Articles

When are gifts treated as income?

By: Melissa M. Boyd, Esquire

You are approached at a cocktail party by a wealthy guest who is aware of your profession. She asks, "I want to give money to my son but I don't want his scheming, philandering wife to lay one hand on the money; is that possible?" Don't be too quick to tell her to "gift away" without reading below.

23 Pa.C.S. § 4302 is the statute that defines income. The Supreme Court of Pennsylvania has analyzed the statutory scheme of Pa.C.S. § 4302 as well as its legislative history. See, Humphreys v. DeRoss, 567 Pa.614, 790 A.2d 281 (2002) (finding the principal from an inheritance was not income for purposes of computing child support). Specifically, the Court found that while the statutory definition of "income" is not limited to the list in Pa.C.S. § 4302, a resource must somehow "reasonably fit within one of the categories enumerated in Section 4302." Humphreys, 567 Pa at 619, 790 A.2d at 284.

As recently as 1997, the legislature expanded the definition of income (please note that trust income is now a part of the definition), but noticeably missing from this amendment to the definition are "gifts." Should a pattern of annual gifting be included within the definition? It's a subject for hot debate. While it may be practical to advise clients to dispose of their assets through tax-immune inter vivos gifts, it may have negative consequences to those clients receiving gifts if they are subject to support actions. Likewise, a family law practitioner may want to exclude gifts received from third parties from the marital estate for purposes of equitable distribution, but those same gifts may be tallied against the client if a pattern of gifting is established in the support action.

In Singleton vs. Waties, 420 Pa.Super. 184, 616 A.2d 644 (1992), the Superior Court stated it would be unfair to attribute gifts from third parties as part of a parents' income since third-party gifts should not relieve an obligor of support responsibility. Coupled with the fact that "gifts" are not considered a form of compensation that qualifies as income pursuant to 23 Pa.C.S. § 4302, Singleton may be further evidence that gifts do not fall within the definition of income. However, I would not be quick to hang my hat on this principle, as recent directives from the Bench hint that the Court may be inclined to include a pattern of gift-giving for purposes of calculating someone's net monthly income.

Another point that must be considered in a support action is whether a party's gift or inheritance is generating passive income. Although the Humphreys case holds that the principal of an inheritance could not be considered income, the interest/dividend income generated from the principal of the inheritance would be considered income available for support. So, those clients who take their gift monies and/or inheritance and invest in real estate may have sheltered their assets, but clients who generate passive income as a result of playing the stock market or putting money in interest-bearing accounts subject a portion of those assets to income available for support purposes.