§ 3.03 TRACING AND COMMINGLING; EARNINGS AND BUSINESS PROFITS

• Jurisdiction: Washington

§ 3.03 TRACING AND COMMINGLING; EARNINGS AND BUSINESS PROFITS

As discussed in §§ 3.01 and 3.01[4], above, the ownership character of an asset acquired during marriage may be shown by tracing the asset to the source, the character of which will control for the particular asset unless there has been a character-changing act by the spouses. Tracing typically involves an effort to show a separate property source to overcome the basic presumption that an asset acquired during marriage is community property.

In Washington, fire insurance proceeds stand in place of the property insured and have the same character, community or separate, as the insured property. See, e.g., In re Marriage of Lindsey, 101 Wn.2d 299, 678 P.2d 328 (1984). The ownership of the proceeds follows that of the property insured, even though community funds were used to pay the premiums for insurance on separate property. In re Hickman's Estate, 41 Wn.2d 519, 250 P.2d 524 (1952). Such payment of property insurance premiums may give rise to a right of reimbursement and an equitable lien against the proceeds. See § 3.04, below, for an analysis of this right. The court applied the rules involving proceeds of fire insurance with respect to homes separately owned by each spouse in In re Marriage of Pearson-Maines, 70 Wn. App. 860, 855 P.2d 1210 (1993). The nonowning spouse argued that use of community funds to pay the premiums on the insurance policy entitled the community to an equitable lien on the proceeds, but the court rejected his claim for lack of proof. Id. at 866 n.5.

Property insurance should be distinguished, however, from mortgage insurance, which promises to pay off a mortgage if the borrower dies before the mortgage has been fully paid. Not surprisingly, such insurance has been treated as a form of life insurance and classified based not on the character of the property insured but on the character of the premiums paid for the most recent term, as with term life insurance. In re Estate of Bellingham, 85 Wn. App. 450, 933 P.2d 425 (1997).

If the source is antenuptial or a donative acquisition and therefore falls within a separate property section of the statute (RCW 26.16.010, .020), the asset will also be separate because "rents, issues and profits" of separate property are, by statute, separate property. In In re Marriage of Brooks, 51 Wn. App. 882, 756 P.2d 161, review denied, 111 Wn.2d 1021 (1988), the court held that the husband's antenuptial interest in a law partnership retained its separate character even though it changed after marriage to an interest in a professional service corporation. Conversely, if the source is community property, an asset acquired after a couple begins living separate and apart will nonetheless be considered community property. E.g., Defoor v. Defoor, No. 62519-5-I, 2010 Wash. App. LEXIS 1880, 157 Wn. App. 1033 (Wash. Ct. App. Aug. 16, 2010) (unpublished) (asset acquired using community-like funds and credit after partners in a CIR separated was properly characterized as community property).

In Beam v. Beam, 18 Wn. App. 444, 569 P.2d 719 (1977), review denied, 90 Wn.2d 1001 (1978), community real property was contributed to a corporation in which the husband held all the stock as his separate property. The Court of Appeals held that the portion of the stock issued in exchange for the community real property was community property.

If there are both separate and community property sources, application of the basic presumption in the form of the commingling doctrine will lead to the conclusion that the asset is community property, in the absence of the necessary clear and convincing proof to the contrary. It is possible that there will be adequate proof of the separate source of a share of ownership even though there is also a community source for the remaining share. Natural enhancement of the value of an asset does not affect its ownership. Guye v. Guye, 63 Wash. 340, 115 P. 731 (1911). Improvement of, or payment of obligations related to, an asset through contributions of a character different from that of the asset (e.g., community funds or labor contributed to separate property) can raise the possibility of sharing in a portion of the ownership represented by such improvement by means of a right to reimbursement.

Commonly, the problems of tracing and commingling arise when community labor has been combined with the use of separate assets to produce income and, ultimately, an accumulation of other assets. To avoid elimination of a separate property share through commingling, there must be an adequate showing of the respective contributions to the asset accumulation. See Donald B. King, The Challenge of Apportionment, 37 WASH. L. REV. 483 (1962).

[1] Presumptions

The basic presumption that property purchased during marriage is community property is not overcome by the acquisition of the property in the name of one spouse, absent evidence of the use of funds from a separate source or other evidence of a contrary intent. See § 3.01[3], above. In Connell v. Francisco, 127 Wn.2d 339, 898 P.2d 831 (1995), the court held that all the regular presumptions that have evolved relating to community property are to apply to property acquired during a committed intimate relationship.

The mere availability of separate funds does not automatically give rise to a presumption that those funds were used to acquire property during marriage. Berol v. Berol, 37 Wn.2d 380, 223 P.2d 1055 (1950); Hill v. Young, 7 Wash. 33, 34 P. 144 (1893). The separate funds used for such purpose must be traced "with some degree of particularity." Berol, 37 Wn.2d at 381-82.

BEROL V. BEROL, 37 Wn.2d 380, 223 P.2d 1055 (1950). The wife appealed from a divorce decree awarding her husband a life insurance policy on his life. The policy was taken out 14 months after their marriage. There was no attempt to establish that the lump sum payment of $4,467.94 on the policy came from the husband's separate funds, save his "bald statement to that effect." Id. at 381. The court held that the availability of separate property to pay for the policy and the husband's self-serving declaration were insufficient to rebut the community property presumption.

Accord In re Allen's Estate, 54 Wn.2d 616, 343 P.2d 867 (1959); In re Marriage of Janovich, 30 Wn. App. 169, 632 P.2d 889, review denied, 95 Wn.2d 1028 (1981); Pollock v. Pollock, 7 Wn. App. 394, 499 P.2d 231 (1972); see also Nat'l Bank of Commerce v. Lutheran Bhd., 40 Wn.2d 790, 246 P.2d 843 (1952).

If separate funds become so commingled with community funds that it is impossible to distinguish or trace them, all of the commingled fund and all property acquired with the fund is community property. In re Witte's Estate, 21 Wn.2d 112, 150 P.2d 595 (1944).

It will often happen that there have been several transactions leading to acquisition of the disputed asset. For example, separate real property may be sold and the proceeds deposited in an account containing community funds, from which stock is purchased. The stock may later be sold and the proceeds again deposited in the account, and another, now disputed asset is then purchased. In such a case, as Professor Cross notes:

If the links of the chain back to, or forward from, a separate property source can be clearly established, there will be separate property ownership of the disputed asset. However, if the character of one of the links is confused or uncertain, the basic community property presumption, in the form of the commingling doctrine or rule, breaks the chain. When this break occurs the uncertain link will be found to be community in character and to be the origin or source with respect to any subsequent changes in form[.]

Harry M. Cross, The Community Property Law in Washington (Revised 1985), 61 WASH. L. REV. 13, 56 (1986).

This is nicely illustrated by Gower v. Shinstrom, No. 49775-8-I, 2003 Wash. App. LEXIS 834, 115 Wn. App. 1041 (Wash. Ct. App. Feb. 18, 2003) (unpublished), review denied, 150 Wn.2d 1020 (2003), a committed intimate relationship case.

GOWER V. SHINSTROM, No. 49775-8-I, 2003 Wash. App. LEXIS 834, 115 Wn. App. 1041 (Wash. Ct. App. Feb. 18, 2003) (unpublished), review denied, 150 Wn.2d 1020 (2003). The couple lived together for 22 years, during the last five of which they resided in Washington. While living here, they acquired a house on orcas Island, using as part of the down payment $54,000 from a checking account in which "community" earnings had been commingled with $46,000 from the sale of Shinstrom's separate property, an airplane. Noting that during the two months after deposit of the airplane proceeds, the account balance had fallen below $46,000, requiring replenishment with "community" earnings to cover the down payment, the court held that Shinstrom could not trace the source of the down payment with specificity. Accordingly, it held that the entire house was presumed "community" property subject to division under Connell, 127 Wn.2d 339.

Practice Tip: It is probably wiser to maintain different accounts for various types of funds than to rely on record keeping to establish the character of purchases from a commingled account.

If the acquisition is clearly traced to the use of separate funds, the basic presumption is rebutted. Austin v. Clifford, 24 Wash. 172, 64 P. 155 (1901); In re Fite v. Fite, 3 Wn. App. 726, 479 P.2d 560 (1970), review denied, 78 Wn.2d 997 (1971).

AUSTIN V. CLIFFORD, 24 Wash. 172, 64 P. 155 (1901). For several years prior to marriage, the husband had been engaged in buying, improving, and selling real property. He owned, at the time of marriage, property valued at approximately $23,000. According to the testimony of the wife, he continued in the same business, using his own money, during marriage. During marriage, he sold some property held before marriage but did not sell any of the property acquired during marriage before he purchased the particular tract in

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