Divorce: How will family gifts be treated if I divorce?

 

Where one spouse’s family has been lavish in their support of the next generation, enabling weddings to be funded, properties and cars to be bought, business ventures seeded and mortgages paid down, it can feel tough for that side of the family if the couple subsequently divorce and they see this generosity being ignored.

In a “sharing” rather than a “needs” based case on divorce, the provenance or source of the divorcing couple’s assets might matter.

But “sharing” cases are strictly for the £5-to-10m-plus category of separating families and that means that for most of us the court will examine the financial position of the couple by reference to:

• Resources on the one side; and
• Needs on the other.

For the court it is a case of seeking a solution that will allow two separate stable households to be created that:

• Is (generally) built on the operation of the CMS formula;
• Provides encouragement to each party to give of their best;
• Drives towards financial independence through the termination of spousal maintenance payments where this can be done without undue hardship; and
• Distributes the financial resources fairly.

It follows that gifts by one family – and who brought what to the marriage – is unlikely to count much in this needs based process.

Of course things may be different where the “family gifts” can be shown to be loans rather than gifts so that:

• The spouse whose parents have provided will be keen to show that the “gifts” were in fact loans;
• The other spouse may be surprised to learn that earlier family support is now being clawed back.

The main feature of a needs case is that there is not enough money to go around (if there were enough then the case would be a sharing case). Of course, where the evidence clearly points to a loan then the court will decide accordingly.

But it is against that backdrop that the family who provided “the loan” will be seeking to explain:

• Why it is that repayment is required now;
• When during all the years of marriage repayment was not made or pursued.

It may be hard for the family to explain why suddenly now at the point of even greater need (as two homes have to be created from the one family home) that repayment is being insisted upon.

The information gathering process is likely to reach out to some or all of the following:

Consistent presentation

• The first tripping hazard is the financial disclosure that is provided by the spouse arguing for the treatment of the family money as loans in the form E and any replies to questionnaire:
• It isn’t sensible to argue that the payment towards the house is a loan (in the property section) and an unmatched contribution that should be recognised in section 4 of the form E.

It is either one or the other and arguing the latter (which is irrelevant) weakens the clear evidence needed to support the former.

Documentation

• Crucial will be the contemporaneous evidence:
• A loan document will be important … indeed some would say that anything less may not get the spouse arguing for the treatment of the family money as loans home (and it will be crawled all over for veracity if the spouse challenging the loan was unaware of it. So both spouses’ signature to it will be really important).

It may be that emails indicating that repayment will be needed as the payment-makers reach old age to cover nursing home costs may play out sufficiently well at court for recovery to be permitted.

Sometimes it will be the fine-print that will destroy the arguments of the spouse arguing for the treatment of the family money as loans: most mortgages are made on the condition that any other payments being made towards the purchase price of a property are from assets which the couple own outright.

Evidence as to intentions as to repayment

• The court will also look at what was said or done during the marriage.

Repayments made since the loan was provided will be crucial or at the very least emails or evidence of other communications chasing up such repayment.

That apart there is going to be a focus on what 3^rd party evidence there is that it is treated as an asset by the “donor”.

• Is it taken account of in any Will by way of reckoning up between the spouse in the divorce and their siblings.

Is the loan referred to as an asset in any presentation of the parents’ assets to wealth advisors or similar.

In the absence of good evidence, payments are most likely to be treated as gifts and therefore will be treated as part of the pot from which the future homes of the parties are to be constructed in any needs based financial settlement.

Of course there are steps that you can take before or even after the marriage to protect the gifts made to you by your family. Consider entering into a prenuptial agreement or, if the gifts arrive during the course of the marriage, a post nuptial agreement. If these agreements are entered into with the necessary formalities they will be persuasive evidence and may operate to ring fence these family gifts.