My Parents Gave Me Money to Help Us Buy a House. Now We Are Getting Divorced. Can We Get Any of That Back?

Everyone knows that the cost of houses has increased dramatically in the last few years. This particularly puts a strain on young people seeking to buy their first home. While there are people who can save a sufficient amount to make a significant down payment on a home, more and more young people are looking to family members to help them get into that first house. Those family members, generally one or both sets of the young couple’s parents, are generally more than willing to help.

So, what happens if the young married couple decides to divorce? What happens to that probably significant amount of money either given or loaned by the parents? To get a little more fact-specific, let’s assume that one side’s parents contributed $100,000 to the purchase of the married couple’s current residence, and they did that five years ago. The couple is now getting divorced after eight years of marriage. Do the parents have any chance of  getting the $100,000 back or at least pushing the contribution to their child’s side of the ledger in equitable distribution?

I will start answering these questions with some before-the-fact suggestions. I have been involved in cases like this where the parents want to classify the contribution as a loan — a loan that needs to be repaid, and preferably by the married partner who is not their child.

The problem with classifying the contribution as a loan is that there needs to be some indicia of a loan before the start of the parents’ efforts to collect on this supposed loan. Obviously, if there is a Promissory Note or some similar writing, signed at or around the time the funds were transferred to the divorcing couple, there is a stronger position that this is a loan and meant to be repaid. If there is an amortization schedule and a history of payments, again, there is more evidence that the contribution was a loan rather than a gift.

A warning I put out there is that courts do not like gifts that are later recharacterized as loans only after the parties separate and head toward divorce. I have also seen situations where the parents of one party to a divorce attempt to intervene in the divorce in order to get their contribution back. While this may work for the parents to a limited extent, it does increase the time necessary to resolve the divorce and also increases the litigation expenses of both of the parties.

If the parents have not secured the contribution to the house as a loan, all is not lost. It is possible that the financial contribution toward the house can be classified as a gift and still be recovered by the parents, or at least credited to the parents’ child in the divorce. The operative section of the Pennsylvania Divorce Code is 23 Pa. C.S.A. §3502(a)(7), which makes the contribution of one party to the acquisition, preservation, or appreciation of a marital asset a factor in determining equitable distribution of either that particular asset, or the marital estate in general.

Let’s make another assumption in our fact scenario. This time the parents of one of the parties gave the $100,000 to the two parties to the marriage to help buy the house. The parents’ child has the argument that he or she should be entitled to a greater equitable share of the equity in the house because, but for the contribution of that party’s parents, the house would never have been purchased. This is not the strongest position, but it is something. The weakness is that the gift was made to both parties to the marriage, not one, so it’s difficult to retract that position.

The more defensible position is when the gift is made to only one party to the marriage, and that party directly pays the funds toward the purchase of the house. By that I mean that the funds did not first go into a joint account before being used for the house purchase. In that instance, the party receiving the contribution has the opportunity to argue for a 20-year vanishing credit as to the contribution from their parents. Conceptually, what happens is that the $100,000 in my example is pro-rated over 20 years and becomes a marital asset at the rate of 5% per year. In my example, assuming separation occurs five years after the purchase of the house, $25,000 has become a marital asset and $75,000 is backed out and “returned” to the party it came from. In my example, that is the child of the gifting parents.

This concept exists in some form in most counties around Pennsylvania, although there is no codification or statute authorizing it. Remember, however, what we are talking about is “equitable” distribution and many other factors can enter into what a court finds to be equitable. The 20-year vanishing credit is derived from the statutory section I note above, 23 Pa. C.S.A. §3502(a)(7), and has been accepted by various trial and appellate courts around the state.

So, in summary, while no parents expect their child to get divorced, some thought should go into lending or gifting a significant amount of money to a young married couple buying a house. If the parents intend the funds to be a loan, make it look like a loan, with as many indicia of a loan as possible. These would include things like a Promissory Note, a payment schedule, payments actually being made, or an amortization schedule. If the parents are fine with the funds being a gift, they should think long and hard as to who receives the gift, either both parties or just their child. If the funds are gifted to just their child, protection of at least some of those funds is a much stronger possibility.