These days, it’s common for couples to receive financial assistance from ‘the Bank of Mum and Dad’ when purchasing a home or another large asset. This article considers what happens to that contribution if the couple gets divorced?
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 the available funds to meet the spouses’ needs, how the financial assistance was provided and if any formal legal documents were drawn up. It also depends on if the money given was merely gifted or inherited.
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, 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 provide security as it 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 will generally provide a much stronger argument that these funds should be returned and not therefore shared with the other spouse.
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). That would ensure the funds would be returned on a sale of the property and provide a very strong argument for the money to be returned.
A declaration of trust would provide more protection than a legal charge as it would make you one of the beneficial owners of the property (so if the property was sold, you would have to be repaid in accordance with your percentage share). With a legal charge, if the debt is not paid the terms of the charge would have to be enforced.
However, it should be noted that a declaration of trust drawn up between the couple themselves (without reference to the provider of the funds) will provide very limited protection and is always subject to the wide jurisdiction of the family court.
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 likely to be disregarded entirely by the court on the basis that family members are unlikely to sue other family members if loans are not repaid. A legal charge or declaration of trust provides security and formality; a loan agreement does not have the same effect.
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’s why legal documents are important.
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.
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 is instead simply the passing of funds to a child / grandchild as early inheritance could be taken into account in any financial settlement on divorce.
If 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 hard to argue that this was early inheritance due 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.
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.