A Divorce Conundrum: Gifts and Inheritances

The general rule of thumb when it comes to divorce, is that everything owned or controlled by the parties (whether in sole name or joint names) is to be considered as part of the matrimonial pot. However, there is a difference between assets and property which have been accumulated by the parties during the marriage through their own endeavours and assets which have been gifted or inherited.

Q1. Are gifts considered part of the matrimonial pot?

Gifts between spouses that are given after marriage and before separation are deemed common assets that must be accounted for, valued, and divided as part of the correct distribution of the matrimonial pot – unless there is express agreement to the contrary. Some of these gifts can be quite considerable in terms of their financial value, such as jewellery, cars, art and property.

Interestingly, an engagement ring will be presumed to be an absolute gift, unless the ring was given with an express or implied condition that it should be returned if the marriage does not take place (section 25 of Law Amendment and Reform (Consolidation) Ordinance, Cap. 23).

Valuable gifts by a spouse to the parties’ children however (especially it is of substantial value) might be clawed back or accounted for unless there is express agreement by the parties to treat it as an absolute gift. There is also a presumption that transfers, gifts and/or sale of property, made within 3 years from the date of the petition for divorce, are intended to defect the ancillary relief claim of the other spouse. The burden is on the person making the transfer, gift or sale of property to rebut the said presumption.

Q2. What about gifts given by third parties?

It is generally established that gifts to a spouse from a third-party are part of the matrimonial pot. Some issues which can cause complications, include establishing who the gift was given to and why – was the gift intended for one specific individual or for both spouses jointly? In answering such question, written proof showing whom in the gift was intended for or the gift being given on a specific occasion will provide clarity in determining the answer. When the answer is unclear, the Court will investigate all details of the specific purpose and circumstance of the gift, hence it is always important to keep notes that can help to prove the original aim of the gift.

Q3. How are inheritances treated?

Whether or not inheritances form part of the matrimonial assets pool hinges on the facts: it depends in each case on the size of the inheritance; when it was or will be received; how it was dealt with during the course of the marriage and upon the financial resources; and needs of both parties during and after the marriage. There’s a variety of scenarios and there are general rules that may apply.

If inherited assets are transferred to joint names, used for the benefit of both spouses, or have always been used to support the family financially, they will likely be considered as part of the matrimonial assets available for division by the Court. For lumpsums or property received shortly before the breakdown of the marriage this is less likely to happen. Although, it depends on the capability of such inherited asset of meeting the future needs of the family and each spouse – in particular when children and their needs are involved.

In summary, generally, inheritance received by a spouse will be considered as a matrimonial asset capable of division.  But if the asset has always been separated from the family, it was never relied on by the family and there is no need to rely on it going forward, there will be a good argument that it should not be shared by the parties.

Q4. Are other monetary gifts given by parents considered differently?

Complications can arise when one spouse receives a gift, but then uses it during the marriage for family purposes. The most common situation is where one spouse received money from his/her parents and invests it in the family home. Despite being an absolute gift to one spouse, the conversion and/or contribution into the family home means that it has now become a matrimonial asset and the starting point is that the other spouse might be entitled to a share of it upon divorce. In most cases, it is up to the person who received the gift to show that it would be unfair to consider it part of the matrimonial pot since the source of funds were non-matrimonial.

Q5. What happens to loans given by parents?

Given the prohibitive real estate prices in Hong Kong, it is rather common for parents to loan or gift money to their children for property purchases. Formal loans – which are obviously very different than gifts hidden as loans – are not as likely to be considered matrimonial assets. However, defining when money received from a parent represents a gift or a loan can be complicated. It is critical to have a formal loan agreement or at least solid documentation which can prove a real loan. It is also advisable to precisely state the terms of the loan, for example repayment of a loan from the family finances could give a certain entitlement to the divorcing spouse too.

Q6. How can gifts be protected from the possibility of divorce?

Well drafted pre and postnuptial agreements may protect both spouses in the event of a marriage breakdown. These agreements usually govern financial arrangements, such as management of family finances, segregation of assets, spousal support and alimony payments, maintenance for children, calculation of assets within the matrimonial pot, etc. Inheritances and gifts, that would be or have been received by the parties, can be specifically excluded from the matrimonial assets through these types of agreements, either before or after marriage.

Q7. Can an ex-spouse advance claims towards gifts or inheritances received after the parties’ ancillary relief claims have been settled or adjudicated by the Court?

If there is a significant change in circumstances, such as the receiver’s needs increasing or the giver’s financial resources increasing, an ex-spouse can potentially make claims against gifts or inheritances received by their ex, even years after relief claims have been settled or adjudicated.  These assets could be considered extra financial resources available, hence a Court could reassess the maintenance amount already granted to the other spouse. A straightforward way to try and prevent such claims is to obtain a “clean break order” from the Court.

An increased financial capacity can also serve as a “trigger” to bring an application to vary the child maintenance order, but this is a rather different situation compared to spousal maintenance.