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As part of divorce proceedings throughout the D.C. metropolitan area, courts are asked to distinguish between marital property and separate property. People marry later these days and bring more valuable assets into the marriage. So the question of what’s his, what’s hers, and what’s theirs has become much more complex. If he bought a house before meeting her, but during the marriage her earnings were used to pay the mortgage, is the house still his? What about her retirement account, started years before they were introduced but to which contributions were made during the marriage? Or his business, also started before the wedding but pursued throughout the marriage with the advice of his wife? Be warned: The laws on separate and marital assets differ among the three local jurisdictions. This article focuses on divorce in Virginia, but it’s worth noting that the applicable laws of Maryland are similar in many respects. SEPARATE, MARITAL, AND HYBRID Under Virginia law — Section 20-107.3 et seq. of the Virginia Code, to be precise — courts must classify property as separate, marital, or hybrid (i.e., part separate and part marital) prior to equitably dividing the marital assets. Contrary to popular opinion, legal title does not control an asset’s classification. The critical factors are when the asset was acquired and who provided the money. Marital property is presumed to be all property acquired from the first day of marriage until the date that one or both spouses intended their separation to be permanent. Earnings from employment are marital assets. Separate property is property acquired before the marriage or after the separation, and property acquired during the marriage by inheritance, by gift from persons other than one’s spouse, or in exchange for or from proceeds of the sale of other separate property. Note that Virginia is unique in the region in defining the moment when a couple stops acquiring marital property as the moment when one spouse intends their separation to be forever. In Maryland and in the District, property acquired until the date of divorce is considered marital property. For separate property to retain its “separate” classification after the marriage ceremony, it must be maintained as separate and not commingled with other moneys or assets. In real life, commingling happens. Since 1990, Virginia has specifically recognized the reality of hybrid property. Pursuant to Virginia law, when marital and separate property are commingled, the classification of the property that is contributed is generally transmuted to the classification of the property that receives the contribution. However, when the contributed property can be traced by a preponderance of evidence and when it was not a gift from one spouse to the other, then it retains its original classification for purposes of divvying up the assets in divorce. In the greater metropolitan area, Virginia is unique in recognizing a hybrid classification for all kinds of property. By contrast, the District treats all jointly titled property as automatically marital; only pensions can be treated as hybrid property. And Maryland does not recognize as hybrid any real estate held as tenants by the entirety. Under Virginia law, once a party claiming a separate interest in hybrid property traces the separate interest by a preponderance of evidence, the burden shifts to the other party to prove (if possible) that the separate property had been commingled with marital property as a gift and thus is now marital property. GIVEN WITH ALL MY HEART Virginia’s statute specifically provides that there is no presumption of a gift when separate property is commingled with jointly owned property, newly acquired property is conveyed into joint ownership, or existing property is conveyed or retitled into joint ownership. Intent, delivery, and acceptance of a gift must be proved by clear and convincing evidence. Take the 1996 case of Theisman v. Theisman. Former Redskins quarterback Joe Theisman was found to have gifted to his wife a farm and brokerage accounts retitled in their joint names when he acknowledged that he had made her an owner of the accounts and wanted her to share equally in the home, placed no reservation on transfers of title that would have permitted him to reclaim the property in a divorce, memorialized the transfers in cards sent to her indicating the farm was “our home” and the money was hers to spend, and, last but not least, bragged that he had made her a millionaire. Earlier this month, in Utsch v. Utsch, the Virginia Supreme Court found unambiguous evidence of a gift when property was retitled as tenants by the entirety through a deed of gift, and the deed listed “love and affection” as consideration and referenced the code section exempting deeds of gifts from recordation taxes. In contrast, no evidence of donative intent has been found when inter vivos trusts were established for estate tax purposes or when money from a wife’s family was placed in a separate account which the husband acknowledged was hers to spend as she pleased. TRACING THE MONEY Assuming the contributed asset was not a gift, the party claiming separate property — in Virginia and Maryland — must trace the linkage between the contribution and the hybrid property. Documents are essential since testimony and flow charts are not sufficient for proper tracing. Appraisals, tax assessments, and settlement sheets evidence the value of real estate at the time of the marriage and the separation. Business valuations or offers to buy or sell the business demonstrate its value. Mortgage statements show principal loan contributions. Bank and investment account statements, checks, and transmittal letters of gifts and inheritance link deposits, withdrawals, and payments. Because tracing requires a specific link between the separate contribution and the asset acquired, the use of joint accounts with frequent deposits of separate and marital contributions, combined with frequent withdrawals for many purposes, will likely result in a finding of transmuted property. Similarly, too much passage of time between the deposit of a separate asset and the purchase of a marital asset may make tracing impossible. THE BRANDENBURG FORMULA Once assets have been traced, the next step is to determine the current value of the separate contribution. When dividing real estate acquired with commingled or hybrid assets, Virginia courts commonly use the Brandenburg formula, first adopted by the Kentucky Court of Appeals in Brandenburg v. Brandenburg (1981). In Maryland, a similar source-of-funds formula was articulated in Harper v. Harper (1982). The basic Brandenburg formula goes like this: The percentage of total contributions that are separate, multiplied by total equity, equals the separate share of the asset. The percentage of total contributions that are marital, multiplied by total equity, equals the marital share. To be counted, contributions, whether separate or marital, must have increased the asset’s equity. When division of real estate is at issue, down payments and payments that reduced the loan principal are considered contributions to equity, while payments of interest, taxes, and customary maintenance and upkeep are not. Also, the value of real estate improvements, not their cost, determines the worth of those contributions. Say that, prior to his marriage to Sue, Sam bought a house that had an equity at marriage of $100,000. During the marriage, Sam and Sue’s earnings were used to reduce the mortgage principal by $50,000. At the time of the divorce hearing, the property’s equity was $250,000. Sam’s separate contribution would be worth $166,667 ($100,000 ÷ $150,000 x $250,000); the marital contribution would be worth $83,333 ($50,000 ÷ $150,000 x $250,000). The marital share would then be divided between Sue and Sam based upon factors enumerated in the statute. The Brandenburg formula is also useful when dividing a hybrid account in a defined-contribution retirement plan, the cash value of life insurance policies, or even the value of automobiles. PERSONAL PUSH Under Virginia law, hybrid property may also be created when substantial appreciation in the value of separate property such as a business, professional practice, or investment results from significant marital contributions or the personal effort of either spouse. The nonowner of the separate property has the burden to prove that such marital contributions or personal effort resulted in the appreciation. The owner of the separate property then has the burden of proving that any portion of that increase in value was not caused by such marital contributions or personal effort. Appreciation due to market conditions, for instance, does not create hybrid property. The Virginia statute specifically defines personal effort to include labor, inventiveness, physical or intellectual skill, creativity, or managerial, promotional, or marketing activity applied directly to the separate property. The effort must be significant. A suggestion by a wife, who was studying to be a realtor, that certain property would be a good investment has been deemed not “personal effort.” In the divorce proceeding, when separate property has been sufficiently traced, the owning spouse should receive credit as part of the division of assets. But even if the tracing is insufficient, all is not lost. When dividing marital property, courts in all three local jurisdictions are mandated to use their discretion. They may consider the spouses’ respective monetary and nonmonetary contributions to the acquisition, care, and maintenance of the marital property. A court may thus award the party who contributed substantial untraced separate moneys a greater percentage of a marital asset or may adjust a monetary award based upon the equities of the case and various factors enumerated in the statutes of each state. In short, the house, the retirement account, and the business acquired before the marriage, but added to during the marriage, may all prove to be hybrid property in Virginia. Depending on the evidence presented, the court will determine what credit is ultimately given and how assets will be divided between the husband and wife. Carol Schrier-Polak is a partner in the Arlington, Va., law firm of Bean, Kinney & Korman. A fellow of the American Academy of Matrimonial Lawyers, Schrier-Polak counsels and represents individual clients in all aspects of domestic relations, and provides mediation services. She can be reached at [email protected].

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