Law on gifted, inherited property continues to evolve

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In Derr v. Derr, 2005 WI App 63, 280 Wis. 2d 681, 696 N.W.2d 170, the Wisconsin Court of Appeals clarified terminology regarding the legal treatment of gifted and inherited property at the time of divorce, and offered fresh insight on how to solve these often thorny issues. Wisconsin case law preceding Derr was less than clear.

The court has published two cases on gifted and inherited property since Derr. So, what’s new? Not a whole lot, but lessons can always be learned from every new decision.
Grumbeck v. Grumbeck

The first post-Derr decision is Grumbeck v. Grumbeck, 2006 WI App 216, 296 Wis. 2d 611, 723 N.W.2d 778.

The Grumbecks were married for 41 years. They had a marital property agreement during the marriage, but agreed that it did not apply to divorce. The court awarded the husband his gifted property, and then divided the marital estate unevenly to achieve an overall 50-50 division of the estate.

The Court of Appeals emphatically disagreed with that result, and was clearly bothered by the de facto division of the gifted property. The somewhat chilling part of the decision is that the court simply remanded with directions that the husband receive his gifted property and that the marital property be divided equally. This is significant for two reasons.

First, the trial court may not have applied this methodology if it had further considered the case on remand. It should be noted that the trial court had “avoided” the problem of establishing whether any part of the appreciation in the gifted shares in husband’s corporation were marital by dividing the overall estate equally. If the trial court had considered the matter on remand, the parties may have revisited this issue and presented stronger proof, one way or the other.

Second, the parties were stuck with the original trial court record without being able to develop an additional factual basis for deviating from an equal marital property division.

Even though one of the factors for deviation is whether one spouse has substantial assets not subject to division, the court gave rather short shrift to this particular factor by emphasizing the presumption of the equal division of marital property. The upshot really is that the court was not impressed by the long-term marriage (41 years) as a “special circumstance” warranting deviation from the equal division of marital property.

Wright v. Wright

The second decision is Wright v. Wright, 2007 Wis. App. Lexis 1052 (Nov. 4, 2007).

The property to be divided from this 20-year marriage was fairly enormous, with the non-gifted property totaling more than $24 million. That property was divided equally.

The case is important because it reaffirmed the burdens of proof for keeping gifted and inherited property non-divisible at the time of divorce. The case is also important because the court discussed potential marital appreciation of a separate asset where the asset is the corporate stock of the owning spouse and the spouse has some involvement in the business.

The Court of Appeals affirmed the trial court’s findings with respect to the latter, and disagreed with the trial court’s finding on the former, ruling that the husband had not met his burden of proof to establish that a money market account had retained its status as a non-divisible asset. Again, it is notable that the court did not remand for additional review of this issue, but instead summarily ordered that the money market account be divided equally.

Lessons Learned

(1) Make extensive factual inquiry and ask for extensive factual findings at the trial court level.

Trial counsel should fully develop the record to establish all facts relating to the alleged gifted/inherited property, along with all facts warranting either an equal or unequal division. The Grumbeck court hinted that the remand order might have been different if the trial court had given additional reasons for the deviation from the equal division of the marital estate:

“Had the record shown and had the trial court alluded to some special circumstances beyond the mere fact that this was a marriage of long duration that was ‘clearly a maintenance case,’ we would remand with directions to consider the special circumstances.” Grumbeck, 2006 WI App 215, at ¶ 16.

Similarly, extensive findings were made in Wright regarding numerous issues relating to the gifted and inherited property, including evidence regarding the owning-spouse’s efforts in the business (relating to the claim of marital appreciation) and evidence regarding the potential transmutation of accounts, including the money market account.

Such factual inquiry and development appear to have proved crucial to the court of appeal’s review and decision.

(2) Stay away from a precise equal division of all assets when there are undisputed gifted/inherited assets as part of the estate.

The wife’s attorney was undoubtedly pleased with the trial court result in Grumbeck, but in hindsight may have wanted to urge the trial court at the time of its decision to either more fully explain the rationale for the decision or request a different division than the precisely equal division of the overall property.

(3) The burden of proof regarding gifted and inherited assets remains the same.

Wright reaffirms existing law as to the owning-spouse’s burden to prove that gifted/inherited property has retained its status as separate property at the time of divorce.

(4) Hardship cases are hard.

Finally, a Derr post script, as round two has recently come before the Court of Appeals. Derr v. Derr, 2007 Wisc. App. LEXIS 977 (Nov. 8, 2007) (not recommended for publication).

The trial court redetermined property division and maintenance in light of the direction from the first appeal. The new appellate decision, affirming the trial court, does not add to the gifted and inherited property discussion, except to the extent that it affirms the trial court’s decision that hardship could not be established by the non-owning spouse.

The trial court has the discretion to include exempt assets in property subject to division if the refusal to divide property will create a hardship on the other party or the children of the marriage. Wis. Stats. § 767.61(2)(b). The appellate court upheld the trial court’s determination that no hardship existed based on the rigorous “privation” standard required to prove it.

The facts showed that the husband was awarded 90 percent of the overall estate, or $905,000, which was determined to be his gifted property, and the wife received little more than $105,000, a gross amount that did not consider her outstanding debts, including attorney’s fees, back real estate taxes and mortgage payments, as well as her need for a new car and house repairs. Despite the one-sided distribution of the estate, the court summarily concluded that the wife did not face a hardship at the time of the divorce. Id., at ¶¶ 19, 20. Luckily, the wife was awarded some maintenance, and that award, in part, impacted on the appellate court’s decision to affirm. Id.

Conclusion

In sum, in cases of potential gifted and inherited assets, trial counsel needs to
be thorough in understanding the exact nature of the assets in question and be able to present all relevant evidence to the trial court for its determination. The financial stakes can be high.