Parents often make lifetime gifts to their children, often as part of a farm or business transition planning strategy. These gifts often come under great scrutiny when the party receiving the gift is divorced from his or her spouse. During the dissolution proceeding, the spouse often argues that the gifted property should be subject to a fair division between the parties. The family members who gave the gift are often called to testify that they intended only their son or daughter to receive the gift.
While equitable division of the gifted property is possible, Iowa law generally favors treating a gift or inheritance as the separate property of the recipient. Like most rules, however, that general rule is subject to exceptions, and a court is given great discretion when dividing property during a divorce action. The Iowa Court of Appeals recently considered such a case, providing a thorough explanation of the framework under which a trial court is to analyze gifted or inherited property. These rules often come into play in the context of a family farming operation.
In the case before the court, the parties divorced after 21 years of marriage. At issue on appeal was the trial court’s decision not to distribute to the wife any portion of assets gifted to the husband by his parents. Specifically at issue were limited partnership units the husband’s parents had begun gifting him in 1997, five years after the parties were married. The parents began distributing units of their family limited partnership to each of their five children at that time. They did not did not give partnership units to any of their children’s spouses. Also at issue in the case were shares in an LLC the parents transferred to their children three years before the parties divorced. The parents did not include the children’s spouses in this gift or in the accompanying gift tax returns. Nonetheless, the wife argued on appeal that she was entitled to an equitable portion of these assets.The trial court disagreed.
Iowa Court of Appeals
On appeal, the court affirmed, finding that equity did not require that the wife receive a portion of the gifted assets.
The court began its analysis by reviewing Iowa law. Iowa law, the court explained, generally provides that “marriage partners are entitled to an equitable share of the property accumulated through their joint efforts.[i]” A court will thus “divide the property of the parties at the time of divorce, except any property excluded from the divisible estate as separate property.”[ii] This “separate property” includes inherited property and gifts received by one of the parties before or during the marriage. Gifted or inherited property is typically awarded by the court to the spouse who received it “independent from the equitable distribution process.” Even so, a court can choose to also divide inherited and gifted property “if equity demands in light of the circumstances of a spouse or the children.”[iii]
In applying the law to the facts at hand, the court first determined that the evidence clearly established that the parents intended the husband to be the sole recipient of the gifted assets. Nonetheless, the court recognized that under Iowa’s “hybrid system,” the intent determination did not absolutely mean that the property would solely belong to the husband. Rather, the court had to analyze five factors to determine if it would be “inequitable” to exclude the gifted assets from the property division:
The court also noted that where the gift had substantially raised the parties’ standard of living, the court’s property division should “enable the parties to continue that lifestyle, even if that goal requires the division of gifted property.”
In analyzing these factors, the court first found that the wife had not contributed to the care or preservation of the gifted property. Although the wife’s part-time employment contributed to the family’s economic welfare, she did not make extensive contributions that preserved the gifted properties. Next, the court found that although the wife had a warm relationship with the husband's parents, especially his mother, the connection was dependent on her role as their son’s wife. This was not the kind of relationship that would require a division of gifted property. The court also ruled that the wife had not enjoyed a substantial rise in her standard of living because of the gifts. Although the limited partnership had substantial value, distributions, which had remained in the sole discretion of the parents,had been limited to small yearly amounts. Furthermore, the parents had not gifted the LLC property to the husband until three years before the divorce. He subsequently traded his LLC interest for a duplex five months after the parties separated.
As to factor four, the court found that the wife had no special needs. And, as to the fifth factor, the court determined that there were no matters that would render it “plainly unfair” to the wife to have the gifted assets set aside for the husband’s exclusive enjoyment. The court determined that the district court had treated the wife fairly in the overall property distribution and spousal support provisions of the decree. Specifically, (1) the husband was required to pay the majority of the marital debt, (2) the husband was required to pay the wife significant spousal support, even though she had a law degree and a “proven intellect,” and (3) although the wife received more assets in the property distribution (including two properties each valued in excess of $187,000), she was not required to make a property-equalization payment to the husband.
This case serves as a good reminder that assets gifted to a child can be sought by a spouse during a dissolution proceeding. The parents in this case made their intentions clear by drafting documents conveying the property to only their children and not their children’s spouses. As this case explains, this may not always be enough. Divorce is always a contingency that should be considered during family business transition planning, no matter how remote the possibility. Parties must understand the decision tree a court would follow in a dissolution action. Although the husband was able to retain the gifted assets in this case, nothing is certain in dissolution.
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