§ 11.03 Transmutation of Property by Commingling
| Jurisdiction | United States |
| Publication year | 2021 |
§ 11.03 Transmutation of Property by Commingling
Under most marital property systems in the United States, before an amount is allocated to a spouse's separate estate, it does not merely have to be established that the spouse acquired certain property during marriage by gift or inheritance, or that the spouse owned a certain amount of property at the time of the wedding.117 It must also be established that this property still exists as separate property at the time of divorce.118 In many states, property owned by either spouse at the time of divorce is presumed to be marital property119 ; this presumption is rebutted by tracing such property to a separate property source.
During marriage, many spouses mix different types of property in a bank account. For example, premarriage accumulations might be mixed with wages earned after marriage and an inheritance received after marriage. How should a divorce court characterize any funds existing in such a bank account at the time of divorce?
Under normal commingling rules, if separate property and marital property are mixed and cannot be "uncommingled," the entire mass is considered marital property.120 It should be emphasized, however, that most cases involve commingling of the separate funds of the spouse who deposited the marital funds in the account. The commingling rule therefore is intended to punish the spouse who carelessly mixes separate and marital funds. This rationale does not apply if one spouse deposits marital property into an account containing separate property of the other spouse.121
Courts sometimes reimburse the spouse's separate property that was commingled if the parties divorce after a short marriage.122
If spouses mix separate and marital funds in a bank account during marriage, two different types of commingling issues can arise. One type of dispute pertains to the character of funds remaining in the account at the time of divorce. The other type of dispute arises when funds are withdrawn during marriage from a commingled account to make an investment, and the investment is still owned by the spouses at divorce. In other words, the former dispute pertains to the character of funds remaining in an account at divorce, while the latter dispute relates to the character of funds withdrawn during marriage from the commingled account.
Mixing separate and marital property in an account, in and of itself, does not cause a significant problem. For example, if a spouse had saved $1000 before marriage in an account, and then deposited into the account $1000 of wages earning during marriage, no great issue is yet presented. The account balance is $2000, and it is $1000 separate and $1000 marital.123 Bigger problems are confronted, however, when money is withdrawn. There is less agreement among courts and commentators regarding how to deal with this.
[1]—Disputes Relating to the Character of Funds Remaining in the Account at Divorce
In order to establish a separate property claim to funds in existence at the time of divorce, a spouse must be able to trace such funds to separate property. As a general rule, if marital property and separate property are mixed in one account, and the respective amounts of either can no longer be determined, the entire commingled mass is considered marital property.124 Therefore, in such a situation, rules governing how such accounts can be "uncommingled" are quite important.
If the dispute at divorce pertains to the character of a bank account into which both separate and marital funds have been deposited, and from which many withdrawals were made during marriage, the resolution of the dispute hinges upon the determination of the character of funds withdrawn from the account during the marriage. If a withdrawal can be tied to a specific expenditure, this can be quite helpful. For example, if a withdrawal is used to maintain a spouse's separate property, it would seem reasonable to deem the withdrawal a withdrawal of separate property.125 Conversely, if the expenditure related to marital property, the withdrawal should be deemed marital.
[a]—Family Expense Doctrine
A number of courts have applied the "family expense doctrine" to this issue. Under this doctrine, if a withdrawal is used to pay a "family living expense,"126 the withdrawal is assumed to be marital property.127 The family expense doctrine stems from the belief that the marital estate should be charged with the reasonable costs of supporting the family during marriage. If such a cost is paid from a commingled account, it is perceived to be fair to charge the marital estate for it, rather than the separate estate.
If the withdrawal can be tied to expenditures relating to a particular item of separate or marital property, or to a family living expense, the character of the withdrawal can be identified. This obviously also helps determine the character of funds remaining in the account. For example, suppose there is $1000 of marital property and $1000 of separate property in an account; if $500 from the account is used to pay a family living expense, the account would then contain $1000 of separate property and $500 of marital property, if the family living expense doctrine is applied.
In many instances, however, parties cannot tie a withdrawal made years ago to a particular expenditure. In this situation, courts in different states take different approaches. California courts adopt a strict tracing rule which assumes that the withdrawal was separate property.128 California places the burden of tracing the character of withdrawals upon the spouse who withdrew the funds; if the spouse cannot establish the character of the property improved with the withdrawal, or that the withdrawal was used to pay a family living expense, that spouse's separate estate must bear the loss.129
[b]—"Marital Property Out First" Rule
Other states apply a very different approach, aptly described as a "marital property out first" rule.130 Proponents of this view believe that it is quite likely that withdrawals during marriage from a commingled account were made to pay for family living expenses. It is perceived to be fair to charge the marital estate for such expenses, as long as there were sufficient marital funds in the account to pay for the expense when the withdrawal was made. It is important to notice the difference between this approach and the family expense doctrine, which requires proof that the withdrawal was used to pay for a family living expense before the marital estate is charged with the withdrawal. By contrast, the marital property out first doctrine is applied whenever there is a withdrawal during marriage; it is not necessary to show that the withdrawal was used to pay for a family living expense.
The marital property out first doctrine is probably sensible in most marriages. However, if the managing spouse has a significant separate estate that requires continuing expenditures during marriage to maintain, it may be less clear that withdrawn funds were used for family living expenses; they might have been used to maintain the spouse's separate estate.
Under the marital property out first doctrine, a withdrawal will be considered marital property only to the extent that there were marital funds in the account at the time of funds were withdrawn. For example, if there are $500 of separate property in an account and $500 of marital property, and $400 are withdrawn, this will be considered a withdrawal of $400 of marital property. However, if $600 are withdrawn, under this approach the withdrawal includes $500 marital property (all of the marital property in the account at that time) and $100 separate property. Even if marital funds are later added to the account, the $100 of separate funds would be considered withdrawn.131 Sometimes courts applying this approach refer to this concept by saying that all of a spouse's separate funds will still be in the account at divorce only if the account balance during marriage never falls below the amount of separate property in the account.132
When determining the character of funds withdrawn from a mixed account, some courts consider the intention of the managing spouse significant. For example, in one Texas case, in January of each year a spouse withdrew an amount that was exactly equal to the interest that accrued on the account balance during the prior year. Interest earned from a separate property bank account is marital property in Texas. The court concluded that the spouse intended to withdraw the marital property interest by these January withdrawals, so all the separate property in the account remained intact.133
It is important to remember that, in the absence of a large number of withdrawals during marriage, it may be possible to at least partially "uncommingle" a commingled bank account, regardless of whether the court is willing to accept the marital property out first view. For example, if an account contained $10,000 of separate property at the time of the wedding, and during marriage ten withdrawals were made amounting to an aggregate of $6,000, the account still must contain at least $4,000 of separate property, regardless of whether any of the uncommingling aids discussed above are accepted.
An account can also be partially uncommingled if the aggregate amount of marital property deposits (plus any accrued interest) is less than the account balance at the time of divorce. For example, if the account balance at divorce is $10,000, and an aggregate of $6,000 of marital property has been deposited in the account during marriage, the account cannot contain more than $6,000 of marital property (in addition to any interest earned on that amount), regardless of whether any of the uncommingling aids discussed above are accepted.134
[c]—Total Recapitulation Concept
Another approach that has indirectly been used as an uncommingling aid is the "total recapitulation" concept.135 Under this approach, at divorce all family...
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