I frequently get asked what happens when the community contributes money or labor to a spouse’s separate property asset. This is a murky area and frequently depends on the facts of the case. However, there are some guidelines.
In the Hiatt v. Hiatt case, the husband owned an automobile dealership as his separate property. (Separate property is usually property acquired by one person prior to the marriage or by gift or even will.) In this situation, the couple took community property money (money earned by the community) and invested it back into the automobile dealership. This investment took the shape of paying off debt and making some improvements.
The Court determined that the total amount of benefit to the separate property dealership was approximately $36,000. (Accordingly, this is the first step in any analysis. Make sure you know what the amount is that has been contributed. This will need backup such as checks for what has been spent or a valuation of the property and business to see how much the land and business has been enhanced.)
The Hiatt Court did not appear to measure the actual enhancement of value to the dealership in this case, but decided that the minimum the community was entitled to was $36,000. The Court then divided this by two and awarded approximately $18,000 to the spouse that did not own the separate property automobile dealership. The Supreme Court of Idaho upheld the methodology of the lower court.
There are some things to be learned from this case. First, keep records. If community property is being used to benefit separate property, both parties should be aware of what is used. This includes money and time.
Second, the separate property owning spouse must be aware of this rule as the court will likely require reimbursement either on a dollar for dollar basis or an enhancement of value basis. Either way, this makes for a very good reason to have an attorney draft a prenuptial agreement. This will protect the asset and do away with fighting at the end of the relationship.
As is always the case when these situations arise an attorney, should be consulted.
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