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When Does a Financial Contribution from a Spouse’s Parents Constitute a Loan versus a Gift? The “Gift v. Loan Conundrum” in New York Equitable Distribution Law

When parents of a husband or wife make a significant financial contribution to a married couple, does this contribution constitute a loan or a gift under New York divorce law?  The answer to this question can significantly affect how assets and debts are equitably divided in a divorce.  If a spouse’s parents’ financial contribution is a loan, these funds constitute a marital debt for which both spouses are liable in the event of a divorce.  Conversely, if a spouse’s parents’ financial contribution is adjudged to be a gift to both parties, then there is no marital debt to be apportioned.  Moreover, any asset that was acquired with the gifted funds (often, the marital residence) is divided between the spouses without any credit or set-off for the parents’/in-laws’ contributions.

In a decision issued on March 28, 2019, Judge John P. Colangelo of the Westchester County Supreme Court addressed the “Gift v. Loan Conundrum.”  The case, entitled M.L.M. v. R.G.M., 2019 NY Slip Op 50466(U), involved a divorce where both sets of the parties’ parents contributed substantial sums to the parties during the course of their marriage.  The husband’s parents provided the parties with $64,000, through four separate checks, when the husband was between jobs, one of which was marked “loan.”  The husband’s parents also provided several hundred thousand dollars that was earmarked toward the parties’ children’s education, but was instead used for daily living expenses.  During the divorce proceeding, the husband argued that his parents’ $64,000 contribution was a loan for which both parties remained jointly responsible to repay.  The wife asserted that the payment was a gift that created no marital debt.

After a trial was held, Judge Colangelo ruled that the husband had not established that the $64,000 payment was a loan.  Among other factors, Judge Colangelo noted that there was no evidence of indebtedness and that the husband had not called his parents to testify at the trial.  Judge Colangelo also noted that given the husband’s parents’ ongoing generosity toward the parties, it was unlikely that the parents actually expected to be repaid.

Judge Colangelo’s decision is consistent with a 2013 decision by the Monroe County Supreme Court in the case G.R.P. v. L.B.P.  In that case, the court noted that a low-interest loan for which the intra-family lender has never demanded repayment evolves, over time, into a gift.  The Court reached the conclusion that funds advanced by one of the spouse’s parents toward purchase of a residence constituted a gift.  Among other considerations, the court noted that there was no written evidence of any schedule of payments or any other document indicating any expectation of repayment.

Therefore, in a New York divorce, a party asserting that payments from his or her parents constitute a marital debt faces a heavy evidentiary burden to establish the existence of a loan.

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