Loan or gift? Why family advances should be recorded properly
Family financial help is common. Parents may help an adult child buy a home. A grandparent may contribute money toward a property. A family member may transfer funds to help with debt, renovations or business cashflow. At the time, everyone may understand what is intended. Years later, particularly after separation, death, illness or a family dispute, the position can look very different.
One of the recurring questions before the New Zealand courts is whether money advanced within a family was a gift, a loan, or something else. The answer can have a significant effect on relationship property claims, estate administration, trust records, creditor issues and what each person is entitled to recover.
The difficulty is that family arrangements are often informal. There may be no loan agreement, no gift deed, no repayment schedule and no clear record of what was discussed. The court then has to work out what was intended from the surrounding evidence.
Zhang and Li v Li — a loan, even without formal documents
In Zhang and Li v Li, parents advanced a substantial sum to their daughter and son-in-law. After the couple separated, the question was whether the money had been gifted to them or lent to them.
The Court found that the advance was an interest-free loan repayable on demand, not a gift. The absence of formal loan documents did not prevent the Court from finding that a loan existed. However, the dispute shows the risk of leaving family advances undocumented. What may have seemed clear within the family at the time had to be reconstructed later through evidence.
The practical point is that a family loan can still be a loan even if it is informal, interest-free and made between close family members. But relying on later evidence is expensive and uncertain.
Chang v Lee — not a gift, but not a straightforward loan either
Chang v Lee involved an uncle who advanced money to his niece toward the purchase of an Auckland property. It was accepted that the advance was not intended as a gift. The problem was that the terms of any loan were not sufficiently settled.
The Court of Appeal did not simply impose a loan arrangement. Instead, it found that the niece held a proportionate beneficial share of the property on resulting trust for her uncle. The uncle’s contribution could be traced into the purchase price, and there was not enough evidence that he intended to give up beneficial ownership of that money.
This case is a useful reminder that the answer is not always limited to “loan or gift”. Where money is contributed toward the purchase of property, a resulting trust may also be argued. That can produce a very different outcome from a simple debt claim, because the claim may attach to a share of the property itself.
Comins v Public Trust — estate documents helped show the advance was a loan
Comins v Public Trust concerned money advanced by parents to one of their daughters to help her buy a home. After the father’s death, there was a dispute about whether the money had been gifted or lent.
The Court held that the money was a loan rather than a gift. One important feature was that the father’s will treated the amount as something to be brought into account. The evidence supported an intention that the daughter was not required to repay the money during the father’s lifetime, but that it was still to be recognised when his estate was dealt with.
This is a common estate planning issue. Parents sometimes make unequal advances to children during their lifetimes, intending that the amounts will be taken into account later. If that intention is not clearly recorded, the estate may be left with an argument about whether the advance was a gift, a loan, or part of a wider arrangement for equality between children.
MacKay v Blair — a “gift” may need closer scrutiny where there is vulnerability or a wider family arrangement
MacKay v Blair involved a mother who paid a significant sum to her daughter to help with the purchase of a home. The High Court had treated the payment as an unconditional gift. The Court of Appeal set that decision aside and sent the matter back for rehearing.
The case is particularly useful because the payment was not considered in isolation. It sat within a wider family arrangement in which the mother expected to live in the property and receive support. The Court of Appeal was concerned with whether she properly understood the consequences of the transaction, including what would happen if the relationship with her daughter broke down or if she could no longer live in the property.
For older or vulnerable clients, this is important. The issue is not simply whether the person used the word “gift”. The question may be whether they understood the practical and legal effect of making an unconditional gift, rather than recording a loan, life interest, occupation right, co-ownership arrangement, trust arrangement or other protection.
What will the court look at?
The central question is usually intention. What did the person transferring the money or property intend at the time of the transfer?
The court may look at:
whether there was a written loan agreement, deed of gift, acknowledgment of debt, mortgage, caveat, trustee resolution or other document;
what was said in emails, texts, letters, bank references or family discussions;
whether anyone described the money as a loan, gift, advance, contribution or inheritance;
whether interest was payable;
whether there was any agreed repayment date or trigger, such as sale of a property, separation, death, refinancing or demand;
whether any repayments were made;
whether the advance was recorded in financial statements, estate documents, trust accounts, loan schedules or tax records;
whether the recipient treated the money as something they had to repay;
whether the transferor retained any expectation of control, repayment, occupation, care, support or beneficial ownership;
whether the money was used to purchase land, in which case resulting trust principles may be relevant;
whether the transfer was made to a spouse, child, adult child, child-in-law, sibling, wider family member or unrelated person;
whether any presumption of advancement applies and, if so, whether it is displaced by the evidence;
whether the transferor was elderly, vulnerable, dependent, under pressure or lacking independent advice; and
whether the surrounding circumstances are consistent with an outright gift.
The court is not limited to the label used by the parties. Calling something a gift will not necessarily make it a gift if the surrounding evidence shows that repayment was expected. Equally, calling something a loan may not be enough if there are no terms and the conduct of the parties points the other way.
Why this matters
A poorly documented family advance can create problems in several situations.
If the recipient separates from a partner, the question may be whether the money is a relationship debt, separate property, relationship property, or a contribution that affects division of assets.
If the person who advanced the money dies, the executor may need to decide whether the estate owns a debt, whether the advance should be brought into account, or whether it was simply a lifetime gift.
If the money was used to purchase property, the person who advanced the funds may claim a beneficial interest in that property rather than just repayment of a fixed amount.
If the recipient becomes insolvent, a documented loan may put the lender in a different position from someone who made an outright gift.
If the transferor later needs residential care, the transfer may also have consequences for financial means assessment.
Practical steps before advancing money
The safest approach is to record the arrangement before the money changes hands.
If it is a gift, record that it is an absolute gift. The document should make clear that there is no repayment obligation, no interest, no security, and no retained ownership interest.
If it is a loan, record the amount, borrower, lender, interest position, repayment terms, whether it is repayable on demand, whether it is secured, and what happens on separation, death, sale or refinancing.
If the money is being contributed toward a property, consider whether the person advancing the money expects repayment only, a share of the property, a right to live there, or some other protection.
If parents are helping one child but want fairness between children later, their wills and estate planning documents should be reviewed at the same time.
If an older person is transferring significant money to a child or family member, independent advice should be obtained. That advice should cover not just the document being signed, but the practical consequences if the family arrangement breaks down.
A short document now can avoid a much larger dispute later. Family arrangements often begin with trust and goodwill. The problem is that the legal issue is usually tested later, when the relationship, circumstances or memories have changed.