Separate (But Different) Property

April 1, 2001
By Clifford Petroske

The idea that there must be legal distinctions for practical differences has always carried with it a related, if somewhat less popular idea — where there are no practical differences, there should be no legal distinction. And yet legal distinctions abound when it comes to the treatment in a divorce case of bank accounts and houses (real property). These assets are not so different that they would merit an entirely different set of rules regarding when a contributing spouse can get his or her separate contribution back, yet they are different enough to give the spouse who had invested his inheritance during his marriage in the downpayment on a house, a decided advantage over the spouse who just stuck it in the bank.

The result is a familiar one. All too often the Courts are confronted with a scenario in which, for example, the husband put a large inheritance into the purchase of the marital home, while his wife puts similar sums into a joint bank account. Each has invested money that, because of its origin, is considered “separate property” under New York law, and which, handled properly, would be fully recoverable to the investing spouse at the time of divorce. Of course, the key words are “handled properly.” Different investments yield completely different results. At the time of divorce, the wife’s investment in the previous example will likely be considered a “transmutation,” while the husband will be entitled to a “separate property credit” and get back the entire amount of his separate deposit in the marital home.

In New York, the deposit of funds into a joint depository account is deemed by statute to create a form of title in which the person making the deposit is presumed to have given one-half of the deposit to the other joint account holder. A “joint tenancy” is created in which each spouse automatically owns one-half of the deposit. In addition, each of the spouses stands to inherit the entire amount of the deposit upon the death of the other. This form of ownership is created in this automatic, often unwitting way, with bank accounts only, and is a creature of New York State’s banking law. Section 675 of the Banking law sets forth prescribed language for the title on a joint bank account. If the language (“pay to A or B, or survivor”) is used, the account is set up as a joint tenancy under the law — with the presumption of a gift of one-half of a deposit to the other party being established automatically, even though the phrase “joint tenants” does not appear anywhere on the account. The advantage is less litigation over what Depositor A really meant when he put the money in — a question that usually arises when he tries to take more than one-half out. The unwritten intention of the law is to protect banks from becoming parties to litigation over the disposition of the proceeds of joint bank accounts. However, the unexpected result has been the creation of rules of ownership that seem to contradict the rules employed by the courts when dividing up other forms of property in a divorce. For whatever reason, when considering bank accounts, divorce courts adhere to the state banking law, yet when dividing other forms of property, they will ignore the “form of title” as the equitable distribution law directs, and divide the marital estate equitably.

There are exceptions, of course, as with the spouse who has deposited separate funds (inherited, gifted or a received as a personal injury award) in a joint account, as a matter of convenience prior to writing a big check as a deposit on a new house. In any given case, the depositing spouse can introduce evidence in a divorce case to “rebut the presumption” of having intended to donate half of it to the other spouse when the joint deposit was made. By rebutting the presumption that the creation of a joint asset was intended, the depositing spouse will not automatically lose one-half of the deposit in a divorce. In a case where separate property funds are deposited for a short period in a joint account as a matter of convenience (i.e., instead of opening a new, separately titled account) and then used for the purchase of a new home, the courts will generally not view the deposit as a joint asset, and the spouse who made the deposit will still be able to claim a separate property credit in the amount of the deposit when the house is sold.

Just as it is hard to define “convenience” in the previous example, there is no bright line rule as to when a deposit into a joint account will be deemed “transmutated” (sorry) into a joint asset. The outcomes vary according to the specific facts of each case. For example, in Pauk v. Pauk, NYLJ 10/15/96 p.30, col. 6 (2d Dept. 1996), the husband had deposited separate funds into a joint bank account one year before the couple purchased the marital residence. Upon divorce, the husband claimed that he had not intended the deposit to become a joint asset, even though he later used the monies (ironically) to help pay for the jointly-titled house. The Court found that there was, in fact, a transmutation of the deposited funds, so that the husband was not entitled to a separate property credit from the proceeds of the sale of the house.

Sometimes the outcome appears to hinge on the creativity of the litigants, as in Giuffre v. Giuffre, 204 A.D.2d 684, 612 N.Y.S.2d 439 (2d Dept. 1994), where the husband was able to convince the court that the reason he had placed his separate funds into joint accounts was to take advantage of greater FDIC insurance.

But rather than scramble in a divorce litigation for a good explanation in order to get the deposit of your inheritance back (while your husband or wife relaxes knowing that he/she will get back every penny of his/her inheritance used to purchase the house), the far easier course, of course, is to go to the trouble ahead of time to open a separate account with that inheritance. Unless, of course, your intention is truly to make your spouse feel loved and included by putting the money in a joint account. And, if you are among the forty-five percent of people whose marriages do not end in divorce, you will probably never live to regret it.

If, however, you are not so fortunate, or it is a little late for good planning, you may wonder whose interests are really being served when the distinctions drawn by the law seem arbitrary, and impossible to predict while married. Frankly, there at least should be uniformity in the “equitable distribution” of marital assets upon divorce, if not an outright uniform split of assets as in states that evenly divide the “community property” acquired by spouses during marriage. In the view of this writer, the latter approach seems a bit extreme. The idea of empowering the courts to decide how things should be split up on a case-by-case basis is a good one, since every case presents unique facts that may influence a reasonable man’s view of what is a fair split of assets and debts. Equal is not always best. However, if the playing field itself is not level, the dignity usually accorded to the referee is lost on the players. If the ordinary person is to feel fairly treated by his society, he must be fairly treated in the courts. Unfortunately, too little attention is paid to the common sense and basic fairness of the law – not just a particular law, but the way in which the laws work together, for this is the way that the law is encountered. Too often, a particular outcome (the joint account deposit is a good example) will be nicely explained (by, say, a judge in his Findings of Fact) in a way that seems very smart and well analyzed, but which fails to consider the rest of the case as a whole. But the basic fairness or unfairness of the result is not lost on the parties. The effect of bad law in divorce is, ultimately, a bad image of marriage, for those who have been burned once tend not to forget. And if we are to work to strengthen families, they must have faith that the institution that binds them will not betray them. Especially in an age with a rampant divorce rate, we must work to ensure, through thoughtful legislation, that divorce is fair for everyone.