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Gifts and Loans From Parents in Divorce
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 is in most instances are the parties' parents. 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 for the property.
Many disputes have arisen over whether a gift from a parent was made to one 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 bank account. See, Dotsko v. Dotsko, 224 N.J. Super. 668 (App. Div. 1990).
It is important for any spouse to keep any of their assets that were 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, quite frequently the spouses 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 into marital property. If this type of situation should occur, then every case is decided on a case by case basis. However, if possible it is always strongly advisable to keep your gifts from your parents and your inheritance separate from your spouse's finances.
My parents gave me $50,000 to use as a down payment on the marital home…
Unfortunately, the marriage was a disaster because my wife is a cheater and a "spendaholic." Is the $50,000 gift from my parents subject to equitable distribution?
This type of scenario also occurs very frequently. Parents often are very generous with their children at the wedding day or in the newlywed years. The parents want their children to get their marriage off to a good start. 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 their 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, in many instances marriages turn out to be disasters. Once a marriage ends, then quite often the in-laws will then contend that the gift was only made to their child. Alternatively, the in-laws could maintain that the gift was instead only a loan. The black letter law on this type of situation 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. Nonetheless, the asset is still subject to equitable distribution. There is no definitive answer to this type of family law scenario. Most courts will analyze this type of fact pattern on a case by case basis.
The equitable maxim that gifts given in good times cannot be taken back in bad time often applies. Unfortunately, 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, say of a down payment on a house, at the time when it was made. Once the marriage breaks down, then the other spouse claims that it was a gift. If any loans are ever made by parents to a child and their 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 that it was a loan would be 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 of a period of time that indicates repayment of a loan.
In summary, 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. This issue frequently arises when one set of in-laws provides the funds to pay for the down payment for a marital home. 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.
What is the legal standard of law that a court must use to consider whether funds from parents are a gift or a loan?
To determine whether funds given from parents are a gift or a loan a court must consider the tests for each. A valid gift must contain the following three elements:
The most important element is the donor's intent. The donor or the parent must intend to make a gift.
What is the legal standard that the court uses to determine if funds given from a parent to their child and his spouse are a marital debt?
For parents to succeed on a claim that the money they lent to their child and to the child's spouse is a marital debt, then they must satisfy a two-pronged test:
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 that the advancement of funds was a loan. Canceled checks that note the repayment of interest or principle may be conclusive proof that the funds advances were indeed a loan.
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 always 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 also be purchased at Staples. The documentation does not have to be overwhelming or be a "book." Instead, parents simply must obtain clear and conclusive "paper proof" that any monies they lent to their child and his or her spouse is 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, then it is much more difficult for a court to ascertain the parent's intentions, and it is harder to obtain the needed documentation.
If the divorce is being filed under one of the seven fault grounds (including extreme cruelty, adultery, abandonment, substance or alcohol addiction, institutionalization, deviant sexual conduct and incarceration), the 18 month separation period, required for a no-fault divorce, is waived. However, each ground for divorce has its own stipulations.
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