Gifts and Loans Upon Divorce
Family Lawyer at Girlings Megan Mahesan considers the legal implications of gifts and loans in marriage and upon separation
As Family Lawyers, we are often asked by clients for reassurance that monies paid to them by family and friends prior to or during a marriage, are protected upon divorce. Often such payments have been from parents to assist with purchasing or renovating a property, or as part of inheritance tax planning. Clients will often say they have received what they term ‘early inheritance’ and they want to make sure it is protected.
It is reasonable for clients to try and safeguard such assets from inclusion in the matrimonial pot. However, often as family lawyers, we must provide candid and potentially unfavourable advice concerning the legal treatment of such payments.
How Gifts are Treated Upon Divorce
Generally, in court proceedings (though parties may negotiate a different financial settlement), gifts received before or during marriage are classified as matrimonial assets and are therefore available for redistribution or sharing between spouses. It is possible to argue that such funds should be reserved for their intended recipient, however making this case is often challenging and complicated.
Megan Mahesan
How Loans are Treated Upon Divorce
When a party asserts that funds received from family or friends constituted a loan to be repaid, the Court will first determine whether the monies were in fact a loan, or otherwise a gift.
If deemed a loan the Court would then consider whether the monies were a ‘soft loan’ or ‘hard loan’. A hard loan will be treated like a commercial loan (the debt has been created to be repaid) whereas the Court will generally take the view that soft loans do not need to be repaid.
Factors that could persuade the Court that the loan should be categorised as a hard loan include that it was a significant sum (meaning the creditor was unlikely to waive the obligation in part or full), that there was a written agreement opposed to a verbal agreement, for example a loan agreement or a declaration of trust existed), that payments have been/are being made and that the terms of the agreement were like a commercial agreement i.e., interest accrual existed. In addition, consideration must be given regarding whether repayment can be legally enforced.
Factors that could persuade the Court that the loan should be categorised as a soft loan include whether the obligation is to a friend/family member, that it was an informal arrangement and there has been no repayments to date.
How to Protect Gifts and Loans
If the payer is seeking repayment, contemporaneous documentation such as loan agreements or declarations of trust, serve as strong written evidence of the parties’ intentions regarding the payment.
If seeking to protect gifts or loans, received prior to, or anticipated during the course of the marriage, then a pre or post-nuptial agreement can offer some protection. Despite common perception, such documents are not just for the rich or celebrity couples. Whilst not legally binding the Court are more frequently upholding pre-nuptial agreements if they have fulfilled a number of criteria at the time they were entered into.
No-one gets married believing that it will end in divorce, nor do people gift/loan money believing that it will not be retained by the intended beneficiary. However, considering the legal implications of gifts, loans and/or ‘early inheritance’ is important if seeking to protect one’s own, or family’s, financial interests.
Megan Mahesan is an Associate Solicitor in the Family Law department working out of the Firm’s Ashford office. To discuss any matter raised in this article please contact Megan: meganmahesan@girlings.com