Elderly parents have been forced to take their sponging son to court to return more than a quarter of a million dollars he had borrowed from them and promised to repay.
In early January 2009 the son said to his father “Dad, I really need a loan.” His father replied “Okay, Mum and I can loan you the money, but we need this to be repaid. When do you need the money by?”
The son replied “I need the money as soon as possible. I will definitely repay the monies back and even more, I will look after you in your old age.” The father transferred $98,000 to his son’s company bank account and over five years there were another 12 loans.
Despite their son’s promise to repay the money, he did not, and the relationship became strained. In an email in 2015, the father wrote:
“I want to bring to your attention mum and I are getting older and I have been unwise with giving so much of our money to you. About $300,000 without interest over the years up to the 9th Jan 2015. We have nothing to back us now in life for our later years for all the years we have worked. So giving all that we have had has been very unwise. This has really concerned me and stressed me very much.”
On the same day, the sponging son replied by email: “I have discussed paying back the money several times with mum. She has always said to me ‘Don’t worry about the money, just take care of you two in retirement’. So I’m very surprised this is all of a sudden urgent. If it is now urgent, I will need to find a way to get you the money. I don’t want to release equity in the business as I will use the dividends to pay you back or borrow against it in future to do so.”
In April 2015 the parents’ solicitors wrote to the son demanding repayment of the money. He argued that the money had been gifted to him and that there was no legal requirement to return the money to his parents.
Clergyman Barry Berghan, 73, and his 72-year-old wife, who has cancer, have twice taken their son to court in a bid to get their money back.
The District Court judge found that while their son had “cynically abused their generosity”, the money given to their sponging son was a moral obligation, not a binding loan agreement.
The Court of Appeal disagreed, and three judges unanimously allowed the couple’s appeal, set aside Judge Everson’s decision and ordered Mr and Mrs Berghan be paid $286,471, with interest. In their judgement, the Court of Appeal said that:
“Payments made by the appellants to their son were contracts of loan in respect of which the monies were repayable on demand and were repayable by him personally. In the absence of an express term in the oral contracts about when the money had to be repaid the law would imply an obligation to repay upon demand.”
What can we learn from this sad story of the sponging son?
If you have clients considering lending money to family members, make sure it’s documented.
Always have a contract drawn by a lawyer which contains the pertinent details: how much is being lent, if there’s any interest payable, and when it’s due to be repaid. This means that every party is aware of their obligations and can’t down the track claim that the money was a gift.
Consider the estate planning implications.
In the example above, the parents had four children. Lending all their money to one child means that the other three effectively miss out on their inheritance. This can cause an estate battle once the parents have passed away.
Over the next 30 years, generations X and Y will be showered with the biggest deluge of inherited wealth the world has ever seen. The baby boomers of rich countries, the generation born in the decade or so after 1945, will start to pass on to their grown-up children their property, stocks and cash. The result is a significant percentage of children and grandchildren fighting for what they believe is their fair share of their inheritance while either one or both aging parents is still alive. There are two reasons for this:
Adult children are not sufficiently saving for their own retirement. They get caught short. A white paper that looked at lifestyle, financial security and retirement in Australia, found that 17 per cent of respondents said they would have to rely on family inheritance to pay off their mortgage.
It’s further complicated by adult children who feel entitled to their parent’s money. They have lived their lives under the assumption that their inheritance will fund their retirement plans. The property boom has many older people living in million-dollar homes while their kids and grandkids struggle under the weight of massive mortgages. Rising superannuation has meant that we’re creating the wealthiest generation to ever retire.