Gifts can be highly valuable financially, but also often hold great sentimental value. If a marriage breaks down, the issue of who retains them on divorce can become extremely contentious.

The following article, written just before the Christmas holiday season, touches on how the season of giving raises questions of what happens if couples later war over their presents in a divorce case, particularly when the gifts are worth considerable sums. This is just another way of showing how HNW divorce cases can involve illiquid and idiosyncratic assets, as well as more liquid ones such as equities or cash. 

To explore this area is Sarah Hutchinson, partner and mediator at law firm Farrer & Co, LLP. The editors are pleased to share these insights; we welcome debate – jump into the conversation! The usual caveats apply to views of guest writers. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

While the tabloids enjoy reporting the outlandish gifts that some celebrity couples buy one another at Christmas, it is not unusual for spouses to gift valuable items, such as artwork, cars, and jewellery, during a marriage. Similarly, expensive gifts may be given by family and friends as wedding presents or during a couple’s marriage, and valuable family heirlooms may be passed on to the next generation.

Gifts can be highly valuable financially, but also often hold great sentimental value. If a marriage breaks down, the issue of who retains them on divorce can become extremely contentious. It is therefore important to consider both how these items might be divided by the courts and also how they may be protected from the outset.

How the court approaches gifts on divorce
The court has complete discretion as to how assets are distributed upon divorce, and can redistribute or order the sale of assets as it sees fit to achieve a fair result. This includes gifts made by anyone to either or both spouses. 

Upon divorce, both parties will be required to provide a summary of their assets, which would include any personal belongings with a resale value of more than ÂŁ500 ($679.5). This may require formal valuations to be carried out, and the tax consequences of a change in ownership or sale to be calculated.

The court will then determine how the overall assets, including any personal belongings, should be divided, in order to achieve “fairness”. In doing so, the court will consider two main principles; needs and sharing.

The parties’ financial needs, both for housing and income, are a priority. “Needs” in this context are not interpreted in the limited way you might expect, and are considered in light of the standard of living during the marriage, the length of the marriage and the parties’ financial resources. It is therefore possible for a person’s “needs” to be assessed as many millions of pounds. Gifted assets, regardless of origin, can be transferred between parties or sold in order to meet the “needs” of one of the parties, including artwork and jewellery if necessary.  

If there are more resources than “needed” by the parties, then the court will consider what portion of the assets are “matrimonial”, and whether these should simply be shared. The law considers marriage to be a partnership, and therefore assets which have accrued during the marriage are deemed matrimonial assets, regardless of who earned or received those assets. However, inherited assets or those owned before the marriage are not considered to be a fruit of the marital partnership, and therefore are considered to be “non-matrimonial”. Non-matrimonial assets are unlikely to be shared, but this might be required, including to meet “needs”.

Gifts could therefore be considered as either matrimonial or non-matrimonial depending on the circumstances; wedding gifts intended for both parties will be matrimonial, whereas family jewellery passed from mother to daughter, for example, would be considered non-matrimonial.
 

Protecting gifts from financial claims on divorce
There are various steps which can be taken both before and during a marriage to limit the impact of a divorce.

Pre-nuptial and post-nuptial agreements are more effective in England than ever before. Although not binding, if they meet certain requirements, the courts can and will hold spouses to their terms. To have an impact, a nuptial agreement must have been freely entered into, with no suggestion that a party was pressured into signing an agreement. Both parties therefore need sufficient time before the wedding to consider and negotiate the terms of a pre-nuptial agreement.

The agreement’s implications must be fully appreciated by both parties, meaning that they must fully understand each other’s financial position and what they may be entitled to should they divorce without the agreement, so they can understand what they are “giving up” by entering into it. Finally, it must be fair to hold the parties to the agreement in the circumstances prevailing at the time of their divorce, so that, as a minimum, the agreement meets the weaker financial party’s needs.

Pre and post-nuptial agreements can therefore ring-fence gifts made to either party prior to and during the marriage.  

When a gift is made during the marriage, it would also be helpful to make clear in writing who the gift was intended for - whether for one or both parties, or for one of the parties during their lifetime and then to be passed on to a child or children. Subsequent arrangements, such as in whose name the insurance policy is in, should be consistent.

It is also important to consider how a gift will be treated once received. To take the simplest example, if a cash gift is made and used to refurbish the family home, then the gift is most likely to be considered a matrimonial asset as it will be incorporated into the value of the property. Whereas if the cash gift had been deposited in a separate sole account and not used during the marriage, it will be easier to maintain that it is non-matrimonial. The same applies to other types of gifts.

As ever in family law, communication between spouses is key and it is important for anyone considering making a substantial gift - either in monetary terms or of sentimental value - to take advice before doing so.