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Effect of Gift as Against Purchasers and Encumbrances

A completely executed gift generally operates, as between the parties to the transaction, as a full and complete transfer of the title to the property from the donor to the donee.

On the other hand, an incomplete or unexecuted gift confers no rights upon the donee.[i] When a gift occurs, ownership vests in the donee immediately and is absolute.  When a gift is made in accordance with the Uniform Gifts to Minors Act, the minor obtains indefeasibly vested legal title to the gift.  However, a donee acquires only whatever interest his or her donor had in the subject of the gift.[ii]

The legal position of gifts as against purchasers and encumbrancers is also similar. 
Generally, a valid gift transferred between living persons (inter vivos) is valid and binding.  It therefore becomes binding upon all other persons claiming under the donor.  In such cases of inter vivos transfers, the donee will be treated as having a title superior to that of a subsequent purchaser or encumbrancer who had notice of the gift.  However, the situation is different if the encumbrance or lien existed prior to the transfer of the gift.  In such cases, the donee will take the gift only subject to any existing lien or encumbrance on the property.[iii]

Therefore, in the event that property offered as a gift is subject to encumbrances, such as a lien or mortgage, the donee takes the debt along with the property.

[i] 38 Am Jur 2d Gifts § 68

[ii] Id.

[iii] 38 Am Jur 2d Gifts § 69

Inside Effect of Gift as Against Purchasers and Encumbrances