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Gifts vs. Loans in Divorce

Many married couples receive financial assistance or assets from their family members. If the parties file for divorce, how should these assets be classified and divided by the court?

Illinois excludes property acquired by gift from a third party from the marital estate, because these gifts are not earned by the efforts of marital partnership. The parties may dispute whether the transfer was a gift, rather than a purchase, loan, or compensation for services.

The question your attorney will want to know is whether the person making the gift intended to transfer ownership of the property irrevocably without receiving anything in return. Courts resolve this question by examining the facts of each case.

First, courts heavily rely on the testimony of the transferor (if credible) when evaluating the nature of the transaction. In re Marriage of Simmons, 221 Ill. App. 3d 89, 581 N.E.2d 716 (1991).

Courts also review the documents associated with the transfer of property to determine if said transfer is actually a gift. When the transfer documents characterize the consideration as love and affection, courts generally find donative intent, absent strong evidence to the contrary. On the other hand, where the relevant documents depict a transfer for consideration, that evidence weights against finding a gift. In re Marriage of Agazim, 147 Ill. App. 3d 646, 498 N.E. 3d 742 (1986).

Ask yourself this: if the transaction created an enforceable repayment obligation, there is no gift. Are there any documents supporting whether or not the transfer of money was a loan? If the couple made payments of principal or interest before the marriage breakdown, the transfer will likely be considered a loan. For example, in In re Marriage of Cook, a father gave the couple money. The father often telephoned the couple to discuss repayment and there were cancelled checks from the couple evidencing repayment to the father. This made it clear to the court the funds given constituted a loan rather than a gift. 117 Ill. App.3d 844, 453 N.E. 2d 1357 (1983).

To the contrary, if there was no note and the couple never made repayments, the transaction will likely be considered a gift. In re Marriage of Heinze, 257 Ill.App.3d 782, 631 N.E. 2d 728 (1994) (money received from husband’s parents for purchase of home was gift, not a loan, where no note was signed). In Illinois, there is a presumption that property transferred from parent to child constitutes a gift. The courts have said that this presumption cancels the marital property presumption and leaves trial court to resolve the issue based on facts presented.

Courts further evaluate intent by looking to the way parties report the transactions to the IRS. Evidence that the transferor complied with gift tax laws generally indicates that transfer was a gift. If the donor was supposed to file a gift tax return but did not do so, the omission generally indicates that the transfer was not a gift. In re Marriage of Agazim, 147 Ill. App. 3d 646, 498 N.E. 3d 742 (1986); In re Marriage of Rosen, 126 Ill. App. 3d 766, 467 N.E. 2d 962 (1982).

If the disputed conveyance is a gift, the question remains whether that gift was intended for both spouses or for one spouse alone. A gift to both spouses is viewed as marital property, while a gift to one spouse alone is separate property. The burden of proof lies on the spouse who claims the gift was individual. In Illinois, there is a presumption of a gift to the marital estate when spouses receive property in joint title as a gift from a third party. In re Marriage of Hunter, 223 Ill. App. 3d 947, 585 N.E. 2d 1264 (1992).