When Gifts Become Loans and Loans Become Gifts



When Gifts Become Loans and Loans Become Gifts

By: Barry L. Kaufman, Esq.


When someone makes a gift, they do not expect repayment. When someone makes a loan, there is an expectation of repayment. The identification or classification of whether monies advanced are a gift or a loan impacts upon both equitable distribution and support determinations in a divorce action. The focus of this discussion will be on the equitable distribution aspect of gifts and loans.

To understand the relationship of gifts to equitable distribution, we must initially identify the elements of a valid gift. First, the donor, or giving party, must perform some act constituting the actual or symbolic delivery of the subject matter of the gift. Second, the donor must possess an unequivocal intent to give. Third, the donee, or receiving party, must accept the gift. Lastly, New Jersey cases have recognized an additional element – the absolute relinquishment by the donor of ownership and dominion over the subject matter to the extent practicable or possible considering the nature of the item to be given.

Ordinarily, a gift becomes the subject of a dispute in family law between divorcing spouses or disengaged couples when one party asserts sole ownership of an item to the exclusion of the other’s interest. Applying gift principals in a divorce action, N.J.S.A. 2A:34-23 (h), mandates that real or personal property acquired by either party during the marriage by gift is not subject to equitable distribution, while interspousal gifts are subject to equitable distribution.

Query then, what happens to a gift in anticipation of marriage, such as an engagement ring or real property, where the marriage does not follow? Strictly speaking, such a gift would fall outside the aegis of the equitable distribution statute and within contract theory or other equitable theories.

Focusing on the symbolic nature of an engagement ring as a pledge of the corning marriage, the court in Aronow v. Silver, 223 N.J. Super. 344 (Ch. Div. 1987), returned a woman’s engagement ring to her former fiancé on the basis that it was a gift to his proposed wife conditioned on the happening of the marriage, which never took place, and the equitable distribution statute was never addressed. Solidifying the conditional gift theory, the appellate division, in Winer v. Winer, 241 N.J. Super. 510 (App. Div. 1990), determined that the former wife’s engagement ring was her property, not subject to equitable distribution upon divorce, because the conditional nature became moot upon marriage. That court broadened its holding stating that an engagement ring is returnable “only if the engagement is broken.”

Consistently, New Jersey courts have treated premarital homes purchased in anticipation of a marriage that does not occur as conditional gifts. The Asante v. Abban, 237 N.J. Super. 495 (Law Div. 1989), and Aronow courts both examined real property purchased in joint names in contemplation of marriage where unequal contributions were made by the parties toward that purchase.  Although titled as tenants in common, credible testimony in Aronow indicated that the subject condominium purchase was funded exclusively by one party. The court denied the non-contributing party’s request for an interest in the property following the broken engagement, vesting sole title in the funding party. Similarly, the Asante court proportioned ownership interests in accordance with the financial contribution of each party following a broken engagement. Recognizing the requisite marriage condition was not satisfied, the court determined the greater contribution made by one fiancé toward the purchase of an intended marital home was not a gift.

Weiss v. Weiss, 226 N.J. Super. 281 (App. Div. 1988), addressed a spouse’s immunity claim to property he purchased (and titled in his name) in contemplation of a marriage, where the marriage condition was satisfied. The court focused on the involvement of both parties in the purchase decision and the active participation of the non-titled spouse, both before and after the marriage, in making improvements to the home. Disregarding the title designation, the court found an implied contract between the parties and determined the property part of the marital estate subject to equitable distribution.

Interspousal Gifts during the Course of the Marriage

N.J.S.A. 2A:34-23 clearly states that interspousal gifts are subject to equitable distribution, but excludes third party gifts, bequests and similarly acquired property by either party during the course of the marriage. Treatment of property received from a third party can have a significant impact upon equitable distribution to divorcing spouses. An asset immune from equitable distribution can be converted into an asset eligible for equitable distribution through an interspousal gift.

Prior to the adoption of N.J.S.A. 2A:34-23, courts analyzed the elements of a gift to determine which party retained the item upon divorce. Farrow v. Farrow, 72 N.J. Eq. (1907), endorsed the principle that to establish a gift from a husband to his wife, there must be clear evidence of the delivery of the property with the intent of divesting the husband of all dominion and control over it and vesting title in his wife. In Farrow, during the course of marriage, a husband provided jewelry to his wife for dual purposes of joint investment and ‘ornamenting’ her. Applying the common law doctrine, the court decided that ownership of the paraphernalia of the wife, even if selected by her and intended for her personal use, rests with the husband.

The Yorn v. Yorn, 139 N.J. Eq. 300 (1947) case concerned a wife’s suit for recovery of her premarital inheritance monies that she made available to her intended (and ultimate) spouse until he could establish his medical practice. Although the account was in both names, there was no evidence of a gift, as the wife never relinquished control over the funds. In deciding the monies a loan or deposit for safekeeping, the court recognized the alleged donee’s failure to satisfy his burden of proving donative intent.

After N.J.S.A. 2A:34-23 was adopted, in Canova v. Canova, 146 NJ. Super. 58 (Ch. Div. 1976), the court considered the effect on property acquired by a spouse prior to marriage who, during the course of marriage, transferred title to both spouses as tenants by the entirety[1]. Ultimately the joint property was sold, and new property was purchased in joint names. The court recognized that the original transfer satisfied the requisites of a gift and held the property subject to equitable distribution even though the proceed from the original transaction could be traced.

Embracing a wife’s failure to preserve her separate ownership interest in proceeds from the sale of premarital stock as decisional grounds, the Pascale court ordered equal division of the marital home.  Pascale v. Pascale, 274 N.J. Super. 429 (App. Div. 1994), rev’d on other grounds. In Pascale, the wife deposited her premarital stock into a joint investment account in contemplation of purchasing a home. Upon divorce, the appellate court ordered equal division of the marital home proceeds, rejecting the wife’s argument that the proceeds from her premarital stock were immune, based on its perception of her transfer as a gift.

In analyzing interspousal gifts, the courts tend to focus on intent of the donor and his or her absolute relinquishment of ownership or control over the subject matter at the time of property transfer. Commingling property is important, but not determinative. Several other factors for consideration will aid the attorney (and court) in determining whether an interspousal gift has been effectuated:

  1. Whether the asset remained separate throughout the marriage;
  2. Whether all transactions during the marriage involving the asset can be traced;
  3. Whether the asset was commingled with marital assets;
  4. Whether the asset still exists in whole or part; and
  5. Whether the asset was placed under joint

Third Persons

The complexities of the gift versus loan distinction are magnified when a third person is involved. Occasionally a third person has an interest in a divorce litigation concerning circumstances surrounding a gift or loan made either to or by one of the parties during the course of the marriage. For example, parents may gift their child and his or her spouse monies towards the purchase of a home or cash for other reasons. Generally, these gifts would not happen if the parents were aware of a pending or future divorce and the resulting benefit to their offspring’s soon to be former spouse but may have occurred earlier in the marital relationship. Similarly, a divorce litigant may have gifted cash or property to a less prosperous sibling or friend.

A gift by a third person to the marital entity has no impact upon equitable distribution. However, a gift to or from an individual may significantly impact equitable distribution. First, a litigating spouse may try to segregate a familial gift as being unique to them, and thus not subject to equitable distribution. Second, a litigating party may attempt to dissipate assets by gifting in contemplation of divorce. Lastly, a litigating party or third person/ may attempt to change the characterization of a gift in an effort to reduce or increase the value of the marital estate.

The supposition that one who deposits his own funds in an account bearing his name and that of another thereby constitutes a gift is erroneous. In Lebitz-Freeman v. Lebitz, a father established a brokerage account in both his and his daughter’s names. Lebitz-Freeman v. Lebitz, 353 N.J. Super. 432 (App. Div. 2002). Although he transferred the account to a different brokerage firm and finally to an individual account solely in his name by forging his daughter’s signature, the court determined the father had not made a gift of the funds to his daughter. The court relied on the father’s sole funding, communications, receipt of income generated and payment of taxes among other factors for support of their position that he lacked the requisite intent and relinquishment of control to effectuate a gift to his daughter.

A. Burdens of Proof

A seminal New Jersey case, In the Matter of Dodge v. Fidelity Union Trust Company, 50 N.J. 192 (1967), affirmed the common law elements of a gift and closely analyzed the burdens of proof for establishing same. In that case, Elmira College representatives embarked on a calculated courtship of a wealthy elderly woman in an effort to secure donation of her substantial art collection to the College. Invalidating the elderly woman’s alleged inter vivos gift, the court characterized the relationship between the parties as being unequal and as such, determined that the donee must show by clear and convincing evidence that the donor intended to make a present gift and unmistakenly intended to permanently relinquish ownership of the subject of the gift. In re Dodge concerned an elderly, potentially incompetent and ultimately deceased woman who may have been the victim of undue influence which poses a different set of circumstances than the often hostile and emotionally charged environment of divorce litigation, but the elements of a gift and the standard of proof enunciated by our Supreme Court survive the facts.

The appellate court, in a business valuation case, Brown v. Brown, 348 N.J. Super. 466 (App.Div. 2002), established the burden of proof by a preponderance of the evidence for a showing that assets were acquired during the marriage by way of parental gift. In satisfying that burden, the husband presented testimony of his parents’ overall estate plan that included their intent to give the family business to their sons without compensation. Finding that his shares in the family floral business were gifts, the court excluded them from equitable distribution. In the same case, documentary evidence such as a RESPA statement and tracing of title and funds contraindicated the husband’s gift position and led the court to its determination that real estate purchased by a familial partnership did not constitute a gift to him, and thus was not immunized from equitable distribution.

The divergence in the burden of proofs required appear predicated on the relationship of the parties involved. The clear and convincing standard of proof applied in In Re Dodge originated in courts of equity over concern that claims unenforceable at law could be fabricated. Herman & MacLean v. Huddleston, 459 U.S. 375 (1983). While the subsequent lesser burden applied in Brown directly addresses parental gifts within divorce litigation, the In re Dodge reasoning is sound and an argument can be made that the higher burden of proof is applicable.

B. Professional and Procedural Concerns

Professional responsibility issues are raised regarding a third person, whose interests and goals may be identical to your client at one point and time, but during the course of divorce litigation may diverge and cause conflict. RP. C. 1.7. Avoiding dual representation, even in a familial situation, avoids the potential conflict problem. Additionally, Joinder and Intervention complications can arise when third parties are involved. R. 4:5-1(b) (2) requires that all parties to an action file, with their first pleading, a certification indicating whether the matter in controversy is subject to any other pending action.

That certification must also include the names of non-parties who should be joined in the action because of potential liability on the basis of the same transactional facts, i.e., property or monies in which they may have an interest. R. 4:27 and R. 4:28 govern joinder of claims and parties. R. 4:33 prescribes intervention. The underlying purposes behind both joinder and intervention are judicial economy, reduction of delays, fairness to the parties, and need for complete and final disposition.

The court in Biddle v. Biddle, 166 N.J. Super. 1 (App. Div. 1979), examined a mother’s claim to an interest in real estate owned by divorcing parties based on her purchase money loan. Although the mother’s intervention application was denied, she was a witness during the divorce trial. Subsequent to the divorce, she brought a complaint against her son and former daughter-in-law asserting a lien against the premises which had been awarded as part of equitable distribution. The trial court dismissed her complaint on the basis that the divorce litigation barred re-litigation of her claim. The appellate division reversed, finding that one who unsuccessfully attempted to intervene in an action is not bound by the claims adjudicated therein unless they were represented by a party to the initial litigation. The court specifically determined that the son could not adequately represent his mother’s interest because his legal ownership conflicted with his mother’s claim.

Whether to bring a third party into divorce litigation requires careful assessment of the potential consequences. Duplication of efforts responding to third parties may lead to excessive fees that exceed the amount in controversy and only serve to disrupt familial relationships. Additionally, innocent people may be dragged into a marital controversy and forced to endure a trial on which they may have minimal impact.

Gift -Loan Distinction

To differentiate gifts from loans, it is essential to examine the elements of a loan. First, the lender must advance money or other object at the time of the agreement. Second, a stipulation or agreement to repay what was advanced upon terms, such as interest and date of payment is necessary. Tieman v. Pines, 51 N.J. Super. 393 (App. Div. 1958). The usual context of a loan arising in the divorce venue is a “familial loan” where a spouse or family member asserts the existence of a loan, often with no stipulated date for repayment or vague terms of repayment. The question of whether or not the obligation to repay exists rests on laxity of its terms: The effect of a loan is a reduction or increase in the marital estate available for equitable distribution, depending on whether it is a debt or receivable of the divorcing parties.

The facts surrounding Biddle[2] are prescient. In Biddle, a mother asserted she loaned money to her son and his wife to facilitate their purchase of a lot and building of a home thereon. The mother claims the parties had an agreement that she have an equitable interest in the property due if the property was sold. The daughter-in-law maintains that the monies advanced were an unconditional gift. The divorce litigation record reflected that the mother and son both testified as to the existence of the loan, but that their testimony was found not credible. The divorce trial judge was silent on the existence of the mother’s loan and determined repayment, if any, would be her son’s responsibility.

In Monte v. Monte, 212 N.J. Super. 557 (App. Div. 1986), the trial court fully allocated the husband’s substantial debts to his family to him on the basis that his wife was unaware of the encumbrances he placed on her marital assets.  Additionally, there existed a question as to whether the loans were bona fide, as none of the loans were substantiated in writing.  While recognizing the sound application of judicial authority in allocation of the alleged debts, the appellate court remanded, placing the burden of establishing traceable debts on the husband.

While the Biddle case concerns a third-party suit subsequent to divorce, reference to the divorce litigation is instructive. As in most cases where a familial loan is alleged, evidentiary proofs become the focus. In both Monte and Biddle, had supporting documents been provided, the outcome of the trial court’s three step Rothman application (identification, valuation and allocation of the marital estate) may likely have resulted in different equitable distribution results. Rothman v. Rothman, 65 N.J. 219 (1974)

In the event a loan is evidenced, the Statute of Limitations maybe implicated. Where no time of payment is specified or expressed in a note or other instrument for the payment of money, the loan is deemed a demand note. Agens v. Agens, 50 N.J. Eq. 566 (Ct. of Ch. 1892). As such, as soon as the note is made and delivered, the holder may immediately demand payment and may enforce his demand at law. Thus, the six-year Statute of Limitations begins to run from the date of execution and delivery of the note, not when actual demand for repayment is made. Rickenbach v. Noecker Shipbuilding Co., 66 N.J. Super. 580 (Ch. Div. 1961). This timing becomes a weapon or tool for the experienced lawyer within the familial loan area of divorce. Other defenses may also exist (i.e. laches or estoppel) when a loan is asserted as a liability subject to equitable distribution.


In analyzing whether a transfer was a gift or loan in the context of divorce litigation, the prudent lawyer will first look to the parties’ actions and recollections along with any available verbal corroboration, then request documentary or other evidence to support his or her position. Validating documents may include gift tax returns, repayment records, stock transfer journals, title documents, promissory notes, mortgages, lien recordings, receipts, writings (cards, diaries and wills), photographs and computer records, as well as the actual subject of dispute to the extent practicable.

Where records exist, interpreting the facts surrounding the receipt of funds or items and discerning gift or loan status is relatively simple. The judge must consider whether the facts surrounding the receipt of money (or objects), taken as a whole, demonstrate that the parties treated the funds received as a loan to be repaid or as a gift with no expectation of repayment. The court then must use its discretionary authority to effectuate equitable distribution of the marital estate, which may include allocating a loan entirely to one party.

[1] See also Pascarella v. Pascarella, 165 N.J. Super. 558 (App. Div. 1979)

[2] Biddle v. Biddle, 166 N.J. Super. 1 (App. Div. 1979)