Family Loan

Family Gifts and Loans, Who Cares?

The term “family assistance” may produce thoughts of government aid to the poor.  However, in Family Court it often means gifts or loans made by parents to their adult children who are now getting divorced.

Family Code Section 770 (a)(2) tells us that all property that a married person acquires by “gift” is separate property.  This means that if a parent gives their daughter a $10,000.00 diamond ring, it is the daughter’s separate property.  Likewise, if a parent gives a son $50,000.00 cash for the down payment on a family residence the gift is separate property and entitles the son to a reimbursement, without interest, to the extent that there is equity in the residence.  Family Code Section 2640 (c).

This scenario changes when the gift is made to the adult child and his or her spouse.  This joint gift is community property.  Family Code Section 760.

Since parents gifts are rarely accompanied by a written statement, the outcome often depends on testimony from the parent, the name of the payee on a check or the name on an account into which the gift is deposited.  Depending on the circumstances, putting the parent gift into a joint account with a spouse can impair the ability of the spouse who wants a separate gift to prove his or her case.

In some cases, the money from a parent comes in the form of a loan and the parent is treated just like any other community creditor.  The community is liable for the debt incurred by either spouse.  Family Code Section 910.  The spouse whose family member is owed the money usually seeks to have the debt assigned to him and her thereby getting more community assets.  On the other hand, the other spouse may claim that the “loan” was really a “gift” to both parties and not subject to the distribution of community assets and debts.

One of the problems with proving a parent loan is that they often lack enforceable terms.  In other words, an agreement to pay back the loan “some day” or “when you can” is not enforceable.  See Alameda v. Ross (1939) 32 CA2nd 135.

To prove that there is a loan there must be a good faith intent on the part of the borrower to repay and on the part of the lender to enforce.  Some of the factors that might prove a loan include the following:

  1. A promise in writing.
  2. An interest charge.
  3. A repayment schedule.
  4. Was security given such as a car title or a trust deed.
  5. Do the facts support a reasonable expectation of payment?
  6. Were any payments actually made?

Because the formalities of a loan are so often lacking in family affairs, some of the other things that a trial judge might look for in deciding whether or not something is a loan or a gift might include:  The intent of the parties, the terms of the loan, acceptance of the loan by the borrower and some form of writing to affirm that the loan is real.  The writing might be a letter, a Thank You note or a Christmas card.

A recent case of mine involved parents who loaned their son $10,000.00 to buy a car so he would have reliable transportation to and from work.  The parents were people of modest means and making gifts to their adult children was not something that they had done before or could easily afford to do.  The son then made several payments but quickly fell into arrears.  The loan was discussed several times and the son affirmed his promise to pay.  These conversations were heard by others who were available as witnesses.  Despite the lack of the formal documents, the court found that there was a loan and that it was a community debt.  The trial court’s decision was not appealed and so the decision cannot be used as authority in a similar case.  However, it gives an example of the kind of evidence that might support a “loan.”

In conclusion, it is important to remember that gifts belong to the recipient which can be one or both parties; whereas loans before separation are obligations of the community.  The character of gifts and loans can be complicated and questions for a particular case should be discussed with a family law attorney.

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