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Seek legal advice before giving money to adult children

An Ontario Court of Appeal decision shows why parents should get legal advice before advancing funds to their adult children, Ottawa family lawyer Timothy N. Sullivan tells AdvocateDaily.com

The unanimous panel’s decision upheld a motion judge’s finding that a mortgage placed by parents on their married daughter’s home must be removed from the child’s net family property calculation because the money was actually given to the couple as a gift.

“It should be absolutely mandatory for parents to speak to a lawyer before any money is advanced for anything so that they can ensure it is treated as a gift or a loan,” says Sullivan, principal of SullivanLaw. “Then you’re more likely to avoid the unfortunate consequences of a misunderstanding like this one, where you get into a he-said-she-said situation.”

Sullivan says loans from parents to adult children form the basis of about 95 per cent of the prenuptial agreements and marriage contracts he draws up. However, he says more people should seek legal advice before making loans or gifts to their adult children to prevent exposing themselves to legal problems later on.

The couple in the appeal court matter purchased the marital home at the heart of the dispute in 2000 but ran into financial difficulties in 2004 when the husband’s job changed. The wife's parents stepped in to relieve them, agreeing to pay off the existing mortgage, which was discharged in February 2005.

However, in July 2005, the wife’s parents registered their own mortgage on the home, an action the husband was shocked by, according to the decision. He testified he only agreed to sign the mortgage documents in order to keep his wife and in-laws happy but claimed he was relying on his wife’s assurances that the house would always be theirs.

Sullivan, who was not involved in the matter and comments generally, says neither the parents nor their son-in-law did an adequate job of protecting their interests.

“The parents seem to have been exceedingly generous in terms of gifts and payment of the mortgage. In the end, they may have felt like they were taken advantage of, but I think they also allowed that to happen,” he says. “The son-in-law could also have more clearly protected himself. If the money was papered as a loan or a gift, it could have been structured in a tax-advantaged way that may have avoided the litigation.”

A judge hearing a summary judgment motion sided with the husband, rejecting the parents’ evidence that the transfers were loans, and the appeal backed his ruling.

“It was open to the motion judge to make those findings of fact, and this court ought not to interfere with them unless the appellants can establish that they represent palpable and overriding error,” the unanimous appeal court panel ruled before adding that the history of the interaction between the parties “strongly suggest that all of the financial assistance provided by the appellants was intended to be by way of gifts and not loans.

“For example, there was never any request for any form of security documentation with respect to any of this financial assistance. There is also the salient fact that, after the conventional mortgage was paid off, the appellants, their daughter, and the respondent, all went out for a celebration of the fact that the daughter and the respondent were ‘mortgage free,’” the appeal court concluded. “This event is inconsistent with the appellants’ position that the respondent and their daughter had simply replaced one mortgage for another, even if the latter mortgage was much more favourable in its terms.”

Sullivan says the parents may have fared better by pursuing enforcement of the mortgage in civil court, rather than via family law proceedings.

“When a mortgage is registered on title, the law is usually that you don’t look behind the registered instrument,” he explains. “Once it’s on title, it’s usually seen as an admission that someone else has an interest in the property.”

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