Taking a Loan Within the Family – in Israel

With regards to passing money between two family members, Israeli law stipulates that the transfer is initially considered a gift (and not a loan) unless proven otherwise. In these cases, the onus, or burden of proof, will be heavier than a similar case where family is not involved.

Israeli law recognizes the legality of gift contracts and there is a high prevalence of these types of contracts especially within social-family contexts. Israeli law stipulates that the undertaking to give a monetary gift requires a written document, and thus establishes prima facie (clear-cut) evidence that the parties involved, the giver and recipient of the gift, both intended to establish a binding legal relationship.

In many cases where there is involvement of familial relationships however, such a requirement for a written document would be unrealistic, and even when a written document is prepared, it is often not detailed and will leave critical aspects of the transfer unspecified and thus prone to errors or disputes. In such cases, the question may arise as to whether the parties intended to legally bind themselves with the agreement. Israel’s Supreme Court ruled that if an individual claims that the money transferred to him was given as a gift, and not a loan, the burden of proof is on him, unless it is a case where family is involved.

In cases where family is involved, the opposite applies: in these situations it is logical to assume that in the case where one party is the natural care-taker of the other party, as in the case of a parent-child relationship, the money was transferred as a gift. Anyone claiming otherwise will bear the burden of proof that it was instead given as a loan. The Israeli Supreme Court ruled that “life experience” dictates customary behavior of parents to give their children gifts, whether they be monetary and/or gifts of value.

The assumption is that a gift applies when two conditions are met: (1) the relationship between the parties is a familial relationship; and (2) the relationship between the family members is of a nature that justifies attributing the automatic assumption that the donor had present intent to make a gift.

The rulings of the courts in Israel also referred to the relationship between a child’s spouse and the parent, after the children were married. In these cases as well, the spouse will usually be covered by the veil of the familial relationship, and is seen as shielded by “the protective wings” of the spouse’s parents and naturally supported by their assistance.

In order to prove that a loan was granted between the family members, and that the donation was in fact not a gift, a written document is not necessarily required as proof of the granting of the loan. Clear proof of the loan however, must still be supplied, and as stated above, the burden of proof is heavier when it is a case involving family members.

In a case that was presented to the Family Affairs Court in the city of Petah Tikva, a father filed a lawsuit against his son and daughter-in-law (who were in the midst of divorce proceedings) for the sum of 400,000 NIS to repay the father for what he claimed was a loan to help his son and daughter-in-law buy and renovate an apartment.

The father did not have a written agreement with his son and daughter-in-law, but presented bank statements of the money transfers which he had printed out and written on them that the transfers were a loan. The father also did not register a warning note in his name with the Land Registrar on the apartment, as is general practice.  The son and daughter-in-law claimed that the apartment, which was purchased for about 1.5 million NIS, was a gift from the father for all intents and purposes.

The Israeli court ruled that in the absence of a written agreement, and in the absence of legally binding references to the loan, and since the claim relied on unproven oral statements, the father failed to discharge the burden of proof imposed on him, which as mentioned above, carries an especially heavy burden, and did not prove that the money transferred to his son and daughter-in-law was a loan and not given as a gift out of a desire to help them. The court emphasized that if the father wanted to give a loan to his son and daughter-in-law, he had to have “anchored the fact in writings.”

The court ruled to dismiss the father’s claim against his family members and ordered that a total of 25,000 NIS be paid in compensation for the son and daughter-in-law’s attorney’s fees.