In today’s world, it is somewhat common to have monies provided to newlyweds by their parents to assist with the purchase of a home, car, rent or for other expenses, particularly when grandchildren come along. Ultimately, if the parties divorce, can a creditor parent recover this money? What is the burden of proof? What does a creditor parent need to do? What protections are there in the law for a creditor parent? While they obvious answer may seem like “yes”, a creditor parent gets his/her money back, that is often not the case. This blog explores how a creditor parent can protect him or herself from having a “loan” erased by a divorce and why this sometimes happens.1
It is probably fair to say most married couples get some financial assistance from their parents from time to time. When the marriage unravels and divorce is filed, parents often want their money back. Ultimately, the court has the discretion to treat these sums as a gift or a loan. Which is it? Well, that depends on the evidence. Where there is a substantial sum provided by a parent to his or her son or daughter during the marriage, this generates a significant amount of litigation. In most all cases, the spouse who did not have the money come from their parent(s) argues it is gift and just part of the marital estate the court is to divide between the parties.
That said, normally a creditor parent is called as a witness at trial and questioned about the circumstances surrounding the “loan”. When was it made? Have any reimbursement payments been made to repay the loan? Was there interest charged on the loan? Is there written evidence of the loan document? The more of these questions that are answered in the affirmative, the more likely the money is to be viewed as a true loan by the judge. Where none of these terms exist, it is likely the judge will find the monies extended to the divorcing parties was a gift and divided between the parties by the court on divorce, not the creditor parents.
For this reason, in every case, where monies are truly loaned to the parties, there should be a loan document, terms of repayment, interest rate, regular payments and the like. This is a more secure way to be able to reclaim monies extended to the parties during the marriage. Where the sums are substantial, such as tens or hundreds of thousands of dollars, the creditor parent is likely better able to protect a “loan” be retaining their own counsel and seeking to intervene into the divorce case and litigate their position. While this may seem unlikely, every divorce attorney has handled a divorce where the vast majority of monies in the marriage came from a wealthy parent(s).
Ultimately, the take-away is a parent who is going to loan monies to their married children should do a formal loan or even take a mortgage against real property. When this has not been done, then it is a call for the judge based on the evidence (or lack thereof) presented at the divorce trial indicating whether the funds were a gift or a loan. The weighing of this evidence is a discretionary call on the part of the trial judge and is unlikely to be overturned on appeal. This blog was written by attorneys at Ciyou & Dixon, P.C. who handle complex divorce case with novel issues, such as parental loans and gifts, throughout the State. This blog is intended to provide general information and is not intended as legal advice or a solicitation for services. It is an advertisement.
- A good representative case on loans and gifts made to the parties by their parents during a marriage is Macher v. Macher, 746 N.E.2d 120 (Ind.Ct.App.2001).