If you don’t document your intentions, you will lose your assets
It is becoming more common in Australia, particularly with our ageing population, that family arrangements are being made to assist each other in purchasing real property. For example, ageing parents using their savings to purchase real property with their adult children to assist them getting into the property market, while securing the parent’s long-term future in retirement.
Usually, when one person (transferee) purchases property in the name of another, the transferee is taken in equity to hold the property on trust for the other party (resulting trust), unless evidence shows it was intended as a gift (presumption of advancement). A resulting trust means the transferee never intended to hold the property beneficially.
However, where the transferor and the transferee stand in particular relationships (e.g. mother and adult child), it is often the case the arrangement is one of advancement rather than a resulting trust. Transfers between spouses and from parents to children raise presumptions of advancement, which support that an outright gift was intended. In the event of bankruptcy, findings on the existence or otherwise of advancement has significant consequences for the bankrupt’s estate and any non-bankrupt party claiming an interest in the property.
Under these principles the following implications in bankruptcy may apply:
If the adult child becomes a bankrupt, the trustee in bankruptcy has the latitude to ‘presume’ the property was gifted to the adult child. The parents could argue that the property was held on trust for them, but the onus of rebutting the presumption of advancement is on the parents.
If the parents become bankrupt, the bankruptcy trustee may have the following recourse:
a. Undervalued transaction under section 120 of the Bankruptcy Act 1966; and/or
b. If the transfer occurred longer than four years prior to the bankruptcy’s commencement, the trustee must prove that the transfer resulted in creating a trust i.e. the adult child is holding the property in equity for the parents.
It is clear that if you or your clients intend on entering into family arrangements to purchase real property together, the transaction parties should obtain advice early and clearly document their intentions to avoid doubt regarding ownership. Otherwise the presumption of advancement could play a part in losing some, or all of the assets.