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1996 National Legal Research Group, Inc.

OKLAHOMA: Gray v. Gray, 922 P.2d 615 (Okla. 1996).

Although veterans' disability benefits are the separate property of the veteran, property purchased with those funds during marriage is jointly acquired property divisible upon divorce.

Assets acquired during marriage with veterans' disability benefits are not shielded from equitable distribution by federal law, according to Gray v. Gray. Although the ruling comes from an "all property" state, it may be significant as well in a dual classification jurisdiction in a case where the veterans' disability benefits arguably have been transmuted to marital property.

Throughout the parties' lengthy marriage, the husband received veterans' disability benefits as a disabled Air Force veteran. When the parties divorced, the trial court awarded vehicles purchased with the veterans' disability benefits to the husband as his separate property, on the theory that any property purchased with, and traceable to, the benefits was exempt from equitable division pursuant to 38 U.S.C. 3501.

Section 3501 states in part:

(a) Payment of benefits due or to become due under any law administered by the Secretary [of Veterans Affairs] shall not be assignable except to the extent specifically authorized by law, and such payments made to, or on account of, a beneficiary shall be exempt from taxation, shall be exempt from the claim of creditors, and shall not be liable to attachment, levy, or seizure by or under any legal or equitable process whatever, either before or after receipt by the beneficiary. The preceding sentence shall not apply to claims of the United States arising under such law nor shall the exemption therein contained as to taxation extend to any property purchased in part or wholly out of such payments.

In Porter v. Aetna Casualty & Surety Co., 370 U.S. 159 (1962), the United States Supreme Court considered the circumstances under which benefits paid by the Veterans Administration retain their exempt status under the predecessor of 3501(a). The Court held that veterans' disability benefits are the separate property of the beneficiary, exempt from creditors' claims, attachment, levy, or seizure, "provided the benefit funds . . . are readily available as needed for support and maintenance, actually retain the qualities of moneys, and have not been converted into permanent investments." Id. at 162. Benefits invested in property are not exempt under the statute, because they are not "payment of benefits due or to become due" within the immunizing language of the statute.

After considering 3501(a), as interpreted in Porter, the Oklahoma Supreme Court held that federal law does not exempt assets acquired with veterans' disability benefits from equitable distribution. Veterans' disability benefits themselves are the veteran's own separate property, but once those benefits are invested in assets the exempt status of the benefits is lost. Under the teachings of Porter, when the husband applied his disability benefits to the purchase of the disputed vehicles, those funds were not exempt, and thus were subject to equitable division by the trial court.

The same rationale would apply, the court said, if the vehicles were traced to the husband's Social Security disability benefits (a possibility question which the trial court apparently did not consider). The Social Security Act, 42 U.S.C. 407, contains limiting language comparable to that found in 38 U.S.C. 3501. Under Porter's reasoning, however, Social Security benefits would lose their exemption once converted into property, the court observed.

Dual Classification Jurisdictions. Oklahoma is an "all property" jurisdiction in which trial courts can divide property acquired during marriage without regard to the source or manner in which the property was acquired. Accordingly, it did not matter in Gray that the disputed assets were acquired with disability benefits. In at least some dual classification jurisdictions, however, disability benefits are the disabled spouse's separate property as a matter of state law. Hence, the benefits would be excluded from distribution whether or not federal law immunized them from distribution. In a case like Gray, but in an equitable distribution jurisdiction that classifies disability benefits as separate property, counsel for the spouse of the disabled individual would need to argue that the benefits were transmuted to marital property when they were utilized to purchase assets that were used for the benefit of the marriage.

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