These days, it is common for couples to receive financial assistance from ‘the Bank of Mum and Dad’ when purchasing a home or in the form of an early inheritance that is not linked to the purchase of an asset. This article considers – what happens to that contribution if the couple gets divorced? Are gifts from parents marital property?
Are gifts from parents’ marital property?
When a couple gets divorced, are gifts from parents considered marital property? Are the financial contributions returned to the parents / grandparents, retained by the individual who is related to them, or shared between the divorcing couple?
The answer depends on whether the divorcing couple have previously entered into a pre or post nuptial agreement, the available funds to meet their respective needs, how the financial assistance was provided, what was intended and whether any formal legal documents were drawn up at the time of the gift.
Gifting money before divorce
If you gift assets or money to your child either before they get married or whilst they are married without entering into a legal document to formalise the arrangement and protect the gift (as discussed below) and your child later gets divorced (without having entered into a pre or post nuptial agreement), there is a risk that the gift would form part of the ‘matrimonial pot’ available for distribution between your child and their spouse. That means the gift could be shared with their ex-spouse and not retained by them or returned to you, which you may not want to happen in the circumstances.
Legal documents that protect the ‘Bank of Mum and Dad’
There are ways to protect and recover the financial contributions given to the couple.
Legal Charge
If, for example, you make a contribution to the purchase price of a property for your child and their spouse, you could enter into a legal charge which would be registered against the title to the property. The charge would usually provide that in the event the property was sold, you would be repaid out of the proceeds of sale (after repayment of the primary mortgage). The existence of a charge would be very strong evidence that the funds should be returned (in accordance with the terms of the charge) and not shared with the other spouse. The value of the funds secured by the charge would therefore fall outside of the matrimonial pot.
Declaration of Trust
Instead of a legal charge, a Declaration of Trust could be entered into naming the person(s) providing the gift as one of the beneficial owners of the property (with the size of their share generally equating to the amount gifted towards the purchase price, which could either be a fixed sum or a percentage of the equity).
A declaration of trust would provide more protection than a legal charge as it would make you (the gift givers) a beneficial owner of the property, meaning if the property was sold you would have to be repaid in accordance with the terms of the trust. With a legal charge, if the debt is not paid then the terms of the charge would have to be enforced by making an application to the court.
The position is different where a declaration of trust is entered into by the couple only (i.e. without reference to the provider of the gifted funds) who later marry or are already married. In those circumstances, a declaration of trust (in the absence of any pre or post nuptial agreement giving effect to it) would provide very limited protection and is always subject to the wide jurisdiction of the family court. Usually, declarations of trust entered into by a couple before or after marriage (which would usually be drawn up to record that they have unequal shares in the property because they have contributed different amounts to the purchase price) are entirely disregarded by the court, who will be primarily focused on the needs of the parties, as opposed to their financial contributions, when deciding how to divide the capital assets.
Loan Agreements
A simple loan agreement would be less persuasive to a court than a legal charge or declaration of trust, as family loans are at significant risk of being disregarded entirely by the court on the basis that family members are unlikely to sue other family members if loans are not repaid. This is discussed further in this article. A legal charge or declaration of trust provides security and formality; a loan agreement does not have the same effect, although each case will turn on its own facts.
The problem lies where there is no formal document detailing the financial assistance and the repayment terms. This can make it harder for the money to be returned to the parents / grandparents in the event of a divorce. It may be argued to either be a soft loan or an outright gift. That is why legal documents are important.
Pre and post nuptial agreements
A pre or post nuptial agreement entered into by the couple which ring-fences any gifts from family members or inheritance would offer significant protection in the event of a later divorce. These agreements are becoming increasingly popular, and for good reason. This is discussed in more detail here.
How the needs of the divorcing couple comes into play
If there are not enough assets to meet the parties’ and any children’s reasonable needs without using the financial assistance provided, and there is no formal agreement, then it will be much harder to argue that the money should be returned.
If there’s an abundance of funds available to meet both parties’ needs, without recourse to the funds provided by the parents / grandparents, then the argument is stronger that the funds should be repaid. It will help the argument if clear repayments can be shown since the payment of the financial assistance and/or any written agreement regarding the funds at the time they were paid, but entering into a formal legal document is always going to offer the best form of protection.
Each case turns on its own facts, but if you wish to protect any financial assistance to a child / grandchild when they are married (or are buying a property with a partner and may eventually get married) then it is important to seek legal advice at the time of doing so.
How early inheritance (not related to a specific asset) is treated on divorce
Any financial assistance that is not made in relation to an asset (for example, a house purchase) and instead simply involves the passing of funds to a child / grandchild as a stand-a-lone gift or early inheritance, could be taken into account in any financial settlement on divorce, albeit as ‘non matrimonial’ property (unless a pre or post nuptial agreement is entered into which provides that any such financial assistance should be ring-fenced).
The distinction between matrimonial and non-matrimonial property is further discussed in this article.
If there is no pre or post nuptial agreement and the funds from the ‘Bank of Mum and Dad’ have been intermingled with family assets, such as being placed in a joint bank account or spent on jointly owned property, it can be very difficult to argue that this was early inheritance intended for just one spouse and that they should receive these funds back in any settlement. This is particularly the case if there is not enough money in the matrimonial pot to meet the parties’ and children’s reasonable needs.
There may be an argument for early inheritance to be kept if there are enough assets to meet the parties’ and children’s needs without this money. It would also strengthen any argument if the money is kept separate from any family bank accounts, such as in a separate bank account, only used by the spouse who is related to the person providing the funds. However, entering into a legal document to formalise the position will offer the best form of protection as the court has a wide discretion and outcomes can be unpredictable. If you would like advice on gifting or loaning money from the ‘Bank of Mum and Dad’, please get in touch and our Family team would be happy to assist you.