The end of the year is upon us, and often parents or other individuals make gifts to their children for the maximum amount allowable to avoid federal and state gift taxes. In the absence of marital bliss, how these gifts are handled can make a significant difference in the event of a divorce.
Divorces often involve complex issues surrounding the division of assets, including the treatment of gifts received from third parties during the marriage. Understanding how these gifts are categorized and distributed under state law is essential for anyone navigating this process.
Marital vs. Separate Property
In New Jersey, gifts from third parties are generally exempt from equitable distribution unless they are deemed to be marital property. The distinction between marital and separate property is key to determining whether a gift will be subject to division in a divorce.
Separate Property
Gifts given to one spouse by a third party (such as a family member or friend) are typically considered separate property. For instance, if a parent gifts their child a car or a sum of money specifically for their use, this asset usually remains with the recipient in a divorce if it is treated as separate during the relationship.
Marital Property
If the gift was intended for both spouses—for example, a shared vacation property gifted by one spouse’s parents, or a check written to both spouses—it will be considered marital property and subject to division.
Intent of the Gift
Courts often look at the intent behind the gift to determine its classification:
Documentation
Was the gift accompanied by documentation, such as a note or deed, specifying the recipient? This can clarify whether the gift was intended for one spouse or the couple as a unit.
Usage of the Gift
If the gift was used jointly by both spouses, it might be harder to argue that it should remain separate property. Additionally, if one spouse consistently uses gifted assets to support the marital lifestyle, the Court may consider this in determining not only equitable distribution, but also issues of support and alimony.
Commingling of Assets
Even if a gift is initially separate property, its status can change if it is commingled with marital assets. For example:
Funds
A monetary gift to one spouse and deposited into a joint bank account might lose its separate property designation. If the gift is used for marital purposes, this furthers the suggestion that it has become marital.
Property
A gift used to improve a marital home or generate joint income may be treated as marital property. For example, if one spouse has an investment property that is rented, and the rental income is deposited into a joint account, the property, or any increase in value during the marriage may be deemed marital. This, even if the deed to the property is never transferred to the other spouse.
Protecting Gifts in Divorce
To ensure gifts remain separate property, consider:
Prenuptial Agreements
For cases in which one or both spouses have separate property or anticipate obtaining separate property during a marriage, a pre-nuptial agreement is one of the best ways to determine how the gifts will be treated in the event of a termination of marriage. These documents can specify how gifts will be used during the marriage and can protect the ownership even if used during the marriage for the benefit of the family.
Keeping Assets Separate
Avoid commingling gifted funds or property with marital assets. Open a separate account and keep the funds only in that account. If joint tax returns are filed, reimburse the taxes paid on the separate money from the separate account into a marital account. If there is insurance on family heirlooms, make sure the premiums are paid from separate assets.
Proper Documentation
Retain records that establish the nature and intent of the gift.
Contact a NJ Family Law Attorney
Gifts from third parties can complicate asset division in a divorce, but with proper planning and understanding of the law, individuals can protect their interests. Consulting with a family law attorney is crucial to navigate these nuances effectively.
By being proactive and informed, you can better prepare for how gifts will be addressed in your divorce proceedings.
