Gifting: about more than what we give at Christmas time

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September 2017

If you think gifting between family members is all about beautifully wrapped Christmas presents then think again. On 1 August there was a headline in the New Zealand Herald: ‘Parents’ $910k ‘gift’ to help couple buy house ends up in court’. This situation will not be unknown to lawyers who deal with separations.

A relatively inexpensive deed or other document drawn up by a lawyer may save serious disagreement and expense in the future. Sometimes that advice falls on deaf ears. I often hear something along the lines of: ‘Other families may fight in court about money but not mine. No, we don’t need anything in writing.’

This article explores court cases about gifting between family members.

The legal requirements for a gift will be satisfied provided you intended to make a gift, the gift was delivered and accepted by the recipient. The obvious contrast to a gift is a loan, because the giver of a loan expects the thing to be returned: whether borrowing money from a lender, or borrowing a friend’s car to use temporarily, or whatever.

So what happens if you make a gift but later regret your generosity?

Reneging on a gift

A gift, once given, cannot be revoked because ownership has passed to the recipient. The courts can only set aside a gift in limited circumstances which include fraud, undue influence and duress, mistake or lack of mental capacity.

An interesting example of a gift being set aside due to mistake occurred in an English case from 2009 called Re Griffiths. The elderly Mr Griffiths gifted almost £3 million into a trust for his wife’s benefit. Subsequently Mr Griffiths discovered he had cancer and died within three years of the gifting, which under English law meant his estate owed over £1 million in tax. Of course the law doesn’t allow for gifts to be revoked simply because a gift-giver wishes they had not made the gift and would like to have back the property or because there was some unfortunate unforeseen consequence of the gifting. But in Re Griffiths, the English High Court found that Mr Griffiths would not have made the gift had he known about his cancer at the time he made the gift, and the mistake was so serious and fundamental that there were grounds to set the gifting aside.

The mental capacity of the gift-giver often becomes an issue with elderly people, who may be vulnerable to exploitation due to age-related mental impairment or dementia. A gift-giver will require a high understanding of what they’re doing if their gift represents a very valuable asset.

In a New Zealand case from 2014, a wealthy elderly man’s family applied to the court for an order that his property affairs be managed by a court-appointed manager because he had given $120,000 in gifts and favourable loans to a much younger woman who was described in the judge’s decision as a ‘predator on elderly, lonely men’. In another case from 2014 (this one in England), an elderly woman named Mrs Smith gifted the entire proceeds of the sale of her house to her daughter. Other family members protested. The court held Mrs Smith did have sufficient mental capacity to understand the consequences of the gift but her daughter had exercised such mental domination over her the gift ought to be set aside.

The point is, however, that gifts are not easily set aside and can only be set aside in limited circumstances which may be difficult to prove.

Regrets from generous in-laws

Gifting often becomes contentious between family members in the context of separating spouses or de facto partners. It is becomingly increasingly common for parents to help their children get on to the property ladder with financial assistance. The dilemma of some parents was described very aptly by His Honour Associate Judge Bell in a case from 2015. He said:

‘During a marriage the parents of one partner may advance funds or property to the couple. On separation, the basis of the advance may be contested […] If a transfer of property has been gratuitous, the parents may be loath to see the assets shared by both [partners]. In hindsight they might wish the asset to have been only for the benefit of their child, not for the other partner.’

By the same token, if there is a provable debt to the couple, the parents may enforce it against the couple but after being repaid they may confer benefits on their own child thereby essentially forgiving their child’s half share of the debt.

One potential pitfall is a legal rule called the presumption of advancement. In New Zealand, the rule has been abolished between couples but still exists for money transferred from parents to children: it is a presumption in law that property transferred to a person’s child is intended to be a gift. It is only a presumption, which can be rebutted by evidence, but bank statements marked ‘loan’, or text messages, or other evidence from the time, may be lost after several years. Judges and lawyers have called for the presumption to be abolished altogether because it’s a bit of an historical relic.

If there is not sufficient proof of whether payments were intended as a gift or a loan, then that can set the stage for an epic (and expensive) court battle.

The case referred to in the Herald was Terry Schwass Company Ltd v Marsh. Mr and Mrs Schwass arranged for their family trust to advance $910,000 to their son Andrew and his long-term partner Donna. Andrew and Donna subsequently separated. Donna claimed the money was a gift. Loan documents had never been signed, but the court was in no doubt the money was a loan because of the extensive documentary evidence including emails and lawyers’ notes discussing such things as interest rates and security. Donna argued that it was her personal understanding the money was a gift. This argument was rejected because the key question was the donor’s intention at the time of advancing the funds.

In another High Court case from February of this year called Zhang and Li v Li, the Court had to determine whether $335,500 given by Ms Zhang and Mr Li to their daughter was a gift or a loan because there was no documentation to record their intention. The daughter’s husband argued it was a gift and therefore relationship property, meaning the couple would benefit from it equally. The Court found on the evidence that it was intended as an interest free loan from Ms Zhang and Mr Li repayable on demand.

A similar case from 2009, Narayan v Narayan, involved parents who had written their own ‘DIY’ loan document which the Family Court held was of no legal effect. However, on appeal the High Court ruled the document was binding and clearly demonstrated Mr and Mrs Naranyan did not intend to gift $100,000 to their son and his wife. The Court held it was a loan. As Mr Narayan said in evidence ‘$100,000 is not peanuts’.

Re Griffiths (Deceased) [2009] Ch. 162
Wilson v Wilson [2014] NZHC 2766
Kicks & Anor v Leigh [2014] EWHC 3926 (Ch) (25 November 2014)
Terry Schwass Company Ltd v Marsh [2017] NZHC 1382 (22 June 2017)
Mulligan v Rhodes [2015] NZHC 2369 (29 September 2015)
Zhang & Li v Li [2017] NZHC 129
Narayan v Narayan [2010] NZFLR 161