Community Property in Washington and Gifts

In Washington, property acquired during marriage is usually considered community property. Gifts intended to be to one spouse, however, are usually considered separate. A recent case illustrates what qualifies as a gift and how additions of labor by the other spouse affect classifying the gift.

The wife’s father owned and leased farmland in eastern Washington. In his divorce, his son had made claims to a large part of his property, and, as a result, he wanted to ensure that the rest went to his daughter. This led to three sets of transactions.

First, the father leased his existing farmland to the wife on a sharecrop basis. The terms were the same as the local market terms, one third of the crop. Although everyone expected the husband to actually work the farm, the lease was to the wife as separate property.

Next, the father leased the farm equipment to the wife, under a lease-purchase deal. Although the wife was named in the lease, the husband made most of the payments, and the father eventually forgave some of the payments. He estimated that he received about $50,000 less than he originally anticipated.

The next year, the father had the opportunity to purchase two more parcels that he had been leasing for a long time. He encouraged the wife to buy them and paid the down payment. The parcels were sold to the wife as separate property, but the husband farmed them and eventually paid many of the contract payments from farm earnings.

When the parties divorced, the husband claimed that the leased farmland, the farm equipment, and the newly bought parcels were community property. The wife argued otherwise. The trial judge ruled for the wife, but the Court of Appeals reversed and sent the case back to the trial court with instructions to reconsider how to divide the property.

Washington requires, in a divorce, that property be identified as either separate property or community property. The reason for this is that the courts usually take this classification into account when dividing the property. Community property is not automatically divided equally, and separate property can be given to the other spouse, but the basic rule is that a fair result is intended, and if community property is distributed unevenly, it usually is in the interest of fairness.

In general, community property is property acquired during the marriage, unless it is obtained by gift or clearly traced to other separate property. The title on a deed may not be enough to prove that property is separate. Usually, a demonstration of how property was acquired or a clear (and preferably written) agreement by both spouses will be needed.

The wife argued that her father intended the leases to be a gift to her alone. The court ruled that wasn’t enough. The deal looked like an ordinary lease, with the market rent charged.   That the father probably wouldn’t have leased the land to anyone else didn’t matter. Similarly, the wife argued that she had separately bought the lease, but the Court of Appeals noted that she did not have separate property beforehand to make the purchase. Instead, she relied on the husband to manage the farm, allowed him to use their retirement funds to pay expenses, and had him co-sign for loans. This indicated that the farm was a community enterprise.

The wife also argued that the farm equipment was separate property. The Court of Appeals noted that she began the equipment lease during the marriage, and payments were made from farm earnings that the husband participated in acquiring. The equipment therefore, was generally a community asset. On the other hand, it was not disputed that the father’s forgiveness of some of the lease purchase price was intended as a gift solely to the wife. For that reason, the $50,000 loan forgiveness was a separate gift, for which the court ruled the wife should be reimbursed.

The later-purchased land also was ruled to be a gift. This time, the Court of Appeals noted that the father had paid a 14 percent down payment on the wife’s behalf, which was a sufficient down to show a gift to her at the time of the purchase. This was reinforced by the father quitclaiming his lease to the wife at the same time. The husband was able to show that subsequent payments on the land sale contract were paid from the farm bank account, which was community property, but that was not enough to convert the land to community property. Instead, the community obtained a lien on the land for reimbursement of its contributions, which will probably mean the husband will get one half of the contribution reimbursed.

The classification of property as community or separate gives strong indications toward a fair distribution. As a result, when all was said and done, the Court of Appeals decided the trial judge needed to review how to divide the property.

In Oregon, the result would probably be a little different. Oregon does not have community property, but almost all property acquired during the marriage is presumed to be the result of both spouses’ contributions. Although gifts clearly to one spouse are an exception to this presumption, if property presumed to be the result of both spouses’ efforts is mixed with property that only one spouse contributed to, usually everything will be treated as subject to a presumption of equal contribution, and, as a result, more often than not will be placed in the list of property to be divided equally or nearly equally. Usually, separate contributions are not backed out.

If you or your spouse have received gifts during your marriage, and you think there may be an argument whether both spouses made some contribution to the management or upkeep of that gift, you may be well advised to bring that question to the attention of a lawyer should there be a divorce. If you or your spouse has been offered a gift intended only for one of you, and you want to keep it separate, you may want to see a lawyer before accepting it. In both Oregon and Washington, agreements between spouses can be made regarding how to handle gifts like this, or any other property acquired during the marriage.

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