Washington Court Finds Property Cannot Remain Separate after Being Conveyed to the Community

The court must characterize property as community or separate when distributing property in a Washington divorce. Character is generally determined when the property is acquired.  When a spouse acquires property before the marriage, that property is presumed to be separate property unless there is sufficient evidence of an intent to change it to community property.  A wife recently challenged a court’s determination that property remained separate after a conveyance to the marital community.

Before the parties married, the husband moved into the home the wife owned with her previous partner.

The husband owned property on Aldergrove with two rental units.  He also owned a property on Yew Street.  After the marriage, the parties rented the Aldergrove units and the Yew Street property and deposited the proceeds into a marital community joint bank account.

In 2012, the wife’s former partner’s interest in the home was transferred to the couple.  They sold it and deposited the proceeds into the joint bank account.  They then purchased a family home.

They sold the Yew Street property.  They bought another property with funds in the joint account, sold it, and deposited the proceeds in the joint account.

The husband paid off the mortgage on the Aldergrove property with community funds.  He testified he did not have a separate account and the couple commingled all of their funds.  The husband grew concerned about potential liability if someone was injured on the property.  He suggested a limited liability company to hold title to the properties.  The couple signed an agreement creating an LLC.  The only member was “the marital community. . .”  The husband transferred his interests in the Aldergrove property to the marital community, and then the couple transferred the marital community’s interest to the LLC.

The quitclaim deed transferring the property to the community provided it was “for and in consideration of establishing community property. . .”  The husband testified he referenced creating community property pursuant to WAC 458-61A-203(1) to avoid excise taxes.  The quitclaim deed transferring the property to the LLC stated it was “for and in consideration of a mere change in identity pursuant to WAC 458-61A-211(2)(a). . .”

The parties opened a checking and savings account in the name of the LLC and deposited rent payments into the LLC account.

The wife filed for divorce in 2018.  She asked the court to characterize the Aldergrove property as community property.  The husband said he did not intend to convert it and considered it his separate property.

The trial court found the LLC was a community asset.  The court divided the funds from the LLC’s bank account equally. The court also found the Aldergrove property was the husband’s separate property and awarded it to him.  It found the testimony showed the transfer was made for “corporate liability shielding.” The court awarded the wife the family home and mortgage.  The court also found the wife had the right to recover half of the community funds used to pay off the Aldergrove mortgage.  The court also awarded the wife spousal maintenance for a few months, an equalization payment, and attorney fees.

The wife moved for reconsideration, arguing there was an inequitable property division and that the Aldergrove property could not be separate property. The trial court denied the reconsideration and the wife appealed.

With no written findings showing how the trial court came to the conclusion that Aldergrove was separate property, the appeals court looked to the oral ruling. The trial court stated it was the parties’ intent “to shield the property, the parties, and their marital community. . .”  The trial court found the intent was insufficient to show the Aldergrove property had been converted to a community asset.

The appeals court found the conclusion the property was separate did not flow from the finding regarding the intent to transfer the property.  The appeals court noted the husband could have just transferred the property into an LLC in only his name.  The husband also testified he wanted to protect his wife and the marital community from liability.

The husband argued the quitclaim deed only relieved the parties of excise tax.  The appeals court noted the regulation cited in the quitclaim deed exempts transfers “that establish or separate community property” from excise tax.  WAC 458-61A203(1). The husband could only avoid responsibility for the excise tax under the regulation by creating community property.  The regulation referenced in the quitclaim deed transferring the property from the community to the LLC exempts transfers from an owner to an LLC.  WAC 458-61A-211. The husband could have avoided the excise tax by transferring the property directly to an LLC which he solely owned.  The appeals court identified no legal reason for the husband to transfer the property to the marital community first if the intent was just to avoid the excise taxes.

The appeals court further found the husband could not have an ownership interest in the property once it had been transferred to the community-owned LLC.

The appeals court also questioned whether there was sufficient evidence supporting the finding the husband did not intend to change the property’s character.  The quitclaim deed stated he intended to establish community property.  Additionally, he shared ownership of the LLC with his wife.  Furthermore, the couple had commingled their funds throughout the marriage.  The husband had also acknowledged the marital community had an interest in the Aldergrove property.

The appeals court reversed the trial court and found a remand was necessary.  The property division had been significantly influenced by the characterization of the property and it was not clear the court would have divided the property the same if it had properly characterized Aldergrove.

Division of property can be complicated when there are multiple pieces of real estate and both separate and community property.  A skilled Washington divorce property division attorney can help you get a fair property division.  Call Blair & Kim, PLLC, at (206) 622-6562 to make an appointment to talk about your case.

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