The community is liable for the debts of either spouse acquired during marriage. Family Code Section 910.
Two common claims arise in dissolution regarding alleged family loans:
1. The parties receive a down payment for a home purchase from one of the spouse’s parents;
2. One spouse claims he/she borrowed money from a family member, and that the parties agreed to pay back the money.
The issue of whether the community owes a debt to a family member is a legal determination. After the Court determines that a liability exits, then the Court must determine how to allocate that debt between the parties. In most cases, the related spouse, i.e. his/her parent loaned the money, wants to assume the loan in exchange for a larger share of the community assets.:
The Family Court must first determine whether a liability exists for which the community is liable.
The relationship of the lender to the spouse carries significant evidentiary weight and a presumption that a gift was intended. The spouse claiming that a legal obligation to the community exits has the burden to prove an agreement that a gift was not intended.
A gift is a voluntary transfer of property made without the consideration. Cal. Civ Code section 1146. Three elements are required in order for a transfer of property to be a gift: 1) present intent of the donor to make an unconditional gift; 2) delivery of the property, either actual, constructive or symbolic, by which the donor relinquishes control of the property; 3) acceptance of the property. When someone receives money from the donor, the second and third elements of a gift are presumed. The legal dispute is as to the first element, namely, was receipt of the funds conditioned on repayment. Lack of documentation regarding the expectation and terms of repayments may be evidence that the transfer was a gift.
In proving that a contract exists, the party alleging a contract must introduce evidence of the elements of a contract, namely, offer, acceptance and consideration. Oral statements and writings which occurred prior to or at the time of the transfer are admissible. However, discussions regarding the terms of an alleged contract after the transfer would not be admissible.
For a contract to exist there must be mutual binding obligations on both parties. Where a spouse claims that the parties agreed to pay back the money when they could or if they could, this does not create an enforceable contract.
Loans from family members also raises tax issues. The IRS looks at several factors to determine whether a transfer of property is a loan or a gift: 1) a writing as evidence of a promise to repay; 2) whether interest was charged; 3) whether a repayment schedule was established; 4) collateral securing repayment; 5) did the lender have a reasonable expectation of repayment? 6) were repayments made? 7) Whether the conduct of the parties was consistent with loan.
In summary, determination as to the existence of a legal obligation to repay a transfer of funds from a family member will turn on admissible evidence of the intent of the parties at the time of the transfer, the terms of the contract, including the amount of the principal, interest and a repayment schedule, acceptance by both parties of the terms, and a writing rather than merely statements by one party.
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]