Industry Insights for Accountants: Reducing the asset pool when the home is paid for by another
Most property disputes involve spouses. But what about other family members? It is possible for other family members to have an interest in a family law property settlement, even if property is owned by a spouse. This means that property that might be subject to a claim may actually belong to someone else and will reduce the asset pool.
An example of this is the family home. In many cases, the family home is paid for by the spouses, so when a claim for property settlement is made, the family home is divided according to the principles of family law. However, what if someone else paid for the family home? What if the family home was bought by the parents of one of the spouses?
If the family home was paid for by a parent, it may be legally owned by that parent. In that case, it is clear that the family home is owned by the parent. But this is not always the case. Often, the family home may be in the name of the spouses, but financed entirely by someone else, such as a parent, either through a cash purchase or a mortgage.
But this does not mean that it is always property that will form part of the spouses’ asset pool. Although the spouses may “legally” own the family home, do they “beneficially” own it?
There is a type of trust called a “resulting trust”. This is similar to an express trust created by a trust deed, where one person legally owns property, but owns it as a trustee, and is obligated to use that property for the beneficiaries. More on express trust can be found in our blog posts on Discretionary Trusts. A resulting trust is similar, but it does not rely on a trust deed. A resulting trust applies when one person owns property but it was bought by another. If it was not intended to be a gift, the property is held on resulting trust.
An example of this is a father buying a home for his daughter and his son-in-law. The father pays $400,000 for the home, but he does not put his name on the title. It is legally owned by his daughter and his son-in-law.
After five years, the daughter and son-in-law wish to separate. Unfortunately, they don’t have a binding financial agreement, so they need to make a claim for property settlement. The family home is in the names of the daughter and son-in-law, but does the family home form part of the property settlement?
If it can be shown that the father clearly bought the house as a gift, then the father has no claim. However, this must be shown to be a gift that was given unconditionally. If the home was not intended to be an unconditional gift, then a resulting trust arises in favour of the father. This means that, despite “legally” owning the home, the daughter and son-in-law do not have the “beneficial” interest. The family home cannot be part of the property settlement, as it is the property of the father, and not the spouses.
It is important for accountants to be aware of the existence of these institutional trusts, such as a resulting trust, when advising clients on their financial affairs. It is equally important to remind clients to keep track of property they give or receive, and to make it clear whether or not the property is intended to be as a gift.
For more information on how accountants and financial advisers are involved in Family Law matters, visit our other blog posts on the topic: