How Are Gifts and Loans From Family Members Affected by Separation and Divorce?
By Timothy Matthews | April 18, 2023
Imagine this scenario: A couple gets married, and shortly afterwards one partner’s parents give her $50,000, which she uses as a down payment for the purchase of a home. The spouses move in to the home and live together in it. The parents tell their daughter she should pay them back when she can; however, no amounts are ever repaid, and no loan agreement is ever signed.
The couple separates six years later. How does this affect the rights of the couple with respect to their property and what they may owe to the other? Is the $50,000 a gift or a loan from the parents to their daughter?
This is a common situation and one that often leads to misunderstanding, disagreement and, not infrequently, litigation.
How are gifts generally treated on separation?
With some exceptions, gifts that are received by married spouses during the marriage are given special treatment. The gift, or property that can be directly “traced” from the gift, must still be in existence at the time of separation for this special treatment to apply.
If that special treatment does apply, gifted property, or property traceable from a gift, can be “excluded” from the spouse’s “net family property”, which is the property that will be accounted for in the parties’ separation. Essentially, the value of the gift would not be equalized between the separating spouses as it normally would, and the spouse who received the gift would retain the full value of the gift (that is, they would not have to account for it as “marital property”).
There are exceptions to this, and the timing of the gift also matters, as gifts received before, during, and after marriage would generally all be treated differently.
For example, if the parents gave their daughter a gift of valuable artwork before her marriage, it would not matter that she received it as a gift. The daughter would be able to “deduct” the value of the item as of the date of marriage from her net family property, just like any other asset owned at the date of marriage.
If the parents gave their daughter a gift of valuable artwork after her date of marriage, but before separation, and the daughter still owned it at the date of separation, it would be “excluded” from the daughter’s net family property, which means she would not be required to share it, or its value.
Finally, if the parents gave their daughter a gift of valuable artwork after the daughter separated from her partner (either before or following a divorce), it would not have any effect on the daughter’s net family property (i.e., it would not be considered in the property or value sharing at all), the same as with any other assets acquired by either party after the separation.
The gift has to have come from a third party, meaning that gifts between spouses do not get this special treatment. A “third party” is often a parent or a grandparent, but could be anyone, including a friend or relative.
The gift also cannot be a matrimonial home, or traceable to a matrimonial home. The “matrimonial home” is defined as a property that, at the time of separation, was ordinarily occupied by the spouses as their family residence. Thus, in the example above, the $50,000 amount received by the daughter generally would not qualify as a “gift” that could be “excluded” from her net family property. On the other hand, if the parents gifted their daughter a rental income property after her date of marriage that was not ordinarily occupied by the spouses as their family residence, the gift exclusion would then normally apply.
A gift or a loan?
It is not uncommon for there to be disagreements between separating spouses (and sometimes their parents) regarding whether a transfer of money or other assets was a gift or a loan. This can make a significant difference to the treatment of the item in the separation. The determination of this will depend on a number of different factors, including whether there was any written or verbal agreement, and whether any repayments were made over time.
So, what about the $50,000?
Given that no amounts were ever repaid and there was no loan agreement, it is unlikely that the $50,000 would be treated as a loan owing from the daughter to her parents at the time of separation. Therefore, it would most likely be considered a gift.
Normally, that designation of the funds as a gift from a third party would entitle the daughter to an exclusion of that gift, if still in existence on the date of separation (or traceable into an asset that was still in existence), for example, if the $50,000 was sitting in a separate bank account or investment account. However, the daughter used the funds to purchase the home, which the parties occupied as their ordinary residence. Assuming the spouses continued to occupy the home as their ordinary residence at the time of their separation, the home would be considered their matrimonial home at the time of separation. So, while the gift was from a third party, and was received during the marriage, there would not be any exclusion or special treatment on account of the funds being traceable to a matrimonial home.
As a result, this gift would not receive special treatment in the equalization of property of the spouses. This may have been contrary to the original intentions of the daughter and her parents: to give the daughter a full exclusion of the $50,000 against her marital property.
Interestingly, had the $50,000 been characterized as a loan from the parents (to either the daughter, or the parties jointly), rather than a gift, it is possible that the daughter could have obtained a more favourable outcome regarding these funds.
This is a complex area, so it is a good idea to consult a lawyer about significant third-party gifts or loans before they are made, in order to better understand the legal implications, and to avoid unexpected results.
Contact Henderson Family Law today if you have questions about a gift or potential gift.
This content is provided as a general informational source by Henderson Family Law, and does not constitute legal advice or opinion, or establish a lawyer-client relationship. Every situation is complex and fact-specific, and appropriate advice will vary accordingly. Do not rely on this information for legal decision-making under any circumstances. Please consult with us and obtain proper advice and strategy concerning the specifics of your particular situation.