Spouse lending money to a spouse
Spouse Loan Agreement
Doctors, Accountants and business owners are at high risk of bankruptcy. They are at risk of being sued and losing everything. In contrast, the stay-at-home parent, teacher or government employee is at low risk. It makes sense to have the family assets in your low-risk spouse’s name. A Legal Consolidated Loan Spouse Agreement works towards that goal. It is another important strategy to protect your family’s wealth.
Husband lends money to Wife – sign the Loan Agreement first
Putting all the family assets into the low-risk spouse is common. This is called the ‘Man of straw and women of substance‘ asset protection strategy. All assets go into your wife’s name. This better protects the family if the husband goes bankrupt.
But what happens if the wife then gifts money to the husband?
Do not gift money to the at-risk partner. That is silly. Instead, the wife lends the husband the money. This is via a legally enforceable Legal Consolidated Loan Agreement between spouses.
What if your husband goes bankrupt? You seek to get back the loan using the Loan Agreement. You at least get some of the money. Also, you can influence, as a creditor, whether your husband goes bankrupt or enters into a compromise.
Do a Spouse Loan Agreement on the back of an envelope?
In the movies, IOUs are often handwritten on a piece of paper. Sometimes instead of a Legal Consolidated Spouse Loan Agreement, someone does a ‘minute’. Both approaches fail. In Rowntree v FCT  FCA 182 shows the additional care required to document even simple related-party transactions, such as loans. In this case, the taxpayer, a practising NSW lawyer, claimed he borrowed over $4m from his group of private companies. The Court said:
‘Mr Rowntree has not deliberately chosen to ignore the law. His evidence presented to the Tribunal suggests that he genuinely believed that there were arguments to support his view that a loan was in existence.
He failed. Only a legally prepared Spouse Loan Agreement satisfies the ATO, Bankruptcy Courts and Family Court.
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Presumption of ‘advancement’ between a husband and wife
Bosanac v FCT
In Bosanac v FCT  FCAFC 158 the husband and wife purchase a property in Dalkeith, WA. This is their matrimonial home.
They pay the deposit for the home with funds from a joint loan. The loan is in both their names.
But, for asset protection, following the man of straw and woman of substance, the property is solely in the wife’s name.
Following an audit by the ATO, the husband is liable for huge taxation debts. (Lucky they followed asset protection strategies).
The ATO wants to use the Dalkeith family home to pay the debt. The ATO argues that the home is owned, at least in part, beneficially by the husband, Mr Bosanac.
But of course, there is an ancient rule called the Presumption of Advancement:
- When dad hands over money to mum or a child it is deemed, on the face of it, to be a ‘gift‘.
- (In contrast, if mum hands over money to dad it is deemed, on the face of it, to be a ‘loan’.)
In what can only be considered sheer arrogance, the ATO contends the 2,000-year-old ‘Presumption’ no longer applies. It is almost ungodly in my view. If the ATO could change the law, which it can not do, then it could be argued that Mr Bosanac intended to retain a 50% beneficial interest in the property.
The ATO argued that the ‘presumption of advancement’ of a wife by her husband, which operates to preclude a resulting trust from arising, has no acceptable rationale and is anomalous, anachronistic and discriminatory.
The ATO asks the High Court to state that the Presumption is no longer part of the law of Australia. At least for the matrimonial home. The High Court, however, refused to do so. Therefore, the husband’s appeal did not depend on the presumption of advancement.
Kiefel CJ and Gleeson J (in a joint judgment) and Gageler J commented that any changes in this area of the law should be left to the legislature. Gordon and Edelman JJ (in a joint judgment) commented that “there may well be scope in the future to extend the ‘presumption’ of advancement to a broader range of relationships”.
Obviously, to avoid confusion:
- build this Spouse to Spouse Loan Agreement
- build a Loan Agreement from a Parent to a Child
- build a Loan Agreement from a Child to their mum and dad
- expressly make a gift with a Deed of Gift
- or if it is all too late expressly forgive the debt by building a Deed of Debt Forgiveness
Presumption of ‘resulting trust’
Bosanac v FCT
As can be seen above, the High Court unanimously allowed Mr Bosanac’s appeal. It finds that the proper inference drawn from the facts is that:
- the husband and wife objectively intended the wife to be the sole beneficial owner of the home.
- the husband merely facilitating her acquisition of the home.
Three useful quotes from Bosanac v FCT:
- “Not only was it acquired in her name and registered in her name, but it was her property”.
- The husband is a “sophisticated businessman” who “must be taken to have appreciated that the name in which real property is held is of significant consequence in almost all situations.”
- “There was no suggestion that Mrs Bosanac contracted to purchase and did purchase the Dalkeith property in her name to assist her husband to avoid creditors.”
Therefore, to the fury of the ATO, Mr Bosanac does not have a beneficial interest in the home.
But is there a ‘resulting trust’ in Bosanac v FCT
There is yet another ‘presumption’. It is the presumption of resulting trust.
This is where the person:
- who advances purchase monies for an asset
- which is held in the name of another person
- intends to have a beneficial interest in the asset
The law only ‘presumes’ this. The facts can override a ‘presumption’.
A common ‘exception’ is where the person is a husband and purchases the asset in the name of a wife, or a parent (or person who stands in loco parentis) in the name of a child.
This is the above presumption of ‘advancement’. “A presumption that the purchaser intended that the beneficial interest would pass with the legal interest”.
It is held also not to be the case.
Do I need a new Loan Agreement if a Lender or Borrower dies?
A distinct advantage of a Legal Consolidated Loan Deed is that it works after death. This is if any of the parties die.
This is important. You do not want to be making new Loan Agreements for ‘old’ loans. This is called ‘past consideration’ and weakens the enforceability of the loan.
For example ‘I lent my spouse some money yesterday, I now want to document this with a written Loan Agreement’. You can do that. But you should have got the Borrower to sign the Loan Agreement first. And only then lend the money. Could you imagine a bank lending you the money? And then documenting the loan at a later date?
‘Past consideration’ weakens the Loan Agreement. Sure, it is better than nothing. But you should get the Loan Agreement fully signed by all the parties. And only then do the transfer of funds.
Similarly, if a party to a Loan Agreement dies, then under a Legal Consolidated Loan Agreement the ‘executors’ or ‘legal personal representative’ carry out the performance of the Loan agreement. You do not prepare a new Loan Agreement. And you should not prepare a new Loan Agreement. To do so damages the loan.
Husband, the Borrower, dies – do I need a new Spouse Loan Agreement?
For example, you lend money to your husband. A few years later he dies. The executor under his Will now has to pay you back the money. You, as the wife/Lender, enforce the Legal Consolidated Loan deed against the estate. (Yes, I know you are probably the executor of his estate. That is fine.)
You should not do a new Loan Agreement. If you do, then the money you lent under the original Loan Agreement may end up as ‘past consideration’.
Contact us for legal advice on building the Spouse Loan Agreement
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For other asset protection strategies see here.
The Wife Borrower is the entity (human or company) who is going to receive the capital (e.g. money) from the husband lender.
The Lender (Husband) is the entity who is passing the capital (e.g. money) to the Borrower (Wife).
In this Spouse Loan Agreement, the person who is the Lender is lending the money and the person who is the Borrower is the person borrowing the money.
Why is it better to prepare my legal document on a law firm’s website?
You are dealing directly with a law firm’s website, therefore you:
- Retain legal professional privilege,
- Legal Consolidated is responsible for the document
- Receive legal advice from us.
How do I build the Spouse Loan Agreement?
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Spouse Loan Agreement Document
Our law firm’s letter of advice on our law firm’s letterhead and signed by one of our Partners.
Sometimes you do not know the amount that you are lending your spouse. If you don’t know you can leave it as the default answer; “as lent from time to time”. This provides flexibility.
If you do know but are paying it in instalments, then put it all in as one figure.
Otherwise, just put in the total figure. Remember to put in the dollar sign.
Sometimes you might not want to set a specific date in the Spouse Loan Agreement. You can leave it as the default answer; “payable on demand as demanded by the Lender”. This gives you flexibility.
If you want it all paid back on the one date, just enter that date in.
Word the Spouse Loan Agreement how you like. For example
1) “Payable in instalments of 10% per calendar month”
2) “Half to be paid on 21 September 2018, and the remainder to be paid on 21 September 2019”
3) “$100 to be repaid weekly for 10 weeks starting from 4 July 2018”
There are five ways you can answer this question depending on how you’d like to do it:
1) If you are charging your spouse no interest, put the word “Nil”
2) If you are not sure what the interest rate is yet, leave it as the default, which is “as demanded from the lender from time to time”
3) You can put in a flat rate, for example, “5%” (do not forget to put the % sign in)
4) Keep it variable, for example, “2% above the Commonwealth Bank interest rate”.
5) You can also use the inflation rate. Use the expression “calculated according to the percentage increase in the Consumer Price Index (all groups) for the average of the capital cities of the Commonwealth of Australia (as published from time to time by the Australian Bureau of Statistics or body that takes over that function)”.