Gifting money to your adult children may be an effective way to support them during the cost of living crisis. Lifetime gifts of this kind are becoming more common as people aim to help their children reach financial milestones such as buying their first home.
Indeed, the Great British Retirement Survey 2023 from ii found that 16% of over-40s were planning to give a “living inheritance” in the next three years, rather than passing on wealth when they die.
You may prefer to pass wealth to your loved ones now instead of when you die as they could benefit from it more at their current stage of life. Additionally, you are around to see them thrive as they use the gift to achieve their own financial goals.
However, if the recipient is married, you may need to consider what would happen to any gifts in the event of a divorce.
Naturally, you will likely want to ensure the wealth stays in the family. Yet, that may not be the case unless you put protective measures in place.
Read on to learn how to ensure gifts to married children stay in the family upon divorce.
A gift is likely to be divided equally during a divorce
Any wealth that you pass to your children is considered a gift if you have no expectation that it will be repaid. You also do not expect to have any financial interest in properties or other assets that they purchase with the funds.
An outright gift of this kind is often considered part of the matrimonial assets by the courts. As a result, the funds may be split between your child and their spouse depending on their financial needs, in the same way as the rest of their shared assets.
However, if the money is a loan, the decision of the courts may be more complex. The difference between a soft loan and a hard loan is important here.
A soft loan is money lent informally by family members or friends, without any written legal agreements. Conversely, a hard loan is money lent by a financial institution with a commercial agreement, which can be enforced in the event that the money is not repaid.
You can potentially argue that the money you give your child is a soft loan and they are liable for the repayments, so, they should keep the funds during a divorce.
Yet, without a legal agreement in place, there is often no way to prove this. As a result, the courts may still rule that the gift should be divided equally.
Ultimately, while each case is different, the courts must take the expectations when the money was gifted, as well as the financial needs of both parties involved in the divorce, into account.
Although you can make an application to the court to intervene in proceedings and argue that your child should keep the gift, there are no guarantees that they will rule in your favour.
Fortunately, you have several options to potentially protect the funds at the point of gifting.
Outright gifts should be recorded in writing
When making an outright gift, it may be beneficial to record it in writing and draw up an agreement with your child.
In this agreement, you may set out certain conditions that could protect your wealth if they later separate. For example, you might specify that the money is advanced as a gift but should be repaid in full if the couple divorce.
Having this in writing at the point of gifting may strengthen your child’s case if they argue that they should retain the gift during a divorce.
A “deed of trust” could protect wealth used to purchase a property
Helping them to purchase a property is one of the most common reasons why you might gift money to your adult children.
In this instance, a “deed of trust” – sometimes called a “declaration of trust” – could help you keep the funds in the family upon divorce. This legal document is created at the point of purchase and outlines who has a financial interest in the property, and what share they own.
It also details what should happen to the property in various circumstances, including a divorce.
You can use this document to stipulate that, should your child and their spouse separate and sell the property, you are entitled to a share of the proceeds. This share will typically reflect the percentage of the property that you paid for.
Bear in mind that for this to be possible, your child and their spouse must be “tenants in common”, meaning they each own a separate share of the property.
Pre- and post-nuptial agreements outline what happens to assets upon divorce
Pre- and post-nuptial agreements are common legal documents used to protect family wealth. They typically outline what happens to assets when the marriage ends by divorce or death.
If you are making a gift to an adult child who is already married, you may want to discuss the possibility of a post-nuptial agreement with them. The document can cover a range of assets including properties, cash gifts, or an interest in a business.
Your child can create an agreement with their spouse to ensure that they retain the gift upon divorce. However, it is important to note that a pre- or post-nuptial agreement is not legally binding.
A judge does reserve the right to veto the agreement in certain circumstances. This usually happens if the division of assets is considered to be discriminatory or unfair to children.
It is important to consider the tax implications when making a gift
Lifetime gifting can be an effective way to reduce the size of your estate for Inheritance Tax (IHT) purposes. This could mean that your family pays less IHT on your estate when you die.
However, there are other potential tax implications to consider when making gifts, particularly if your child divorces and the funds are repaid.
For instance, if the value of an asset – such as a property – increases in value, your share may be worth more than the initial gift. If your child divorces and your share is repaid, you may have to consider the Capital Gains Tax (CGT) implications of this.
Generally, the handling of gifts upon divorce can be very complex. As such, you may want to seek professional advice to ensure that you protect your wealth and understand the tax implications of your gift.
Get in touch
If you are planning to gift money to your adult children, we can discuss it with you to ensure you take the necessary steps to protect your wealth.
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This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.