1. Are gifts from parents subject to equitable distribution in a divorce case?
No. N.J.S.A. 2A:34-23 specifically excludes from equitable distribution all gifts received by either spouse from a third party. The third party, in most instances, is a parent of one of the parties. However, it is important to note that interspousal gifts are subject to equitable distribution. The burden of proving that an asset is an interspousal gift rests upon the party alleging the status of the subject property.
Many disputes have arisen over whether a gift from a parent was made to one spouse or to both spouses, or whether a gift to one spouse lost its separate and immune character by virtue of being commingled with marital property (for example, by deposit in a joint savings account). See Dotsko v. Dotsko, 224 N.J. Super. 668 (App. Div. 1990).
It is important that a spouse keep assets derived from a gift(s) separate and distinct from the rest of the marital property. Separate property that is brought into the marriage is not eligible for distribution upon divorce. However, spouses quite frequently commingle their resources. Consequently, separate property that was a gift is often commingled with marital funds. If this should occur, then an argument can be made that the gift was converted to marital property. The outcomes of these situations are decided on a case-by-case basis. However, if possible, it is always strongly advisable to keep gifts from your parents and your inheritance separate from your spouse’s finances.
2. My parents gave me $50,000 to use as a down payment on the marital home. Unfortunately, the marriage has broken down – my wife is a cheater and a “spendaholic.” Is the $50,000 gift from my parents subject to equitable distribution?
This type of scenario occurs very frequently. Parents often are very generous with their children on their wedding day or in the newlywed years. The parents want their children to get a good start to their marriage. A generous check often can be used as a down payment to purchase a new home for the newlyweds. Moreover, in many cases, the parents will gift lots of land to a child and to his or her future spouse. The parents have visions of a happy marriage and of many happy and healthy grandchildren. If this vision “pans out” then the gifts were worth it in the eyes of the parents.
Unfortunately, many marriages turn out to be disasters. Once a marriage ends, the in-laws will quite often contend that the gift was made only to their child. Alternatively, the in-laws could maintain that the gift was only a loan. The black letter law with this scenario is that a gift by a third party (usually an in-law) to both spouses, typically the down payment on their house, is subject to equitable distribution. However, the fact that the gift was made by the parents of one spouse is a factor that the court may take into consideration when it decides on equitable distribution. There is no definitive answer to this type of scenario; most courts will analyze these fact patterns on a case-by-case basis.
The equitable maxim that gifts given in good times cannot be taken back in bad time often applies. In most cases, there is no writing or contract to corroborate the fact that the parties and the generous parents viewed the money as a loan, perhaps as the down payment on a house, at the time when it was made. Once the marriage breaks down, the other spouse will claim that it was a gift. If a loan is made by parents to a child and his or her spouse, then it should be carefully documented so that there can be no dispute in the future. If the monies advanced were a loan made to both spouses, then it is a marital debt that should be repaid. The best evidence of a loan is a promissory note that is given by both parties. But other evidence may be sufficient, such as canceled checks by the spouses to the parents over a period of time, which may indicate repayment of a loan.
To summarize, if a spouse is making a significant down payment that consists of a gift from a parent(s), then it is always advisable to have a basic prenuptial agreement prepared. A prenuptial agreement can provide that the in-laws shall receive their contribution back if the marriage is terminated and if the marital home is then sold.
3. What is the legal standard of law that a court uses to determine whether funds from parents are a gift?
To determine whether funds given from parents are a gift, a court must consider the tests for each. A valid gift must contain the following three elements:
a. The donor must perform an act which constitutes an actual or symbolic delivery of the subject matter of the gift;
b. The donor must have the intention to make a gift;
c. The donee must accept the gift and the donor must relinquish ownership and dominion over the subject matter of the gift as much as is practical or possible.
The most important element is the donor’s intent. The donor (or the parent) must intend to make a gift.
4. What is the legal standard of law that a court uses to determine whether funds from parents are a loan/marital debt?
For parents to succeed on a claim that money given to their child and to the child’s spouse is a loan and therefore marital debt, they must satisfy a two-pronged test:
a. The lender (the parents) advanced money to the borrower (the child and/or spouse); and
b. There is an agreement for repayment which includes terms such as interest and when payments are due.
In most family court cases, it is rare for family members to have loan contracts. Therefore, the next question is whether there is any supporting documentation or any other evidence of repayment to support a contention that the advancement of funds was a loan. Canceled checks that note the repayment of interest or principal may be conclusive proof that the funds advanced were indeed a loan.
5. My parents lent me $50,000 to purchase a new house. How can I ensure that my parents will be repaid these monies if I should ever get divorced?
Parents should document any and all loans that they make to their children. These loans should be in writing. There are countless forms for promissory notes on the Internet. Moreover, simple promissory notes can be purchased at an office supply store. The documentation does not have to be overwhelming or be a “book.” Instead, parents simply must show clear and conclusive “paper proof” that monies lent to their child and his or her spouse were a loan and not a gift. The simple task of documenting a loan can avoid thousands of dollars in litigation costs if the parties ultimately divorce. The more time that passes after a gift or loan is made to children, the more difficult it is for a court to ascertain the parent’s intentions. It is also harder to obtain the needed documentation with the passage of time.
