Dividing marital assets at the end of a relationship can be quite straightforward, but how do the courts look at gifts and divorce?
It is not unusual for parents to give their adult children significant gifts to help them get ahead in the property market, to go on a holiday or perhaps to assist with the raising of their children.
This is all perfectly standard and legal, and many people are lucky enough to receive monetary gifts from their retired parents.
A problem arises when the adult child receiving a gift of money is in a relationship and this relationship later ends.
Does the other spouse have a right to the money that was given as a gift?
How can a person hold onto their gifts in a property settlement?
Will the gift be counted as part of the divisible pool of marital assets?
Property settlements do not follow any specific formula and many different points come into consideration.
Here are some of the most important elements to consider when looking at gifts in property settlements.
Assessing Contributions In A Property Settlement
A property settlement involves identifying a couple's – whether de facto or married – assets, resources and liabilities and working out their total value.
This typically involves looking at bank accounts, superannuation, property, mortgages, loans and sometimes other physical assets such as cars.
Both parties' contributions to the marriage are evaluated.
Contributions can be classified as direct and indirect, financial and non-financial.
Non-financial contributions include caring for children and maintaining the household.
These are viewed as equally valuable as earning an income to provide for the relationship and family.
The court will divide the assets according to the contributions made by each party to the relationship.
However, adjustments may be necessary to account for a difference in the spouses' current or future earning capacities.
One spouse, for example, may be the primary carer of the couple's children and therefore have a limited capacity to work.
A person may also be less able to work due to illness, age or other reasons.
Any gift received by a party to the marriage will most likely to be counted as a financial contribution they made to the relationship.
If the gift was received before the start of the relationship, it will be categorised as an initial contribution.
As this increases the contributions the gift recipient made to the marriage or de facto relationship, their entitlements in the property settlement are likely to increase as well.
But be careful – there are other factors that affect the division of assets, and every case is different and is considered on its own.
Who Received The Gift?
Because a property settlement is about assessing contributions to the relationship, an important question is who was intended as the beneficiary of the gift.
If one spouse in the relationship receives a substantial monetary gift, it must be determined whether the gift was meant for their sole benefit or for the benefit of the other spouse as well.
Unless it is clear that the gift was meant for the equal benefit of both people in the relationship, the court will usually consider the gift as received by only one party.
This will then affect the assessment of contributions as well as the adjustments made in the property settlement.
However, the question of who the gift belongs to holds less weight the longer the couple were married or in a relationship.
When dividing the property and assets following the breakdown of a shorter marriage or de facto relationship, such as one lasting for five years, it is more likely that any monetary gift received by either party will be kept out of the divisible asset pool, remaining the property of the gift recipient.
For longer relationships lasting at least ten or fifteen years, regarding gifts in property settlements, it is less relevant which side of the family the gift came from.
The court is more likely to treat both spouses as equally entitled to the money.
Determining who receives gifts in property settlements or whether a gift is divided equally depends on the assessment of contributions and each party's earning capacity.
Protection of Gifts When Getting A Divorce
If you are the person giving a significant gift to your adult child, the possibility of their relationship ending in the future and their spouse claiming the money can be a legitimate cause for concern.
There are some strategies you can use to protect against this possibility, even if you do not think it very likely, and to keep the gift in your child's possession in the event of a relationship breakdown.
One way to safeguard any gifts in property settlements is by recording your gift as a loan to make it technically repayable to yourself.
Loans are treated differently in property settlements from outright assets.
The court will not consider it as part of the divisible pool of marital assets as it is money that needs to be repaid.
If the court decides to have the loan repaid using the resources in the asset pool, following the finalisation of the divorce you are able to regift the money to your child.
The second way to ensure a gift remains belonging to its initial recipient is to draw up a binding financial agreement, or a prenuptial agreement.
Here, both spouses acknowledge the existence of the gift as belonging to one spouse, and acknowledge that the gift is not divisible with the other spouse in the event of relationship breakdown.
A binding financial agreement is a legal document, witnessed and signed by an authorised person such as a Justice of the Peace.
The Engagement Ring
Parents are not the only people who may be concerned about the division of gifts in property settlements.
When a relationship breaks down, the spouses can have their mind on a very significant and symbolic gift made from one to the other: the engagement ring.
Australian couples now marry later than ever before, the engagement period lasts longer and over 75 per cent of couples move in together before getting married.
As with any relationship, ring or no ring, engaged couples sometimes break up.
Because the ring is generally a very expensive purchase, exactly who it belongs to – the gift recipient or the gift-giver – becomes a very important question.
Up until around the mid-20th Century, family courts typically considered the ring as belonging to the person who gave it to the other spouse.
The thinking was that the gift was given in contemplation of marriage, but the marriage never happened.
Today, the law varies on who owns the engagement ring, and the court's decision often depends on factors including the value of the ring itself, who gave it to whom and whether the couple cohabited.
For many couples, the engagement ring can be a significant purchase.
Engagement rings are often expensive pieces of jewellery, but the value attributed to gifts in property settlements is based on their current second-hand purchase price rather than their value at the initial time of purchase.
Therefore, engagement rings may diminish in value when considered as part of the property settlement.
If the judge finds the engagement ring to not be of great value, and therefore not worth any kind of division or transfer of ownership, they will then usually allow the person who received the ring to keep it.
However, engagement rings with a significantly higher second-hand value, and therefore more likely to be causing conflict in the property settlement, will generally be counted as part of the asset pool to be divided between the spouses.
Considering the engagement ring as a gift given with the promise or expectation of marriage may affect a court's decision on who retains ownership of it following a break-up.
The court's decision may depend on who gave the ring and who left the relationship.
If the person who was given the ring refused to fulfil the conditions of the gift – marriage – then they may have to return the ring.
If the person who gave the ring refused to follow through with the promise of getting married, they may have no claim to the ring in the property settlement.
All this is based on the assumption that the couple in question cohabited as a de facto couple while they were engaged.
To be entitled to a de facto property settlement, which does not differ from the property settlement of a married couple when they divorce, a couple must be living together on a genuine domestic basis, not related to each other and not legally married.
The majority of Australian couples live together before marrying, making the ending of an engagement and the ending of a marriage a similar matter before the family court and raising the same issues regarding gifts in property settlements.
Gifts in property settlements can be quite difficult, and it always best to seek specific legal advice for your situation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.