In a Washington divorce, a party who claims an asset is separate property must show it qualifies as separate property by clear and convincing evidence. If separate property becomes commingled with community property to the extent it is impossible to distinguish it, then it becomes community property. In a recent case, a husband challenged the trial court’s distribution of property, arguing the certain assets could not be sufficiently traced to retain their separate character.
The parties were married for nearly 32 years when they separated in January 2018. They owned nine rental properties. The wife argued she made the down payments for three of the properties from her inheritance from her father’s death. She claimed she had a traceable separate property interest in those properties.
Her inheritance had been deposited into a joint savings account where community funds had been deposited. The funds in the account were sometimes used for community expenses. The wife testified the account was used infrequently so the inheritance “was kind of kept separate in there.” She testified she had wanted to keep her inheritance as separate property, but was concerned putting it in a separate account would look like she was not trying to work things out after a recent reconciliation.
The husband argued the down payments were not paid with separate funds. He argued the wife had not kept records of segregating the funds. The properties were financed and purchased in both parties’ names. The wife agreed that they made joint decisions to buy the properties and that both parties participated in managing them.
The trial court ordered the parties to identify an accountant to review the matter. The accountant prepared a spreadsheet of the deposits and expenditures from the savings account after he met with the wife. The wife had deposited $164,378.11 in inherited funds. An additional $163,560.00 not identifiable as inherited was also deposited into the account. He testified that those other deposits were partially a return and reinvestment of her inherited funds. The parties used the savings account when large assets, such as vehicles and real property, were bought and sold. Some assets were purchased from the account and later sold at a higher amount. Some of the other deposits, therefore, did not represent entirely new funds, but were instead “recycled.” The accountant testified his analysis found that there would not have been sufficient funds in the account to purchase the three properties “but for the inheritance. . .” He also found the same was true for a fourth property.
The trial court found the wife had shown she should be reimbursed $82,189.05. The court ordered the husband to pay her $264,562.45, which included repayment of the separate property plus a marital estate equalization.
The husband appealed.
The appeals court noted the accountant testified he could trace inherited funds to four properties because their down payments were made from the savings account. He testified those payments could not have been made without the use of the inherited funds.
The husband argued the other deposits and the use of funds to pay other expenses rendered tracing impossible. The accountant’s spreadsheet had not been made part of the record for the appeals court, but the appeals court found the tracing, as the accountant described it, could have been possible. The appeals court noted that, as the appellant, the husband had the burden of providing an adequate record. The appeals court further noted the husband’s argument did not address the accountant’s testimony that he based his tracing on the fact that there were insufficient funds in the account to make the down payments for the four properties without using the inherited funds. The accountant testified that the 50% amount for traceable funds had been difficult to determine. The appeals court noted this was a conservative approach, when the exact amount likely could not be determined. The appeals court also pointed out that this calculation likely benefited the husband.
Additionally, the trial court likely would have made the same distribution even if it did not find the wife had a traceable separate property interest in the properties. Washington case law allows a court to make a disproportionate award if a spouse’s separate property materially benefited the parties before it lost its character as separate property. The trial court had stated that “fairness” and “the equities of the case” required reimbursement to the wife.
The husband also argued the trial court had erred in the amount of separate property reimbursement. The appeals court agreed, finding the net assets distributed to the wife included half of her separate property interest. Thus, the husband should only have been ordered to reimburse her half the value of her separate estate, or $41,904.53.
The appeals court rejected the husband’s argument the court erred in calculating the marital estate equalization payment, finding instead the trial court had misstated the husband’s net estate.
The appeals court reversed the amount of the husband’s payment to the wife and remanded to the trial court to correct the finding of the value of the husband’s net assets and to reduce the payment to reflect the correct separate property reimbursement amount.
This case shows that in some cases, property may maintain its separate character even if it was deposited into an account with community funds if it can still be properly traced. If you are facing a divorce and anticipate issues involving separate property, a skilled Washington divorce attorney can help. Call Blair & Kim, PLLC, at (206) 622-6562 to set up a consultation.