Equitable Distribution

Ensuring Gifts To Your Children Are Not Subject To Equitable Distribution In Divorce

A recent case from the Pennsylvania Superior Court has highlighted the need to make sure that estate planning gifts you make to your children are not later subject to equitable distribution during a child’s divorce.  Currently, one out of two marriages will end up in a divorce.  Thus, there are several precautions that you should take to ensure that your plans to provide for the well-being of your children is not set aside by a court deciding that gifts you made for the benefit of your child are now deemed to be marital property and equitably divided between the spouses during a divorce.

Equitable Distribution in Pennsylvania

There are two categories of property under the Pennsylvania Domestic Relations Code.  The first category is “marital property,” which is divided between the parties in such proportions as the trial court equitably deems appropriate.  The second category is “non-marital property,” which is retained by the spouse who owns it. This non-marital property distribution scheme is different from the “all property” equitable marital property distribution scheme, in which all property is equitably divided, or the “community property” scheme, in which all community property is divided equally.

Under the Pennsylvania Domestic Relations Code, there are a number of criteria or factors that the Court will consider when equitably dividing the marital property but there is no mandatory requirement that the judge give more weight to certain factors over others. The trial court judge has total discretion over how much weight to place on each factor. The trial court judge is given this discretion because the goal is to effectuate economic justice between the spouses.  The judge even has the discretion to consider each marital asset independently, applying a different percentage to each asset. Furthermore, there is no presumption that the marital property will be split evenly between the spouses.

Marital Property vs. Non-Marital Property

Under the Pennsylvania Code, the definition of marital property begins with the broad concept that marital property means all property acquired by either party during the marriage prior to the date of final separation. Unless a spouse can prove by a preponderance of evidence that the property falls into one of the exclusions from marital property, the court will presume that all real and personal property acquired by either party during the marriage is marital property.  Beyond certain legislated exceptions, it is the time of acquisition, and not how the property is titled, which determines the nature of property in equitable distribution. For instance, property acquired before the marriage is not marital property if it remains titled solely in the name of the spouse who acquired that property.  However, the increase in value of that separately titled property during the marriage and prior to final separation will be considered marital property.

In general, property which a spouse acquires by gift, bequest, devise, or descent is excluded from marital property. Furthermore, if the spouse used that inherited or gifted property to acquire other property that after acquired or exchanged property is also excluded from equitable distribution. As with property acquired by a spouse prior to the marriage, any increase in value of property received by a spouse through an inheritance or gift from a non-spouse individual will be deemed to be marital property. Moreover, courts will presume that a gift or an inheritance which is re-titled in joint names is intended to be a gift to the marriage, converting that property from non-marital property into marital property.  Also, gifts between spouses are considered marital property and subject to equitable distribution.

Again, the timing of when the property has been acquired is key.  Property which has not been “acquired” by a spouse prior to separation is not marital property. This includes an expected bequest under a will or property held in trust for the benefit of a spouse over which that spouse does not have any withdrawal rights.

Wiegand v. Wiegand

Conversely, if a gift or inheritance is acquired by the spouses jointly, that property will be considered martial property.  In Wiegand v. Wiegand, the Pennsylvania Superior Court considered whether gifts from the husband’s parents were gifts to the spouses jointly or whether they were intended to be gifts solely to the husband, Roger Wiegand.  The parents had made cash gifts totaling $2.7 million and also had gifted limited partnership interests in certain oil and gas leases.  Each of the gifts was accompanied by a handwritten note from the husband’s parents addressed to both the husband and the wife and which included personal messages to each the husband and the wife.

During the divorce, the husband contested the classification of these gifts as marital property.  The husband’s father testified during trial that the gifts were intended to be only to the husband, thereby contradicting the letters he had written and signed when each gift was made.  The trial court found his testimony not to be credible and found that the gifts were marital property and determined that roughly a 50-50 split to be appropriate.

The question considered by the court was what was the donative intent of the husband’s parents when the gifts were made looking at everything including the letters to the parties, tax considerations, the relationship of the parties and their behavior regarding the gifts.

Steps to Take When Making Gifts to Your Children

In order to protect your children in a divorce, when you are making gifts to your children, it is important to clearly specify that the gifts are being made solely to your child and not to the child’s spouse.  If you intend to make the gifts outright, such as a gift of cash or an interest of a limited partnership or limited liability company, you should accompany the gift with a note or a card addressed solely to your own child.  In those instances, it is also important to discuss with your child that the gift should remain in his/her name alone, even if they use the cash to purchase other property.  The gifts you made to that child alone would be considered non-marital property, but your child may inadvertently convert the property to marital property by using that property to purchase other property jointly titled in both spouses names.  Moreover, if you make a gift of cash to your child, you should advise that child to deposit those funds in an account that is titled solely in that child’s name.  Depositing the funds into an account that is jointly owned with his or her spouse would convert the property from non-marital property into marital property.

If you are concerned that your child would not heed your advice to keep the gift titled solely in their own name, another way of ensuring that the gift does not become marital property is to place the gift in trust for the benefit of your child.  Certain restrictions would be placed on the trust to prevent the property therein from becoming co-mingled with your child’s property, jointly owned with his or her spouse.  These restrictions could include limiting your child’s right to receive income and principal from the trust or spreading out distributions of the principal held in the trust over the lifetime of your child or at the discretion of an independent trustee.  While the property is owned by the trust and not currently distributable under the terms of the trust, the property therein will retain its non-marital property characterization.   When your child withdraws that property it will only remain non-marital property while it is titled solely in your child’s name.  However, once your child has the power to withdraw property from the trust, the increase in value on that property from that point until the date of that child’s final separation from his or her spouse is arguably considered marital property even though it remains titled in a trust.   Therefore, if you plan to make substantial gifts to your child during your lifetime or after your death, you may want to suggest to your child that he or she and his or her spouse enter into a prenuptial or postnuptial agreement that would exclude all such property received from you, and the increase in value on that property during the marriage, from marital property.

If you have any questions about how gifts to your child may be subject to equitable distribution during his or her divorce, our experienced family law and estate planning attorneys should be consulted.