Never look a gift horse in the mouth they say. But what happens to these gifts you received during your marriage in your divorce? New Jersey is what is referred to as an “equitable distribution” state which means that divorce will cause the court to make an equitable (not necessarily equal) split of the parties’ marital assets. Marital assets are generally property that was acquired during the marriage. The court uses a list of factors to determine what is the “most fair” or equitable split of this property.
There are some assets and property that will not be split in equitable distribution which are called “separate assets” and will be determined to be owned by only one spouse. Identifying whether property and assets are separate or marital is often fact specific and leave many people with questions about what is and what is not, going to be shared with their spouse. Below I will address some common questions our clients have about gifts received during their marriage and how they are treated in equitable distribution.
1. Gifts from my spouse
Gifts from your spouse are called interspousal gifts and are typically subject to equitable distribution. The party who wants a piece of property to be considered an interspousal gift has the burden of proving it was, in fact, a gift. One of the most common gifts that are raised as a question is the engagement and wedding ring. An engagement ring is considered a “conditional gift” meaning that the gift of the ring is conditional on one spouse fulfilling the promise to get married. Once the marriage happens, the ring belongs to spouse who received it, not the purchaser, and it is considered separate property. However, this can change if the engagement ring is later enhanced or upgraded during the marriage, where the Court will usually divide the value of the upgrades. The wedding ring however is typically considered an interspousal gift that is subject to equitable distribution.
2. Gifts from third parties
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, the caveat to this statement is that most of the time an argument arises as to whether the gift was to one spouse (separate property) or to both spouses/family (marital). For example, just because Husband’s friends gave a gift does not mean it belongs solely to husband. Additionally, even if gifted solely to one spouse, the gift can still become marital because it is comingled with marital property. For example, if Wife’s grandmother gives her a check for $1,000.00 and she deposits that money into a joint account with her Wife, that money has been comingled with marital money and is now considered marital. (See, Dotsko v. Dotsko, 224 N.J. Super. 668 (App. Div. 1990).)
3. Gift from parents
Ok. You got me. If you’ve read this far you probably realize that gifts from parents are similar to number two because they are gifts from third parties. The reason this earned a separate category is because this scenario occurs so frequently. Parents often are very generous with their children at their wedding or early as they begin their lives together because parents want them to have a good start on life. We are often asked about generous checks given for down payments on new homes or even the gift of a new home/land.
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 donor must perform an act which constitutes an actual or symbolic delivery of the subject matter of the gift.
- The donor must have the intention to make a gift.
- 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- meaning they must have intended to make a gift. Once a marriage ends, it is very common for parents to claim that the gifts were made solely to their child or that the gift was really simply 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, is subject to equitable distribution. However, as we discussed above, New Jersey is an equitable distribution state not equal distribution. Because of this, 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 what share each party should receive. Determining what portion each spouse will receive has to be made in a case-by-case basis.
Money from parents (or other third parties) are going to be considered gifts unless there is some formal writing confirming the disbursement was a loan. In order to support the position that the money was a loan, the in-laws typically would need some writing or contract (promissory note) to corroborate the fact that the parties all viewed the money as a loan and not as a gift at the time it was made. 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:
- The lender (the parents) advanced money to the borrower (the child and/or spouse); and
- 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 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.
1. Keep separate property, well, separate.
The only way to guarantee that you will not have to share a gift is to ensure that you keep the gift separate and distinct from the rest of the marital property. Separate property that is brought into the marriage (premarital property), is not subject to distribution upon divorce, except that most people commingle resources when they marry, which transforms the property from separate to marital-making it subject to distribution. Similarly, a gift is often commingled with marital funds making it subject to distribution. Therefore, if possible, it is always strongly advisable to keep your gifts from your parents and your inheritance separate from your spouse’s finances.
2. Document loans to ensure repayment.
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.
3. Prenups do not have to be what we see in movies.
If one 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.
If you have questions about property division, let us answer them. We can talk with you about how the court is likely to treat the property and debt in your divorce.