Dividing Separate Property in Divorce

Philip Tsai spoke at the 6th Annual Family Law Hot Topics:  War, Peace, and Unhappy Families on October 7th, 2011.  At this seminar, Philip discusses Separate Property Claims (Part 2) in reference to issues that can send your case to trial.   To view Part 1, click Spousal Maintenance.

Separate Property Claims

Another difficult issue that may thwart settlement is how to analyze and prove a separate property claim.   First, some basic tenants of the law are examined.

The law favors characterization of property as community property.  Marriage of Davison, 112 Wn.App. 251 (2002).  Marriage of Brewer, 137 Wn.2d 756 (1999).

When dividing property in a divorce, the Court has to have characterization as either separate or community “in mind” or it is reversible error.  Blood v. Blood, 69 Wn.2d 680 (1966).   Marriage of Skarbek, 100 Wn.App. 444 (2000).

Separate property should not normally be subject to division between the parties.  Marriage of Olivares, 69 Wn.App. 324 (1993).  However, separate property may be divided under the just and equitable criteria of RCW 26.09.080.  Exceptional circumstances is no longer necessary for the court to invade separate property to achieve a just and equitable result as all property is before the Court for a fair and equitable division.  RCW 26.09.080.  Marriage of Griswold, 112 Wn.App. 333 (2002).

One of the most common and notable scenarios in family law is when a spouse owns a separate property residence prior to marriage but later refinances the residence titling the property in both parties’ names.  Or, one spouse uses separate property to purchase property in the name of the other spouse or both spouses.  Prior case law established that under this scenario, there was a presumption of a gift by the spouse owning the separate property to the other spouse, otherwise known as the “joint title gift presumption”.  See Marriage of Olivares, 69 Wn. App. 324 (1993), Marriage of Hurd, 69 Wn. App. 38 (1993).

However, the joint title gift presumption was recently overruled in Estate of Borghi, 167 Wn.2d 480 (2009).  The Court in Borghi, supra,  recognized the conflicting presumptions established in the cases up to that point in time.  The court in Borghi, supra, stated:

Further, to apply a presumption based on a change in the name or names in which title is held would create a situation in which a court is asked to resolve an evidentiary question based on nothing more than conflicting presumptions.  This case illustrates the conundrum. A court starts with the presumption that the property is Jeanette Borghi’s separate property because it was acquired with her own funds before her marriage to Robert Borghi. The parties in this case agree it was initially her separate property. Then, the court must rely on the inclusion of both Robert and Jeanette Borghi’s names on the 1975 deed to support a presumption that the property is community property. Applying these presumptions simultaneously, the court reaches an impasse. If we somehow reason that the community property presumption must prevail because it is later in time, then what became of the rule that clear and convincing evidence of actual intent is needed to overcome the original separate property presumption? In sum, applying a gift presumption to counter the separate property presumption in these circumstances would reduce community property principles to a game of King’s X. See 19 Weber, supra, § 10.7 n.4, at 142. We refuse to do so and instead adhere to the well-settled rule that no presumption arises from the names on a deed or title. To the extent Hurd and Olivares suggest a gift presumption arising when one spouse places the name of the other spouse on title to separate property, we disapprove these cases.

While the joint title gift presumption has been overruled, this does not automatically mean that a spouse who decides to use separate property to acquire property in both parties’ names cannot make a gift to the community by doing so.  However, clear and convincing evidence of the intent of the spouse creating community property needs to be established with concrete evidence of intent to create community property to overcome the separate property presumption.

Another scenario that may thwart settlement is a lack of sufficient tracing of separate property by the spouse making the separate property claim.  The law is clear that property acquired during a marriage is presumed to be community property.  Marriage of Sedlock, 69 Wn. App. 484 (1993).  However, it is also clear that property owned by a spouse prior to marriage is presumed to be separate property.  Marriage of White, 105 Wn.App 545 (2001).  To rebut the community property presumption, the burden of proof is on the party claiming separate property to clearly and convincingly trace the property to a separate property source.  Marriage of Pearson-Maines, 70 Wn. App. 860 (1993).   Specifically, the Court in Pearson-Maines, supra stated:

The well-established rule is that the character of property, whether separate or community, is determined at its acquisition. Property acquired after marriage is presumptively community property. The presumption may be rebutted by clear and satisfactory evidence.  E.I. DuPont de Nemours & Co. v. Garrison, 13 Wash. 2d 170, 174, 124 P.2d 939 (1942). If the property was separate property at the time of acquisition, it will retain that character as long as it can be traced and identified.  Baker v. Baker, 80 Wash. 2d 736, 745, 498 P.2d 315 (1972).

There are many different factual scenarios that can arise when tracing separate property.  Some common situations include: (1) a spouse owned a separate property residence that was sold during the marriage and the proceeds of the sale were used as a deposit or down payment for another residence purchased during the marriage; (2) funds that exist in a bank or stock account prior to marriage that have been used during the marriage and commingled with community bank or stock accounts; (3) retirement accounts that were contributed to prior and during the marriage resulting in mixed separate and community property character; and (4) stock options that were awarded prior to the marriage but vest during the marriage.

It is advisable if you have separate property tracing issues in your case to begin the tracing analysis immediately upon commencement of the representation.  In many instances, it can take several months to obtain documents (if they can be obtained) that will be necessary to meet the clear and convincing evidence test enumerated in Pearson-Maines, supra.

There are some cases where your client may have the documents necessary to perform the tracing, but many times, that is not the case.  Depending on the length of the marriage, the documents necessary for a tracing analysis can be decades old.  Issuing subpoenas to obtain the documents is helpful.  However, having your client contact the appropriate source, whether it is real estate professionals and escrow documents or financial institutions holding bank and retirement account statements to obtain the documents is frequently more fruitful.

Beginning the tracing analysis early on in your case is key to a successful settlement.   Do not use the mediation or settlement conference process to perform discovery or expect the other spouse to admit that the property in question is separate.  If necessary, hire an expert to perform the tracing analysis and provide a report that you can use during mediation or at trial.

Expectancy Or Loss

Another issue that can sometimes interfere with your ability to settle a case in the context of division of assets and liabilities is a proper analysis of expectancy or loss.  There are many types of expectancies that arise in family law cases including: (1) whether a spouse will receive an inheritance, (2) the likelihood that a spouse will receive a parental gift subsequent to the divorce, (3) possibility of remarriage, and (4) receipt of or loss of social security benefits.  Some expectancy benefits are able to be considered by the Court while others are not.

Inheritance

The general rule regarding inheritance is that a bequest in a will while the testator is still living is merely an expectancy and should not be considered by the Court when making a division of assets and liabilities.  See Rubin v. Rubin, 204 Conn. 224, 229-30, 527 A.2d 1184, 1187, 62 A.L.R.4th 91 (1987); Gassaway v. Gassaway, 489 A.2d 1073, 1076 n.9 (D.C. 1985).  However, when the testator has passed away and the will can no longer be changed, the bequest becomes a vested interest to the extent of its actual value.  Marriage of Hurd, 69 Wn. App. 38 (1993).  Under that circumstance, although the inheritance is characterized as separate property, the Court should consider its existence pursuant to RCW 26.09.080(2) .  Hurd, 69 Wn. App. at 50.

In an unreported case, Marriage of Trammell, 98 Wn. App. 1003 (1999), the Court applied the expectancy rule enumerated in Marriage of Hurd, supra, and found that a non disclosed inheritance where the testator had passed away created a vested interest which should have been disclosed to the other spouse pursuant to a Property Settlement Agreement that divided any undisclosed assets between the spouses equally.  Trammell is a good example of the importance of properly analyzing an expectancy and full disclosure.

Parental Gifts

Similarly to the expectancy rule enumerated in Marriage of Hurd, supra, the Court should also not consider whether the parents of a spouse will make a gift to the spouse when determining a fair and equitable division of assets and liabilities.  Lake v. Lake, 63 Wyo. 373 (1947).   In Bungay v. Bungay, 179 Wash. 219 (1934) (a pre no fault divorce case), the Court stated:

Since, as we have seen, the husband has only two hundred dollars per month income, above that already assigned in good faith to secure the payment of community indebtedness, these provisions are impossible of performance unless someone comes to the appellant’s aid. It is suggested that appellant’s father is well-to-do, and perhaps it was expected that he would assume the burden thus created, but we know of no rule of law which, under circumstances such as here exist, makes a father liable for the indebtedness of an adult son, and the law can look only to appellant’s earning power as the measure of his duty to provide.

The Court in Bungay, supra, makes it clear that when dividing property between spouses, the fact that one or both of the spouses’ parents may have means to assist the spouse after the divorce is final, the Court cannot take that factor into consideration.

Remarriage

The Court may also consider whether one of the spouses in a divorce proceeding is likely to remarry when determining a fair and equitable division of assets and liabilities.  The Court in Eide v. Eide, 1 Wn. App. 440 (1969) upheld the trial court’s division of property and liabilities and specifically quoted the trial court as follows:

She has had no training for any particular occupation.  It is true that she has been a waitress.  She has been a cashier.  But people who can do that kind of work are numerous, and except in times of high employment, which is now, of course, I would think that she would have more difficulty in getting that kind of a job than someone twenty or twenty-five years younger.  Also, as we get older that kind of work becomes much more difficult to be on your feet all of the time.

But I do think that some thought has to be given here to her security for the future and the fact that at her present age she is much less likely to remarry than she was at the age when she did marry Mr. Eide.

Social Security Benefits

The Court may also consider as part of a fair and equitable division of property whether a spouse will receive Social Security Benefits.  Specifically, in Marriage of Zahm, 138 Wn.2d 213 (1999), the Court held that Social Security Benefits are indivisible separate property of the spouse earning the benefits.  Specifically, the Zahm, supra, court held:

Although extrajurisdictional case law on this issue is scant, we conclude that federal statutes secure social security benefits as the separate indivisible property of the spouse who earned them. This approach ensures that the benefits intended for the beneficiary reach that party and that the benefits are insulated from the occasionally unpredictable fortunes of legal dispute.

The Court is also able to consider whether a spouse will lose anticipated social security benefits when fashioning a fair and equitable division of property and liabilities.  The court in Patrick v. Patrick, 43 Wn.2d 139 (1953) specifically held:

After considering the rules just mentioned, we are of the opinion that an award of alimony to the appellant in the sum of fifty dollars a month would not be unreasonable, as the property award made by the trial court will hardly leave the husband in a necessitous condition. While we are not inclined to disturb the court’s division of the property, we believe the court erred in failing to make some provision for reasonable alimony to the wife, since, in our opinion, appellant should be compensated in some manner for her potential interest in the social security benefits of the husband, as to which, under Federal law, she will lose all rights by virtue of the divorce.

Therefore, the family law practitioner should be aware of the different arguments that can be made regarding expectancy and loss when considering the overall economic circumstances of the parties.

Conclusion

Preparing both the case and the client for mediation is the most important thing an attorney can do to maximize the chances of settling.  While some issues are particularly problematic in this economy, those issues can be resolved by creative drafting that gives the parties options not available at court.  Sample agreements regarding the sale of real property and formulas for maintenance are attached.