The Colorado Court of Appeals issued a decision recently concerning commingled assets which reminds us of the power that spouses have in marital agreements (in this case, a “prenup”, or prenuptial agreement) to deviate from the normal statutory property division in a divorce. For a complete discussion of prenuptial agreements and marital agreements in a divorce, see our Prenuptial & Postnuptial Agreements article in the Colorado Family Law Guide.
In Alt,1In re: Marriage of Alt (Colo.App. No. 21CA0591 Mar. 3, 2022) (Unpublished Decision). the parties entered into a prenup shortly before their marriage which contained the following provisions relevant to the appeal:
- Each party waived any rights to the “separate property” of the other, which was defined as meaning “property owned by a party prior to the marriage of the parties… and property acquired in exchange for or with the proceeds from the sale, lease, pledging or other use of the separate property of a party.”
- “Marital property” was defined as “all property acquired by either party or by both parties during the marriage” which was not defined as separate property.
- Marital property included “the ‘net appreciation’ (defined as the total of the increase of the value of a party’s separate property less the total of the decrease of the value of a party’s separate property)” of each party’s property, with a few listed exceptions.
- The parties were prohibited from having commingled assets in their their separate retirement accounts (i.e. mixing marital with premarital funds), as those accounts were excluded from the “net appreciation” method,
The wife asserted that the husband had commingled assets by depositing marital earnings into his premarital accounts, thereby transforming those accounts into marital property. The husband asserted that the accounts themselves were still his separate property, and under the “net appreciation” portion of the premarital agreement, only the increase was divisible as marital property, not the entire account, so it should not matter if they contained commingled assets.
The trial court agreed with the wife’s interpretation and found that an account which commingled assets (i.e. mixed marital and separate property) became a marital account, subject to equitable division. The husband appealed, and the Court of Appeals reversed.
Spouses Can Waive Property Rights in Prenup
The court first discussed the relevant statutory provisions, and that parties who intend to marry can sign an agreement which complies with the Uniform Premarital and Marital Agreements Act, which is then effective without any consideration (i.e. no “tit-for-tat” required). And in order to waive a property right, the premarital agreement must state that the parties are giving up such rights should their marriage end. Alt.2In re: Marriage of Alt, ¶ 11 (Colo.App. No. 21CA0591 Mar. 3, 2022) (Unpublished Decision).
The goal in interpreting a marital agreement is “to determine and give effect to the parties’ intent as reflected in the language of their contract.” Alt.3In re: Marriage of Alt, ¶ 13 (Colo.App. No. 21CA0591 Mar. 3, 2022) (Unpublished Decision).
Commingled Assets Not Defeat Net Appreciation Method in a Prenup
When the marital estate is divided in a dissolution of marriage, the appreciation of a spouse’s separate property is considered to be marital property. Normally, this means looking at each individual asset, and if it increased, the increase is marital. If it decreased, then there is no marital property, but neither is the decrease offset against the increase in value of other assets (i.e. the premarital property is not treated as a “pool” where gains are netted against losses).
But the parties’ prenup explicitly redefined marital property in this case to allow such an offset: “‘Net appreciation’ under the [Premarital Agreement] means the total increase in value during the marriage of a party’s separate assets combined less the total decrease in value of those assets.” Alt.4In re: Marriage of Alt, ¶ 14 (Colo.App. No. 21CA0591 Mar. 3, 2022) (Unpublished Decision).
And in this case, the appellate court held that the “net appreciation” provision required comparing the values of the premarital accounts at the time of divorce to the values at the time of marriage, with the net difference being marital property subject to division.
Notably, while there was a provision which prohibited commingled assets in the husband’s retirement accounts (which would remain entirely his, including the appreciation), there was no similar prohibition on commingling marital funds into his other premarital accounts which fell under the “net appreciation” provision. Accordingly, by finding that the commingled assets converted the premarital accounts into marital assets, the trial judge failed to follow the “net appreciation” clause of the prenup which provided that only the increase would be marital.
“the assets listed in Exhibit A remained husband’s separate property under the PMA no matter the nature of the assets or where they were located. Therefore, regardless of whether husband’s premarital funds were commingled with marital assets, they remained separate to the extent of the values in Exhibit A. By applying commingling analysis to render husband’s three premarital nonretirement accounts entirely marital, the court gave wife more than she bargained for under the PMA. The court gave her husband’s premarital separate property in these accounts contrary to the PMA’s provision allowing him to retain ownership of such property as defined in Exhibit A no matter the form or location. Under the PMA, husband is obligated to share with wife only any net appreciation of all of his separate assets that exists at dissolution.”Alt.5In re: Marriage of Alt, ¶ 18 (Colo.App. No. 21CA0591 Mar. 3, 2022) (Unpublished Decision).
While the husband prevailed on the commingled assets issue, it is never a good practice to have commingled assets in the same account. And that’s especially important where there is no prenup, as is the case in most dissolution of marriage actions. By commingling marital and non-marital funds in the same account, a spouse always runs the risk that the court will treat the entire account as marital, as happened here with the trial court. And unlike the husband in Alt, most spouses will not have the benefit of a prenup to argue that the commingled assets don’t change an account from separate to marital.
Debt for Expert Fees is not Marital Debt
The husband did not prevail on every issue, however. During the divorce, the parties stipulated to a joint expert, and the husband incurred debt to pay that expert. The trial judge allocated all of the expert fees to him, rather than treating them as a marital debt and dividing them equally. The Court of Appeals upheld this allocation of the expert fee debt to the husband, finding that a joint expert is governed by the rules of evidence, rather than being treated as a marital debt.
And Colo. R. Evid. 706(b) provides that an expert “shall be paid by the parties in such proportion and at such time as the court directs, and thereafter charged in like manner as other costs.” This means the family law judge has discretion to allocate expert fees in a divorce, and “the court determined at permanent orders that it would be fair and equitable for husband to pay the entire expert fee. We discern no error by the court in doing so.” Alt.6In re: Marriage of Alt, ¶ 29 (Colo.App. No. 21CA0591 Mar. 3, 2022) (Unpublished Decision).
However, in view of the revised property division because of the commingled assets finding, the trial court was also directed to reconsider whether the fee award was still fair and equitable. Realistically, however, since the trial court already found it was equitable for the husband to pay the fee entirely, in view of the commingled assets ruling which will allocate even more assets to the husband, it is difficult to see that order changing.
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