The case in question – Gifting for the purpose of property finance
This situation is likely to be one that is more common. The parents had given funds to their daughter and the daughter’s life partner of many years in the amount of around € 100k. This was used for co-financing a residential property that had been jointly acquired by the beneficiaries. Less than two years after the gifting had occurred the couple separated. Thereafter, the parents sought to reclaim from the former life partner his respective share of the gift and succeeded in doing so – in the final instance, the Federal Court of Justice ruled in their favour (judgement from 18.6.2019, case reference: X R 107/16).
Does the basis of a transaction cease to exist in the case of a separation?
The court did nevertheless clarify that a donor basically bears the risk that the future lifestyle of a beneficiary and what s/he does with the gift will not conform to the expectations of the donor. However, the case should be judged differently if the donor’s expectations had discernibly become the transactional basis for the gift. If this ceases to exist then there is justification for cancelling the transaction.
Gifting property ownership, or amounts of money intended for this purpose, to a child and his/her partner is usually borne by the expectation that, in any case, the property will be used jointly as a family home by the beneficiaries for a certain amount of time. That was also the court’s assessment of the issue in the case in question. The parents’ expectations became the transactional basis for the gift and this as eliminated by the separation that occurred shortly afterwards. The conditions for cancelling a transaction had thus been satisfied.
Please note: On the question of the period of time for which a relationship has to last in order to be able to deny that the basis of a transaction has ceased to exist, the court implied that, in this respect, it wished to base its decision on case law pertaining to marriages of short duration under maintenance law. Accordingly, periods of up to two years would always be viewed as being of (too) short duration and a period of more than three years always as long enough.
Legal rights to demand the return of a gift
Apart from the basis of a transaction ceasing to exist, there are two further regulated possibilities for demanding that a gift be returned.
- Impoverishment of the donor (Section 528 German Civil Code (Bürgerliches Gesetzbuch, BGB) – A donor, following the gifting, finds him/herself in a position where s/he is unable to reasonably provide for him/herself or to meet the maintenance obligation incumbent upon him/her by law.
- Gross ingratitude of the beneficiary (Section 530 BGB) in the form of serious wrongs done to the donor or a close relative of the donor, e.g., physical ill treatment or serious insults.
Recommendations: Set out the contractual rights to demand the return of a gift...
To counter the uncertainty of whether or not the rights to demand the return of a gift would be pertinent it would be advisable, in the gift agreement, to lay down specific criteria for demanding the return of the gift in special circumstances. Typical cases could be, e.g.,
- beneficiary dies before the donor;
- insolvency of the beneficiary;
- beneficiary needs a carer;
- beneficiary sells the gift without the consent of the donor.
... protect against tax risks
Sometimes people also forget to protect against the tax risks of gifting that arise from the rights to demand the return of a gift. This is particularly the case where business assets are gifted. The parties involved usually assume that gift tax is not applicable here because of gift tax exemptions. However, the conditions for exemptions are complicated and include a number of risks, e.g., with respect to non-operating assets that are harmful from a tax point of view. It is therefore advisable, as a precaution, to likewise provide for the possibility to demand the return of a gift if, contrary to expectations, gift tax is triggered. If the right were exercised then gift tax would expire retroactively. Moreover, re-transferring would not constitute gifting again.