Treatment Of Gifts And Heirlooms In A Divorce

In financial proceedings on divorce, both spouses will be required to disclose their personal belongings, which may include items that they have received by way of gift, including family heirlooms. Such assets usually attach high sentimental value and have been given to the spouse with a general understanding that they will be kept ‘within the family’ and passed down through generations. Therefore, it is understandable that tensions often arise in respect of the treatment of gifts and heirlooms on divorce.

This article will highlight the Family Court’s approach in Hong Kong when dealing with assets such as gifts and heirlooms.

Recent case

Our firm was recently involved in the case of W,LT v GWH also known as HGW [2021] HKFC 142 concerning a dispute over a painting that had been in the family for over 120 years. It was directly acquired by the husband’s great grandfather, passed on to the husband’s grand aunt by inheritance, and then to the husband’s father by inheritance. The issue arose when the wife alleged that the family painting formed part of the marital assets that were subject to division.

The husband had entered into a family agreement with his father to purchase the painting as an advance inheritance to enable his parents to buy a home for retirement. Subsequently, they entered into another agreement where the husband transferred the painting back to his father.

In considering the wife’s application to set aside the subsequent transfer, the Judge held that the agreements between the husband and his father was entered into with very specific issues in mind, the central one being that the painting should be preserved and if possible, retained by the family for future generations.

The Judge declined to set aside the transfer and concluded that the painting was clearly an inherited property. It was initially acquired by the husband’s family by way of inheritance and from a source wholly external to the marriage. In reaching her conclusion, the Judge referred to LKW v DD (Ancillary Relief: Guidelines) [2011] HKFLR 106 where Mr Justice Ribeiro PJ said inter alia the following:

‘87. The source of an asset may provide a reason for excluding it from the sharing principle on the basis that it is not an item of matrimonial property. Of course, in many cases, no question of any distinction between matrimonial and non-matrimonial property will arise. But where there are assets which may be capable of being so differentiated, section 7(1)(a) implicitly requires the court to consider whether any part of such assets ought in fairness to be excluded from the sharing principle. Differentiation might also be seen as a requirement of section 7(1)(f) if the source of a particular asset suggests that it is an independent and unmatched contribution by one of the parties.

89. The existing case-law identifies two classes of assets as possible candidates for exclusion on the basis of source. The first involves property acquired during the marriage by one of the parties from a source wholly external to the marriage, such as by gift or inheritance. The second involves assets derived from a business or an investment conducted solely by one party (sometimes called “unilateral assets”).’

Marital or non-marital assets?

When a gift is received as part of inheritance or a family heirloom is passed to a family member, unless there is an express intention that it should be passed on or returned, the Court may need to determine if such asset will form part of a spouse’s property and financial resources and taken into account when determining the division of assets.

In the UK case of White v White [2001] 1 AC 596, which was followed in Hong Kong in LKW v DD, Lord Nicholls explained that:

‘Property acquired before marriage and inherited property acquired during marriage come from a source wholly external to the marriage. In fairness, where this property still exists, the spouse to whom it was given should be allowed to keep it. Conversely, the other spouse has a weaker claim to such property than he or she may have regarding matrimonial property.’

The nature of the inheritance is also important. As Lord Justice Ward said in the UK Court of Appeal case of Robson v Robson [2010] EWCA Civ 1171:

‘the ancestral castle may (note that I say “may” not “must”) deserve different treatment from a farm inherited from the party’s father who had acquired it in his lifetime, just as a valuable heirloom intended to be retained in specie is of a different character from an inherited portfolio of stocks and shares. The nature and source of the asset may well be a good reason for departing from equality within the sharing principle.’

The circumstances of the case, the nature and the value of asset and how it was acquired are all factors that will be taken into account when deciding whether an asset falls into the category of marital or non-marital property.

How can you protect gifts and heirlooms?

Any assets including heirlooms, gifts or inheritance that are brought into a marriage by one party can be protected if there is evidence of intention to exclude such assets from the matrimonial pot. They should be kept separate and not be intermingled with the marital assets and a prenuptial or post-nuptial agreement can help safeguard such assets.

While pre-nuptial agreements are not binding on the courts in Hong Kong, the law in this area has developed following the Supreme Court of England and Wales decision of Radmacher v Granatino [2011] AC 534 where it was held that:

‘the court should give effect to a nuptial agreement that is freely entered into by each party with a full appreciation of its implications unless in the circumstances prevailing it would not be fair to hold the parties to their agreement.’

This position was endorsed by the Hong Kong Court of Final Appeal in SPH v SA [2014] HKLRD 497.

Conclusion

The Family Courts have very wide discretion in matrimonial cases. However, there is a general view that gifts and heirlooms will be treated as ‘non-marital’ assets unless it would be unfair to exclude such assets from the matrimonial pot. While disputes over gifts and heirlooms are rare, these can be avoided if there is evidence of intention of the treatment of inherited gifts and heirlooms, including for instance a pre-nuptial or post-nuptial agreement.