Whether you can get money back in a divorce that was gifted to you depends on several factors. First, you need to determine if the money was a gift to both of you or if the money was a gift to you alone.
If the money was gifted to both of you, then the answer is simple. The money is a marital asset and will be divided equitably in the divorce, just like any other asset in your marital estate.
If the money was a gift to you alone, the analysis is complicated. It depends, among other things, on (i) when the money was gifted to you and (ii) whose names are on the deed to the house.
Joint Gift or Not?
Determining whether the money was a gift to you alone or was a gift to you and your spouse jointly requires an analysis of the facts and evidence. For example, there may be letters or emails indicating your parents’ intent. Maybe they gave you the money on a holiday or your birthday and the card indicates that it was a gift to you. Maybe the check was written out to you individually or the funds were transferred to an account in your name alone.
On the other hand, if they wrote the check to both of you and/or signed a “gift letter” as part of your mortgage process stating that the money was a joint gift and/or told you they were giving the money to both you, then the money would most likely be a joint gift.
The Money Was Not a Joint Gift: Do I Get it Back?
If the money your parents gave you was not a joint gift, then you may get some or all of it back. That will mostly depend on two factors: (i) who is on the deed to the house and (ii) when you put the money into the house (i.e. how long ago you purchased the house).
If the deed to the house is in your name alone, then you will likely get all of your money back from the proceeds from the sale of the house (assuming the value of the house has not decreased). Any excess equity in the house would be divided between the parties equitably (note: if the house was purchased before the marriage, a totally different analysis is required).
If the deed to the home is in joint names, then the money would likely be treated as a gift “to the marriage.” However, depending on how long it has been since you purchased the home, you may be entitled to some or all of the money back.
In Bucks County, PA, the court and divorce mediators utilize something called a “vanishing credit” to determine how much of the money you would get back. Using a vanishing credit, the amount of the principal of the gift you would get back would be reduced 5% each year for a maximum period of 20 years.
Let’s look at some examples that can help you understand the application of these guidelines:
John’s parents wrote him a check for $100,000 in 2007 as a gift and as part of their estate planning. At the time that John’s parents gave him the money, it was clear that it was a gift to John alone. John deposited the money into an account titled only to him. John was already engaged to Sarah, with a wedding planned for 2008. At the time of the gift, John and Sarah maintained a joint account for their shared living expenses, and the joint account was where John and Sarah each deposited their paychecks. Before their marriage, they lived together in rented apartment. After John and Sarah married, John and Sarah decided to purchase a home.
John and Sarah had not saved any money from their earnings and the only source of money available for a down payment was John’s gift from his parents (which was in his individually titled account). John decided to use this money for the purchase of the house. In 2018, the parties separated and intend to divorce. John wants to know if he gets his $100,000 back. The parties are selling the house and anticipate net proceeds of $200,000.
Scenario One: House in John’s Name
When the house was purchased, John insisted that the house be titled to him because he was using his parent’s gift to him to fund the down payment. This analysis here is fairly straightforward: John will receive his $100,000 gift back from the sales proceeds, and the remaining $100,000 will be divided between the parties as a marital asset.
Scenario Two: House in Joint Names (the usual scenario)
When the parties purchased the house, they decided to place the home in joint names. John could get some of his money back under a “vanishing credit” theory. Applying the “vanishing credit,” $5,000 per year of the gifted money “vanishes” and becomes marital property. Therefore, after 10 years of owning the house, $50,000 of John’s money converts into marital equity (.05 (5%) x 10 years x $100,000), and John would be entitled to $50,000 from the sale proceeds before dividing the balance of the equity ($150,000) between the parties as a marital asset.
As stated above, if the money was a gift to the parties jointly, such as a wedding gift, then it is treated the same as any other marital assets and divided equitably in the divorce.
Given the realities of life, there are many other potential situation not discussed here. This blog is also based on Pennsylvania divorce law. Considering that there is usually a substantial amount of money at stake in these situations, its best to either mediate the issue with an experienced divorce mediator, who can guide you to a fair result based on the law, or to consult with a divorce attorney.