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Washington Appeals Court Finds Separate Property Converts to Community Property During Separation Under Prenuptial Agreement

No one wants to think about divorce before they are even married, but a prenuptial agreement can protect both parties if the marriage doesn’t work out.  While most people think in terms of either being married or divorced, Washington divorce attorneys understand there may be significant periods of separation.  If a prenuptial agreement does not specifically address what occurs during the separation, the parties will likely be considered married until the dissolution.  This could result in separate property converting to community property during the separation, as occurred in a recent case.

wedding ringThe husband had become wealthy from the stock options he received as a Google employee.  The couple signed a prenuptial agreement and married in September 2005.  They separated in 2014 when the husband filed for divorce.

They reached an agreement on a parenting plan for their child, but they had to go to trial to resolve their financial issues.  The husband appealed the trial court’s distribution of property, challenging the interpretation of the prenuptial agreement.

The husband challenged the trial court’s interpretation of the property conversion provisions.  These provisions converted separate property to community property at specified intervals during the marriage.  The husband argued the property should not continue to convert after he filed for dissolution.

The 10th anniversary of the marriage occurred after the husband had filed for dissolution but before the trial occurred.  The agreement provided, “On the tenth anniversary of the Marriage, one –sixth (1/6) of each party’s remaining separate property shall be converted to community property.”  The agreement further provided that, if an actual re-designation of title was not accomplished to implement the conversion, the marital community would have a community property lien on the separate property.

The trial court found the agreement was not ambiguous.  Anniversaries continued until the marriage was dissolved, so a conversion occurred on the 10th anniversary.  The husband argued that the anniversaries stopped when he filed for dissolution.  The appeals court noted the agreement contained an acknowledgement that the parties had discussed spousal property rights under Washington law with their counsel and that the agreement waived those rights.  The appeals court also pointed out that there were other provisions in the agreement that showed the parties knew how to include further limitations if they intended to do so.  These required the husband to contribute separate property to a community account in an amount calculated based on the date of separation, with the intention that the separation be permanent if the dissolution became permanent.  The appeals court found no reason to imply similar language in the provision at issue.

The appeals court also rejected the husband’s argument that allowing the conversion would encourage a party to stall the dissolution process.  The trial court did not find evidence that the wife had caused a delay and noted that the husband could have asserted equitable defenses if she had.

The husband also argued that the trial court should have offset the amount of his separate property converted to community property by the amount of community expenses he paid with separate property.  As noted above, the agreement contained language that the community property would have a lien against the separate property if the party did not implement the conversion.

The husband had paid many of the couple’s living expenses by contributing money from his separate account to a community account.  Based on language in the agreement, the trial court found that these payments were gifts.  At trial, the husband testified that he did not categorize the funds.  They were not transferred on the dates listed in the agreement.  The appeals court found that he did not intend to make the conversions at the time of the transfers and that he could not subsequently re-characterize them.

The court found that no conversions occurred, so the marital community had a lien on the husband’s separate property, pursuant to the agreement.  This lien was not reduced by the community expenses he paid, since those payments were gifts under the agreement.

The appeals court affirmed the trial court’s decision.

This case illustrates the importance of understanding the terms of a prenuptial agreement before you sign.  Additionally, the parties should consider what will occur during separation and ensure the agreement accurately reflects their intentions.  The timing of a divorce can have significant consequences when there is a prenuptial agreement.

If you are facing a divorce, the Washington high-asset divorce attorneys at Blair and Kim, PLLC, can help you.  Call us at (206) 622-6562 or contact us online.

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