Gifts- The Importance of Donative Intent

Take-Away: The key element in a lifetime gift is the donor’s intent to make the gift.

Background: These days there is considerable discussion about making lifetime gifts to use the donor’s large applicable exemption amount to shelter the gift from gift taxation and generation skipping transfer tax (GST) taxation. Gifts to spousal lifetime access trusts, gifts to dynasty trusts, and gifts to irrevocable grantor trusts flood the estate planning literature these days. There is also discussion with respect to making these lifetime gifts with ‘strings’ so that the property might be returned to the donor should Congress not get around to reducing the donor’s applicable exemption amount. As such, gifts are a hot topic in estate planning these days, so it might be a good idea to quickly review the rules on when a gift occurs, and when the gift is completed for state property law and federal tax law.

Elements of a Gift: In order for a gift to be valid, three elements must be established under Michigan law. (i) The donor must possess the intent to transfer title gratuitously to the donee. (ii) There must be actual or constructive delivery of the subject matter to the donee, unless the property is already in the donee’s possession. (iii) The donee must accept the gift. Whether the donor has acted with donative intent is a question of fact for a court or a jury. “The donor’s intention to make a gift need not be expressed in any particular form, and donative intent may be typically proven through oral testimony.”  In re Rudell Estate, 286 Mich. App. 391 (2009) For the gift to be legally respected, it must not only be immediate, but absolute and irrevocable. In re Casey Estate, 306 Mich. App. 252 (2014). While the federal Tax Court uses a different set of criteria, the most important is whether the transferor intended to make a gift.

The issue of the donor’s intent to make a gift was recently litigated in a reported Michigan Court of Appeals decision.

Reported Decision: Springer v. Springer, Michigan Court of Appeals, No. 352647 (April 22, 2021)

• Facts: A father (living in Tennessee) and his son (living in Michigan) had been estranged for several years. After those years they tentatively started a reconnection. The son wanted to purchase a new home, but he would have to sell his existing home to purchase the new home. The father offered to pay the purchase price on the new home, so that the son would not have to sell his current home in a ‘fire sale’ setting. The father later testified that he did not want to see his son ‘lose that house’ that he wanted. The father proposed that the ‘new’ home be held in both names, but the son and his family would live in the ‘new’ home. The father later testified that his son orally agreed to reimburse the father for one half of the purchase price after selling his original home, and if the son had not reimbursed his father for that 50% interest by the time the father died, the son would inherit the home. To be expected, there was absolutely no documentation to establish that the son had agreed to reimburse his father for one-half of the purchase price of the ‘new’ home. The ‘new’ home was purchased for $280,000. Both father and son signed the Purchase Agreement. The sole source of the $280,000 purchase price was the father. A warranty deed conveyed the title to the ‘new’ home to father and son as tenants in common in January, 2019. After a one week visit of father to the son (in the ‘original’ home) in the spring of 2019, they had yet another ‘falling out.’ The father decided that he no longer wanted any financial connection with his son. Note, the father never saw the ‘new’ home, nor did he stay in that home. The son never paid his father anything towards the purchase price of the ‘new’ home.

• Dispute: The father sued his son asking that the ‘new’ home be sold in lieu of a legal partition action against a co-tenant, and that the father be reimbursed the full $280,000 that was used to purchase the ‘new’ home. The son denied that there was any oral agreement for reimbursement. The son also argued that the father’s claim was barred by the Statute of Frauds (nothing in writing with regard to the purchase of real estate.)

• Trial Court: The trial court held for the son. The judge found that the father had intended to make a gift to his son. The judge order the son to refinance the ‘new’ home with a mortgage and pay to the father $140,105. The son obtained the mortgage and tendered that amount to the father, but the funds were rejected by the father. The father appealed.

• Appellate Court: The Michigan Court of Appeals upheld the decision of the trial judge. The Court found that two of the necessary elements for a gift were represented by the warranty deed: it proved by the delivery and acceptance elements. As for proving the intent to make a gratuitous gift, the Court focused on the father’s trial testimony.

The father testified at the trial that: “ I may have a chance to do something for you now. We did not get along for 10 or 11 years ago. Let’s try that again. I’d like to help you.” Focusing on that testimony, the Court found:

“ Plaintiff’s testimony demonstrates that because he had an estranged relationship for most of the defendant’s life, he wanted to do something to help the defendant without expecting anything in return. Which is evidence that plaintiff intended to transfer title to the property gratuitously to the defendant. For these reasons, the trial court did not clearly err by finding that plaintiff intended to gift a one-half undivided interest in the property to the defendant…Plaintiff intended to transfer title to the property gratuitously to defendant, there was delivery of the property to, and the defendant accepted the gift. Therefore, plaintiff could not revoke the gift after he decided he no longer wanted to have a ‘financial connection/ with the defendant.”

Conclusion: The result in this reported decision is not surprising. What is does show, though, is the type of proof a court might look to, to find an intent to make a gratuituous transfer. Since intent is normally a question of fact for the trier of fact, a trial is often required to establish whether that intent exists. In intra-family transfers, often there is no documentation to support the nature of the transaction, i.e. loan or gift? Usually the burden of proof falls on the donor as to what the intent was behind a transaction, and in intra-family transactions the courts are willing to supply a legal presumption that a gift was intended.