bargains, not gifts to adult independent children. In other words, while the child may have legal ownership of the money, the parent is considered the beneficial owner.

This is called the presumption of resulting trust. It applies unless evidence shows that the transfer was intended as a gift.

The presumption can lead to complications if a dispute arises later, particularly when there is no clear record of what the transferring parent intended (gift versus loan) at the time of the transfer.

Making Your Intentions Clear

To avoid confusion and potential disputes, it is critical to establish, from the outset, whether the money is intended as a gift or a loan. If the parent intends the funds to be a loan, certain steps should be taken to document this clearly:

  1. Create a Written Loan Agreement: Courts focus on the intention of the parent at the time of the transfer. A written document illustrating the parent’s intention, prepared contemporaneously with the transfer of funds, provides the strongest evidence of this intent.
  2. Specify Repayment Terms: The loan agreement should outline the terms of repayment, including any interest, schedule of payments, and consequences of default. Even a simple repayment plan reduces ambiguity as it demonstrates the expectation of repayment.
  3. Keep Documentation Accessible: Retain copies of the loan agreement, bank transfers, and any correspondence discussing the loan. This documentation can be invaluable if disagreements arise later.

If the funds are intended as a gift, it is equally important to document that intent. A simple Deed of Gift, gift letter or other written declaration can help to evidence the intention of the parent to give the money with no expectation of repayment. This protects both parties and can be used to rebut the legal presumption of resulting trust.

Common Pitfalls

Problems most often occur when nothing is documented at the time of transfer of funds. What begins as a clear oral agreement can become muddled over the years, especially as family dynamics shift – for example, if the child separates from a partner, if siblings become involved, if the parent’s financial situation changes or if someone dies.

Without clear evidence, one party may later claim that the funds were a gift, while the other insists they were a loan. This can lead to costly legal battles and lasting strain on family relationships.

Final Thoughts

Providing financial assistance to family members can be a generous and helpful gesture, but it comes with potential legal and relational complexities. By clearly documenting gifts or loans (specifying repayment terms), and keeping thorough records, parents can protect their interests and maintain harmony within the family. Clear communication and proper documentation ensure that everyone understands the nature of the transaction, preventing misunderstandings down the road.

If you are considering providing financial help to a child or another family member, it’s important to make sure your intentions are clearly documented. The lawyers at Heath Law LLP in Nanaimo can guide you through preparing a loan agreement or gift documentation to protect both your interests and your family relationships. Contact us today to schedule a consultation.

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Secret Trusts – Alive And Well In British Columbia

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This article concerns the recent British Columbia Court of Appeal decision in Bergler v Odenthal, 2020 BCCA 175 [“Bergler”] The appeal concerned the validity of a “secret trust” that Ms. Stuhff, now deceased, had allegedly imposed on her common-law partner, Mr. Odenthal. Secret trusts contain two essential features: “communication by the deceased person to his or her devisee, legatee or intestate heir, and an acceptance by that person of the request that he or she will hold the property in trust for the stated person or purposes.”[1] Acceptance may occur in the form of silence. The secret trust must also meet the usual trust requirements of certainty of intention, objects, and subject-matter.

 

The trial judge held that Mr. Odenthal had accepted Ms. Stuhff’s request that her estate would go to her niece, Susanne Bergler. The trial judge determined the acceptance occurred at the hospital shortly before Ms. Stuhff’s death. Ms. Stuhff’s niece and sister testified that in the days leading to Ms. Stuhff’s death, Mr. Odenthal had told them that Ms. Stuhff told him that she wanted her estate to go to her niece, Susanne. Susanne did not have a career or a home and wanted to go back to school. Ms. Stuhff’s sister testified that Ms. Stuhff told her that Mr. Odenthal was to transfer her estate to the Bergler family when he started a relationship with a new partner.

 

A conflict arose concerning when the estate was to be transferred to the Bergler family. Mr. Odenthal claimed he was to hold Ms. Stuhff’s assets until his death (he was 51 years old). After Ms. Stuhff’s death, Mr. Odenthal received the entire estate as heir on intestacy. He later married and removed Susanne as a beneficiary under his will, leaving nothing to the Bergler family. A relative of Ms. Stuhff testified that he overheard Ms. Stuhff tell Mr. Odenthal that when he ‘had a new chick’, she wanted ‘all her money’ to go back to her family.[2] The relative said he did not hear Mr. Odenthal object to the request. The trial judge found the relative’s evidence to be reliable. According to Mr. Odenthal’s testimony, he told Ms. Stuhff that he would abide by her wishes concerning the distribution of her estate. The trial judge held that this constituted the requisite acceptance for the creation of a secret trust.

 

On appeal, Mr. Odenthal claimed there was no evidence of his acceptance of the secret trust. The Court held that the trial judge did not err in finding that Mr. Odenthal had accepted the secret trust. He was required to transfer the assets either upon death or upon entering into a new relationship, whichever came first. A secondary issue on appeal concerned a property owned in joint tenancy by Ms. Stuhff and Mr. Odenthal. Mr. Odenthal claimed it passed to him automatically upon her death and, as a result, never became part of her estate. The Court held that the creation of the secret trust severed the joint tenancy and that once the secret trust came into existence, “nothing was left to pass by the intestacy to the defendant”.[3] The Court upheld the trial judge’s decision and dismissed the appeal.

[1] Bergler at para 2.

[2] Ibid at para 5.

[3] Ibid at para 40.

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Resulting Trusts: Making Gifts during Your Life

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In order to minimize taxes, avoid probate fees, control distribution or to avoid estate litigation that may result from a Will, some people decide to give away some or all of their assets while they are alive. However, in some cases, giving a gift during your lifetime and outside a Will may lead to litigation to determine whether the person giving away the asset intended to give a gift.

Gifts Made During a Person’s Life

A person may make gifts during his or her lifetime by giving another person a particular item, money or an interest in property.  When a person makes a transfer of an item without receiving anything in return, the law presumes that there is a Resulting Trust. A Resulting Trust means that the person who received the transfer of the item holds the item in trust for the person who made the transfer. In other words, the person who made the transfer keeps the beneficial ownership of the transferred item because he or she did not receive anything in return for its transfer. In these circumstances, the person who received the transfer of the item has an obligation to return the item to the person who transferred it.

There are exceptions to the presumption of a Resulting Trust. For example, there is an exception where a parent has given a gift to a minor child. In these circumstances, the law presumes that the parent intended to give a gift to his or her minor child. This exception does not apply where a parent gives a gift to his or her adult children.

The person who received the gift may be able to rebut the presumption of a Resulting Trust and establish that the transfer was indeed intended it to be a gift. In these cases, the law looks to whether the person who made the transfer intended to give a gift or if they made the transfer for some other purpose (and believed that they would have the item returned). If a Court determines that the person who made the transfer intended to give a gift, no Resulting Trust will be found.

Unequal Distribution under a Will

How a person organizes their financial affairs while they are living may result in what seems like an unequal distribution of their financial assets to family members upon that person’s death. Beneficiaries may argue that, due to the presumption of Resulting Trust, gifts that the deceased made during his or her life were meant to be divided within the Will.  For example, a person may transfer a large sum of money to his or her adult child to help make a down payment on a house. In this case, the transfer may result in a smaller estate available to be shared by the beneficiaries under the Will. Beneficiaries under the Will may argue that the money advanced was only a loan and that the presumption of Resulting Trust applies such that the money should be returned to the Estate and divided according to the Will.

Making the Gift

When a person wishes to make a gift, he or she may want to clearly demonstrate that it was his or her intention to make a gift and not to have the item returned. For example, in the scenario described above, the parent may wish to create a Deed of Gift – a written document – stating that the money is a gift and that the other party does not need to pay the money back.

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