Refinancing Your Separate Real Estate Property during Marriage: Have you just given away half the farm?

More often than not a spouse owning separate real estate property acquires it through a previous marriage or by receiving a gift or inheritance; this spouse may then marry, and later divorce. Some forensic accountants with specialized knowledge often work on divorce matters with the issue of separate vs. community property and business valuation. Attorneys and the courts presume that the party owning the separate property real estate has made a 50% gift of the property to the other spouse when the spouse’s name appears on the real estate documents. The gift issue arises because a party in whose name separate property is titled cannot make a gift of that property to the community, only to their spouse. This gift occurs when the name of both parties appears on the Warranty Deed.

What we encounter in many purchase or refinance transactions is that the lenders and title companies routinely name both parties on the Deed of Trust and the Warranty Deed when real property is being purchased by one of the spouses, even though they are using his/her separate property. Both names on the Deed of Trust do not change the separate property nature of the real property, but can do so when both appear on the Warranty Deed. This type of issue occurs in two instances:

1)     The spouse paying separate property cash knows their spouse’s name will be on the Warranty Deed but does not have an understanding of the ramifications and has no intention of making a gift. They just do what the lender, title company, or realtor instructs them to do. It is also our experience that realtors generally do not understand the gift issue, either.

2)     The spouse paying separate property cash does not have any knowledge that his/her spouse will be named on the Warranty Deed and in most cases does not understand the legal consequences of the Warranty Deed. A Warranty Deed provides the greatest protection for the purchaser (grantee) because the seller (grantor) pledges or warrants that he, she, or both own the property and that there are no outstanding liens, mortgages, or other encumbrances against the property.  It not only conveys the grantor’s interest in and title to the property, but also guarantees that if the title is defective the grantee may hold the grantor liable.

3)     For a homestead if the husband sells the property and the wife is not on the original deed, the title company will, more than likely, require her to sign the deed to the buyer to make sure she gives up her homestead claim.

Question: If the husband signs the promissory note and Deed of Trust but the wife is not on the Warranty Deed why does the wife have to sign the Deed of Trust? 

Answer: In the event the husband defaults on the promissory note, the bank can remove her from the property because she has signed the Deed of Trust stating that it is okay to take her homestead interest in the property if the husband defaults. If a lender does not get the wife’s signature it will have a problem.

If contemplating a divorce in these situations, it can be very important to retain forensic accountants that have specialized knowledge of this issue.  The ability to conduct interviews of all the related parties to the transaction and to assist the attorney in developing a defense is very important. It is our understanding that there are two primary defenses to disprove a gift.

A gift has three elements:

(a)   Intent to make a gift

(b)   Delivery of the gift

(c)    Acceptance of the gift

The intent to make a gift is dealt with by interviewing the client to determine all of the factors relating to the purchase or refinance, and why the name of the other spouse is shown on the Warranty Deed instead of just the Deed of Trust. If no intent to make a gift can be established then the other two elements of a gift are moot.

With respect to the client using separate property funds to purchase real estate, or involved in the refinancing of separate property, the title company should be informed of the existence of separate property funds and instructed that the Warranty Deed should contain only the name of the spouse who advanced separate property funds for the property.  When the holder of separate property funds has no knowledge that their spouse would be on the Warranty Deed and therefore change the character of the funds, the same interviewing procedures as above would apply. In addition, it is important to determine everything that transpired pertaining to the circumstances surrounding their lack of knowledge including: the customary procedures of the title company for including the spouse with no separate property fund on the Warranty Deed. Usually, at closing, both parties simply sign the voluminous documents before the closing agent with little explanation—rarely do the parties understand the meaning or purpose of any of the documents executed or their legal ramifications. Knowledge is synonymous with intent, and without knowledge of what a party is signing there is no intent to make a gift.

The ultimate remedy to prevent gifting separate property to a spouse in a real estate transaction is knowledge of the legal effect of signing a document. Both parties must sign the Deed of Trust but only the spouse tendering separate property money to purchase the real property will sign the promissory note to the lender and be listed as the sole grantee on the Warranty Deed. Unfortunately, most married couples buying or refinancing real estate using separate property funds make a mental note that the funds are separate and do not operate in a preventive mode with a divorce in mind. For example, in a recent trial the Judge ruled in a divorce matter that a refinance changed the character of the separate property from 100% the wife’s separate property to 50% the wife’s separate property and 50% the husband’s separate property.

In summary, a knowledgeable forensic accountant can provide significant benefit  by assisting attorneys with this issue through thoroughly and accurately investigating the situation of whether a gift was intended, and the manner in which the other spouse’s name came to be included on the Warranty Deed.

A forensic accountant is particularly helpful in divorce matters in community property states where the tracing of separate and community property is required and so are business valuations.  The tracing is best done with original records and a financial investigative program that allows a complete in depth analysis of the financial records, bank accounts, brokerage accounts, credit card statements, income tax returns, and accounting records.  Sage Investigations, LLC uses DIO (Diogenes) a proprietary financial investigative database that acquires pertinent financial data in electronic form for use in analyzing the flow of money, tracing diverted revenue, to categorize income and non-income deposits and personal and business expenditures.  This technique generates a summary of voluminous records in Microsoft Excel format, which is presented in a written Expert witness report detailing the findings and conclusions.  All this information is delivered in a presentation with demonstrative evidence to the mediator, or to a judge and jury. 

There is no better firm at “following separate property funds” than Sage Investigations with over 50+ years of experience and using proprietary software (DIO) to help develop the full picture of the financial aspects of the case.  Learn more about assisting your clients by contacting Retired IRS Special Agent Edmond J. Martin, Chief Investigator at Sage Investigations, LLC.  Email website: or call 512-659-3179.  Thanks to Kenneth Huff, CPA and Henry Novak, Attorney for their input for this article.