Is It a Gift or a Loan?

During a marriage, it’s common for the couple to receive funds from relatives or friends.

Spouses receive these “family-and-friend” funds for wedding expenses, to make ends meet during economic downturn, to support a spouse’s living expenses during educational pursuits, and for a multitude of other reasons

During divorce, sometimes the parties disagree about whether such funds were gifts to the couple, to just one spouse, or if the funds represented a loan. Of course, these “family-and-friend” funds are different from loans from a financial institution, which have technical and specific paper trails.

As community debt is divided equally between the spouses during a divorce, the question of a loan versus a gift can become a contentious issue if the parties cannot agree. And if the parties cannot agree, the court will decide.

Gifts and loans are not the same and if you are in this situation you may want to contact a family law attorney before making decisions that may have long lasting effects. Contact Lavinsky Law for these matters.

A California court will consider a variety of factors when deciding whether the funds at-issue were a gift or loan:

  1. Testimony: The court will consider testimony of the spouses and the payor/lender of the funds. The court will focus on the circumstances of the receipt of the funds, how the funds were used, and will assess each spouse and witness’s credibility.
  2. Payments: Were any payments ever made? Did the payor/lender ever demand payment? If not, depending on the date of receipt of the funds, it will be more difficult to argue these funds were a loan as opposed to a gift. The court will also need to know if the statute of limitations has passed pursuant to the California Code of Civil Procedure.
  3. Writings: Is there a promissory note or other written memorandum of understanding? If so, who signed it? The court will also look to see who the payee was on any check or transfer and how/where the funds were deposited.
  4. Other context: If the payor/lender has a history of recurring gifts to the couple, or the funds were given around a holiday or birthday, this could impact the court’s decision in characterizing the funds.

Characterizing these “family-and-friend” funds can be a complex and subjective issue. As always, it is generally in a divorcing spouse’s best interest to try to come to an agreement on this issue, but with the potential of significant community debt on the table via this complicated issue, it is important to be advised by attorney.

Spousal support and Marital property are rather complex legal issues, and you should seek proper counsel prior to arranging any court proceedings. Contact our attorneys at Lavinsky Law today at (310) 929-6411 for a free consultation.