Gifts, Loans and Divorce in New Jersey
Couples going through a divorce in New Jersey typically divide “marital” property (assets acquired during marriage, including gifts between spouses), but not “separate” property, which includes property either spouse owned before the marriage, individual gifts from third parties to either spouse during the marriage, and inheritances.
For more information on how New Jersey courts divide marital property in divorce, see New Jersey Divorce: Dividing Property, by Teresa Wall-Cyb, and our New Jersey Divorce and Family Law page.
Gifts as Separate Property
Questions about gifts in divorce tend to come up in a few different situations. Probably the most common is where one spouse claims certain property was a separate gift that doesn’t have to be shared in the property division.
When faced with such questions, New Jersey courts start by assuming that all property a couple owns either together or separately at the time of the divorce is marital property. From there, one spouse can prove that an asset was actually a separate gift with evidence regarding the nature and the circumstances of the gift, including testimony of the donor.
Even if an item was clearly intended originally as a gift to only one spouse, if that spouse “commingled” (mixed) the gift with marital property by depositing it into a joint account, for example, or by using it for the benefit of the other spouse or the couple, a court might find that the gift has lost its separate character. The court will essentially conclude that the spouse who originally received the gift decided to give a portion of it to the other spouse.
However, depositing money received as a separate gift into a joint account for a brief period doesn't necessarily establish commingling if the spouse claiming that the money is separate can prove there was never an intent to give part of it to the other spouse and can trace the exact amount of the gifted funds through bank records.
Exchanges and Increases in Value
Property purchased with separate property gift funds or received for the sale or exchange of separately gifted property remains separate, but the spouse claiming the separate character must be able to trace the money or property back to the original gift.
An increase in the value of a separate gift during marriage as a result of economic circumstances alone is also generally separate. For example, the interest earned on separate money kept in a savings account would be considered separate.
But an increase in value from the active efforts of either spouse is marital property, even if the original owner made the only active efforts. So, for example, if the marital home was originally a gift to only one spouse, and that spouse also earned all the income in the family and made all the mortgage payments, the increase in equity due to the mortgage payments made during the marriage would still be marital property, because the efforts of the homemaker spouse contributed to the ability of the working spouse to make those payments.
If the property also increased in value due to market conditions, the total increase in value would be partially separate property and partially marital property.
One spouse can also make a gift of separate property to the other during marriage by changing the title of the property to joint ownership. This “transmutes” (changes) the property from separate to marital. So, for example, if one spouse changes the title on a separately owned home to “tenants by the entireties,” the home becomes martial property subject to equitable distribution during a divorce.
Gifts versus Loans
In some situations, the question won’t be whether or not property was a separate gift, but whether or not it was a gift at all or simply a loan. One spouse may want to characterize money received from a parent or relative for a major purchase, such as a family home, or for another purpose, such as establishment of a family business, as a loan, so that both spouses will share responsibility for repayment. The other spouse will want to claim that the money was a gift, which doesn’t have to be repaid.
Unless there is a signed promissory note or some evidence of partial repayment (such as cancelled checks), a court is unlikely find a valid debt, or to assign such amounts as debts in the property distribution.
For more information on the division of debts in New Jersey divorce, see Credit Cards and Divorce in New Jersey, by Lina Guillen.
In a few cases, New Jersey courts have characterized some assets as “conditional gifts,” including property one spouse purchased shortly before marriage, but which both spouses improved during marriage, because it was purchased “in contemplation of marriage.”
These courts essentially concluded that the asset (usually the marital home) was a gift made on condition of marriage. As long as the marriage occurred, the asset became marital property. More recently, however, courts have criticized this doctrine as having no basis in law, so it isn’t certain that a court today would follow it.
Courts have also applied this concept of “conditional gifts” to disputes regarding ownership of engagement rings given by a husband to a wife prior to marriage. New Jersey courts consider the ring to be the wife’s separate property in the event of divorce. If the couple decides not to marry, however, ownership of the ring goes back to the fiancé that gifted the ring, regardless of who breaks off the engagement.
Characterizing gifts during marriage for purposes of property distribution can be complex. If you and your spouse can’t reach an agreement about the nature of a gift, contact an attorney for advice.