§ 6.02 Property Acquired by Gift

JurisdictionUnited States
Publication year2021

§ 6.02 Property Acquired by Gift

Almost all marital property states exclude property received during marriage by gift from the marital estate.12 A number of questions can arise regarding the "gift" exclusion.

[1]—Nature of a Gift

A gift is something transferred for purely donative purposes and for no consideration. In a marital property system, such property received by one spouse from a third party is not considered a part of the marital estate, since it was not acquired as a result of the effort of either party. Pursuant to the theory that marriage is a partnership, marital property should only include property acquired due to the efforts of either spouse during marriage. So, a gift normally would not be included in the marital estate. However, if a spouse is "given" something during marriage, but the gift is given in appreciation of past services,13 or with the understanding that future services will be rendered during marriage,14 it is doubtful that this is truly a lucrative,15 as opposed to onerous,16 acquisition.17

Similarly, a sweepstakes prize is not a gift; it is a reward for skill.18 (This assumes some skill is required to fill out the sweepstakes form.) Similarly, a reward like a Nobel Prize would be considered marital property, because it is a recognition of the spouse's efforts.19 Of course, an interesting marital property issue could be presented if the spouse received the award after divorce, but the prize related in part to work done during marriage.

A donor must own something and transfer it to the donee. In an Arkansas case, a father organized a business and arranged for his daughter (the wife) to receive shares in the new company in exchange for a note. The Arkansas Supreme Court did not accept the wife's argument that her father had made her a gift of a business opportunity.20

For a gift to occur, the donor must transfer the ownership interest. In a Missouri case, the court held that the husband had not made a gift to his wife of a truck, where he did not transfer title.21

Property transferred by an employer to an employee is rarely a donative transaction. Such transfers are almost always indirectly a part of an employee's compensation package. As a result, even if an employee receives Christmas "gifts" from an employer, they should be treated as annual bonuses for characterization purposes.22 A Florida court held that a transfer of stock in a law partnership from the partnership to the husband during marriage would not be considered a gift.23 In some instances, a court will consider an employer payment as a gift if the employer had no obligation to make the payment, and the payment is a special payment to one employee.24 An Illinois case concluded that a transfer of stock to an employee during marriage was his separate property. The company had issued stock to others after the employee had purchased shares before marriage; the later transfer to the spouse during marriage was considered a means by which the company avoided diluting his premarriage percentage ownership.25

A Mississippi case involved a spouse who worked during marriage for a family-owned business and received shares of stock from his father. The state Supreme Court affirmed the trial court's ruling that the stock was marital property because it was not clear whether the stock was received as a gift or as compensation for services during marriage.26

In a similar New York case, the court noted that one factor which led to the conclusion that stock was compensation and not a gift from parents was the lack of an equivalent gift to the spouse's sibling.27 If an equivalent gift to a non-employee sibling was made at the time of the transfer to the spouse who was an employee, this would strengthen the argument that the stock transfer to the husband was a gift.28

A New Jersey court has held that in a situation where the parents did not file a gift tax return (which would have been required if a gift had been made), this is not determinative for marital property purposes.29

In a Georgia case, the husband worked for a family-owned business and received $400,000 from the business. The husband's father testified that this was intended as a gift to his son. However, the company prepared a Form 1099 for the payment and deducted the payment as a business expense. No gift tax was paid and the husband declared it as income for tax purposes. The Georgia Supreme Court reversed the trial court's finding that the payment was the husband's separate property.30

It is sometimes unclear whether a transfer of funds to a spouse during marriage from a friend or relative constituted a gift or a loan.31 The determination is a question of fact. For example, in a New York case it was thought important that the check contained a notation "loan."32

In a South Carolina case, the wife's mother provided funds so the couple could renovate their home. In connection with a later divorce, the wife and the mother contended that the advances were intended to be loans. The court did not accept this argument when no loan documents could be found.33

A similar question arises when a spouse is "given" real estate during marriage from parents, but the spouse assumes a loan secured by the property. This creates a characterization problem, since property acquired due to the credit of either spouse during marriage generally is considered marital property.34 There are a number of ways to characterize such a transaction, depending upon how the state characterizes property acquired over time. The transaction could be considered partly a gift and partly a purchase.35 If the state uses the inception of title approach,36 for example, the principal balance of the note assumed could be considered a marital obligation and contribution, and the difference between the fair market value at the time of the gift and the principal balance could be deemed the separate contribution.37 Consequently, each estate would own a fractional interest. A similar analysis could be made pursuant to the pro rata approach.38 Alternatively, a gift of encumbered property could merely be considered a gift in the amount of the equity.39

A partial gift issue can arise in another context. Suppose a friend or relative "sells" a car or other piece of property with a fair market value of $10,000 to a spouse during marriage for $5,000. If the $5,000 employed is marital property, is the car totally marital property, or is half of it a gift?40 The courts have not frequently considered this issue. If the concept of "partial gift" is accepted, it may substantially complicate divorce property division. The courts should only accept it in relatively extreme circumstances.

For example, in one case the wife's father "sold" a house to the spouses for $17,500 when the house was worth considerably more.41 The court considered the sale primarily a gift to the wife, the marital estate was reimbursed for the $17,500 paid, and the house was considered the wife's separate property.

A Tennessee case also presented this partial gift issue.42 In that case, the husband's grandmother transferred a farm worth approximately $73,000 to her grandson in exchange for $3,000. The wife claimed that the husband and wife also agreed to care for the grandmother. Some marital funds were used to improve the farm. The court concluded that the farm was marital property. The idea of a "partial gift" was not mentioned.

An Illinois case discussed the idea of partial gift in more detail.43 In this case, the husband's father sold the husband shares worth at least $500 per share for $200 per share. The court accepted that a partial gift could occur in this context. Indeed, the court stated that it would have treated it as a partial gift if the parties had so treated it. No gift tax return was filed, however. The court concluded that this suggests that there was no intention to make a gift. More cynical observers of such transactions might merely conclude that the parties wished to save gift tax. In any event, the court affirmed the characterization of all of the stock as marital property.

Parents sometimes transfer property to a married child in exchange for a promissory note, and the promissory note is later forgiven. In such a situation, courts must decide whether the contribution of the promissory note, later forgiven, makes the purchase an "onerous"44 acquisition, not a gift. A Virginia court ignored the later forgiveness of the note and deemed such a transfer to create an acquisition of marital property.45 A Kentucky court reached the same conclusion (that the property was marital property) where the parent forgave the debt by issuing a "credit memo" to both the son and daughter-in-law; the court apparently concluded that the debt forgiveness was a gift to both spouses.46 In contrast, a Wisconsin court concluded that the spouse acquired separate property, when it appeared that the transfer initially was structured as partially a purchase merely in order to minimize gift taxes.47

In these cases, it is important to determine whether the debt was truly forgiven gratuitously or exchanged for something. In a Kentucky case, the court concluded that the debt was extinguished in exchange for the son's agreement to employ the father.48 This was not considered a gift.

Another related point is whether the debt incurred at the time of the transfer from the parent will be considered consideration for the transfer. A Maine court concluded that the note was not consideration for the transfer, but was part of a separate agreement.49 The transfer therefore was considered a gift.

A Missouri case presented an issue of this type. Apparently because the spouses did not have the money for a down payment and could not qualify for a loan by themselves, the husband's parents advanced the down payment ($18,000) and co-signed the purchase money loan. The spouses and the husband's parents were listed on the deed as grantees. The spouses initially considered the...

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