It is not uncommon for a husband or wife to claim he or she borrowed money from a parent or other family member which is a community debt in a dissolution case. At the same time, the other spouse often claims it was a gift and not a loan and therefore not subject to the equal division requirements of Family Code Section 2550.
When this issue is before the Family Court the analysis involves two parts. First, was the debt incurred during the marriage? Family Code Section 910. If the debt was incurred during marriage, the community is liable and the court must include it in the division of assets and debts. Family Code Sections 2551 and 2620. Since the allocation of community debts is regulated by statute, the rest of this discussion will focus on whether or not the transaction during marriage is a gift or a loan. Pursuant to Civil Code Section 1146, a gift is a voluntary transfer of property without consideration. In other words, the person making the gift is not receiving anything in return.
The party who claims a loan will say that he or she agreed to repay the value of what was received. This promise to repay must be binding. Where the promise to pay is conditioned by statements like “what they can” or “when they can” the promise is not “binding” and therefore not enforceable.
When people do expect repayment they usually take steps to protect their right to recovery with written agreements. Because loans from parents to children are popular estate planning techniques, there is a body of tax law that can be looked at to answer the gift or loan question. InTodd vs. Commissioner of Internal Revenue Service, T.C.M. 2011-123, the Tax Court was called upon to decide whether Dr. Todd received a $400,000.00 loan (non-taxable) or an income distribution (taxable). In making its determination the Tax Court considered the following factors:
1. Was the promise to repay in writing?
2. Was interest charged?
3. Was there a fixed schedule for repayment?
4. Was the loan secured by collateral (something pledged as security for repayment, to be forfeited in the event of a default)?
5. Whether repayments were made.
6. Whether the borrower was reasonably able to repay the loan?
7. Whether the parties conducted themselves as a debtor/creditor relationship?
The Court concluded that the Todd transaction was a gift and not a loan. However, Todd demonstrates the importance of considering all of the facts surrounding a transaction.
For a California court decision on the gift vs. loan issue we have the case of Burkle vs. Burkle(2006) 141 Ca4th 1029. In Burkle, a daughter sued a father claiming the father never told her about a loan and therefore it must be a gift. Father responding by saying the issue should be determined by his intent when the funds were transferred.
The Trial Judge decided in favor of the daughter (gift). The Appellate Court upheld the Trial Judge and said that by transferring money without the daughter accepting terms for repayment, the father could not prove a loan agreement. If your case involves a family gift or loan, made during the marriage, it is a good idea to collect all documents surrounding the transaction and then scheduling a consultation with a family law attorney. Clients are often focused on equitable feelings on what ought to be done and forget to focus on the evidence that is necessary for a court to make the gift/loan determination.
If you want a better understanding of what constitutes a loan versus a gift, please contact our office to schedule a consultation. The Law Office of Bawden & Kochis also handles legal issues regarding adoption, annulment, mediation, child custody (with no accompanying domestic violence), child and spousal support as well as pre-marital and post-marital agreements. Telephone (909)792-0222, or email us at [email protected]