In a Washington divorce, inheritance will generally be considered separate property. What happens, though, when a spouse uses separate property to pay off the debt on a community asset? A Washington appeals court recently considered this issue.
According to the unpublished opinion, the wife bought a home in California while the parties were dating. The husband moved in with her a couple of months later. After they married in 2002, they formed a trust with the two of them as co-trustees. The trust stated that all property held in joint tenancy was their community property. The wife signed a quitclaim deed conveying the house to the two of them as trustees as community property. In 2013, they executed another quitclaim deed as trustees, this time transferring the property to the two of them as spouses “as joint tenants with rights of survivorship.”
They lived in the house together for 14 years and refinanced it at least three times. They both paid on the mortgage, but the wife ultimately paid it off in 2015 using funds she received from an inheritance. They sold the house in 2016. They then moved to Washington.
The wife filed for divorce in December 2017. She argued she was entitled to a credit for the amount of the mortgage pay-off. Although the trial court found the house had been her separate property, it also found she intended to convert it to community property when she signed the trust agreement and the original quitclaim deed. Additionally, the trust stated property the parties held as joint tenants was community property. The trial court found there was clear and convincing evidence she intended for the house to be community property.
She had used her separate property to pay off the mortgage, but the trial court found once she used them for that purpose, the funds lost their separate character. The trial court found the separate asset “merged into the home without altering the home’s community character” regardless of whether the wife intended it to be a gift or could later trace it back to her separate inheritance.
The trial court ordered the proceeds from the sale be divided equally, with the wife ultimately being ordered to make a transfer payment of $78,569.16. The wife appealed, arguing the court erred in characterizing the home as community property.
She argued the house was no longer community property after the parties as trustees signed it over to themselves as joint tenants. The trust agreement, however, stated that the parties declared all property held in joint tenancy was their community property. The appeals court noted this language applied to all property they held as joint tenants, not just that held at the time the trust agreement was signed.
The wife also argued she had used separate property to pay off the mortgage. The appeals court noted that use of separate property to pay expenses related to community property does not change the characterization of the community property. The appeals court found there was substantial evidence supporting the trial court’s finding the wife intended the house to be community property and the court therefore did not err in finding the proceeds were also community property.
The wife also argued the trial court erred in not ordering reimbursement of the separate property she used to pay off the mortgage. The appeals court noted that a trial court is required to make a “just and equitable” property distribution. RCW 26.09.080. The distribution is not required to be equal, but fair.
The appeals court noted that both parties had contributed to the mortgage payments and they had refinanced the house multiple times. The court indicated its intent to make a “fair, just and equitable distribution.” The appeals court found the trial court was in the best position to make that determination and acted within its “broad discretion” in distributing the property.
The appeals court affirmed the trial court’s distribution.
Significant separate assets can make a divorce complex and sometimes contentious. An experienced Washington divorce attorney can help you protect your assets. Schedule a consultation with Blair & Kim, PLLC, by calling (206) 622-6562.