Is natural love and affection valid consideration for transfer of property?

When the transfer is made by a person who later becomes bankrupt, the short answer is no.

The transfer of property for “natural love and affection” quite literally means that the person is gifting the property because of their goodwill towards or emotional attachment to the recipient. Transfers of this kind are usually between family members such as from parent to child or from one spouse to another.

In their statement of affairs, a bankrupt must disclose details of any material (greater than $5,000) property transferred in the five years prior to bankruptcy. A bankruptcy trustee will conduct their own searches to corroborate this information and then investigate any transactions identified for potential recovery action.

In making their assessment, a trustee will consider:

• The actual value of the property at the time of transfer
• The consideration paid for the property
• How any consideration paid was utilised by the bankrupt

A transfer of property for natural love and affection is a red flag for a trustee as it normally indicates that the property has been transferred by the bankrupt to a family member for nothing in return.

The potential recovery actions available to a trustee are set out in Sections 120 and 121 of the Bankruptcy Act 1966 (Cth).

Simply put, if a bankrupt transfers property for no consideration or consideration less than market value and the transfer is within a certain timeframe (Section 120) or the main purpose of the transfer was to defeat creditors or delay the property being made available to creditors (Section 121), then the transfer may be deemed to be void. The trustee can seek to “undo” a void transfer, accounting to the recipient for any consideration paid.

When assessing the consideration paid, the Act is clear that “the transferee’s love or affection for the transferor” is not consideration.

If the other criteria of Section 120 and/or Section 121 are met then a transfer made by a person prior to their bankruptcy for natural love and affection is very much at risk of being undone by the trustee, with the trustee seeking to realise its share in the property for the benefit of the bankrupt estate.

While property acquisitions and transfers are often made without the looming possibility of bankruptcy for one of the parties involved, it is still important for families looking to transfer property among one another to consider and understand the implications and risks of the various structuring options available to them and seek appropriate professional advice.

For more information 

If you require further information on transfer of property, please contact your local RSM office.