In a marriage, commingling happens when money belonging to one spouse is mixed with the funds of the other spouse. In the context of marriage and divorce, commingling refers to instances where separate property is mixed with community property, such that the separate property can no longer be distinguished from the marital assets.
In a marriage, commingling funds risks turning separate property into community property. For example, if someone places non-marital funds, such as an inheritance, into a joint account, the property is commingled. Generally, when a new asset is acquired through a combination of marital and separate property, the money loses its identity and the property becomes marital.
Spouses are not prohibited from commingling funds. In fact, commingling only becomes an issue in a divorce. Otherwise, the division of property is not a problem for spouses whose marriages are intact and harmonious, and during the course of tranquil marriage spouses routinely mingle money, often for their own convenience.
Very often young married couples starting life together pool their money and take a “what’s mine is yours and what’s yours is mine” worldview about finances. For example, young couples frequently put all the cash they receive as wedding gifts into a pot with the idea that down the road they will use it for a house. During the happy times of a marriage neither spouse worries about ownership because “the money is ours.” In a marriage, commingling often begins when the couple shares a joint account but begins depositing separate resources into the account, such as putting paychecks in a money market account.
During the unhappy times of the marriage commingled property makes for surprises in a divorce, for example, when the couple purchases a house using a mix of shared and separate monies, such as wedding present money and inheritances. In such cases, it can be difficult to trace which funds were used to buy the property, and so the spouses face issues when attempting to classify the family house in a divorce.
Generally speaking, the mere act of commingling assets usually does not change separate property into community property, or vice versa. Commingling only begins to have legal effects when the separate property can no longer be distinguished from the community property, such as the house purchase. When this happens, the separate property is “transmuted” or changed into community property (if the couple is in a community property state). Upon divorce, the property will be divided equally between the partners instead of one spouse owning it in full.
Moreover, one of the more difficult facets of property division in a divorce happens when separate property becomes commingled as a result of interspousal conveyance. This is called transmutation, and it can happen as a result of a transfer by contract, gift, or a mere change in legal title. A money gift to one spouse deposited in an account in both names become commingled property and may be viewed as a gift to the marriage, i.e., both spouses.
Courts classifying the marital estate in the division of property in a divorce ask and answer three questions:
- Was the transfer a contract?
- If not a contract was the transfer a gift?
- If the transfer was a gift into a sole title, is the interspousal gift marital or separate property?
In general, courts agree that property can be classified as marital or separate by agreement of the spouses or by operation of “the relevant equitable distribution or community property statute,” (with the first taking priority over the second). This may happen when couples enter into what is a contractual agreement, particularly what is called a contractual transfer.
Courts view contractual transfers as happening when they are the result of actual negotiations with “substantial discussion”; when one spouse has a history of otherwise keeping separate finances; when the transfer happens “during a period in which the parties are experiencing marital problems.” By comparison, courts view that transfers made for proposes of estate planning are not contractual.
In common law, a gift requires three elements: intent, delivery and acceptance. Under common law, the burden of proof is on the party who claims donative intent is present, and this applies even when the property is transferred into the name of one spouse alone. Property conveyed as a gift generally is governed by what is called the joint title presumption, which means that a transfer into joint title places the burden of proof on the party who claims that the transfer is not a gift. When the court finds that a conveyance into joint title is a gift, the conveyed property is 100 percent marital, not 50 percent separate property of each spouse.
Very often, courts must struggle with what one legal observer calls “the meaning of donative intent.” One body of thinking — which he calls the legal title approach — defines “donative intent as the intent to convey legal title without consideration.” Another body of thought defines “the intent to convey beneficial interest without consideration.” According to the legal title line of thought, “a deliberate transfer into joint title without consideration is a gift even if the donor did not intend to give both spouses actual beneficial interest. According to the second line of thought, ” [the intent] that each spouse would have a real beneficial interest in the asset.” In this case, the asset is non-marital.
When the court finds that a conveyance into any form of title is neither a contract nor a gift, the transfer does not affect the classification of the asset.
Sometimes assets are transferred from single to joint names as part of estate planning. The single most-common reason spouse may transfer property to joint names is the desire to avoid probate. If the marital home, for example, is jointly owned by husband and wife as tenants by the entirety, the spouses both have a 100 percent interest. The house thus escapes probate when one spouse dies. Under the legal title approach, a desire to avoid probate does not alter the fact that legal title was conveyed to both spouses; under the beneficial interest approach, however, “the transferor has no intent to give the transferee a beneficial interest at any point short of death.”
A common analogy used to describe commingled property is that it is much like a scramble egg because the more commingled separate and marital property becomes, the more difficult it is to decipher and separate appropriately upon divorce. As mentioned, the most typical of commingling of assets is using inherited or separate funds to help purchase a marital house.
Dual classification, equitable distribution states do not have uniform definitions of separate property, but all agree on two points. First, property acquired in exchange for separate property is separate property, and second, separate property becomes marital property when the owner gives it to the marital estate.
Commingling laws may vary from state to state and are usually only applicable in community property states. In states that follow non-community property laws, the issue of commingling is sometimes not even an issue. In non-community property states, courts do not rely on classifications such as separate or community property when dividing assets in a divorce proceeding. Rather, they will follow principles of equity to determine how property can be fairly divided between the parties.
Commingling various properties can lead to confusion in a divorce, so good legal advice may be necessary. Spouses can settle any disagreements over commingled funds with marital contracts, such as prenuptial or postnuptial agreements. The couple can agree about the division of commingled funds, so long as they conform to the law.