In a divorce, the parties divide up what is called the “Marital Estate.” The marital estate includes any assets or debts that the parties own at the time of the divorce. Each spouse is deemed to have an equal interest in marital assets or debts.
This true no matter how property is titled or held and no matter which spouse’s job paid for the asset or which party incurred the debt. That means the marital estate includes a 401 K account or a credit card debt that is in your spouse’s name alone. In fact, marital property is inclusive and encompasses 401K plans, stock plans, stock options, real estate, frequent flier entitlements, bank account proceeds, couches, chairs, cars, utility debts, credit card debts and any other form of asset or liability.
How those assets are divided may vary from state to state but no longer depend greatly on whether your State has Community Property laws or Common Law Property laws. The laws are substantially similar in this day and age and both allow for an equitable division of the marital estate. It should be emphasized that an equitable division does not mean equal and means, instead, what is fair. What is “fair” obviously can be an arguable question and is guided by the individual laws in each state.
An equitable division views marriage as a civil partnership with many of the characteristics of a business partnership. When you join a business general partnership, each partner has an equal interest in the ownership of the business and is exposed equally to the liabilities of the partnership. This is true even if one partner incurs the debt on behalf of the partnership or one partner performs all the work making the partnership a more valuable asset. The best way to determine what debt exists is to run a credit report.
Where there are property disputes in divorce, Courts are not particularly fond of hearing those issues. This particularly true when the dispute involves assets that are primarily household furnishings. As a result, courts often render very unsatisfactory Orders related to the division of household furnishings. In fact, in one memorable case, the Judge gave one spouse half of the dining room table and half the chairs and the other spouse the other half. In the end, the judge stated, “if you don’t like what I did here, you will go out in the hall and find a better solution.” This is certainly an aberration and not the norm. However, it does underscore the Court’s general dislike in dealing with property issues.
There are any number of ways to creatively divide household furnishings and personal property when disputes occur. In some cases, the parties may make a list and alternately choose an asset. In other cases, parties may bid on each item of property and the highest bidder both receives the asset and has that value credited to him or her as part of the property division. This may result in an payment from one spouse to the other to equalize the value of the assets received by each. In yet other cases, the one party may create two lists of assets and the second party then has first choice which list and assets he/she will receive.
Mediation is always a potential option for such divisions.
Some states, not all, have classifications of property that are exceptions from the marital estate that is divided. These assets are often called non-marital assets. Any non-marital assets that you possess remain yours and any non-marital assets of your spouse remain his/her assets. Among States that take this approach, some listed non-marital classifications include:
• Premarital. Any asset acquired before the marriage (if the asset was encumbered by a loan that was paid off during the marriage, it may only have a partial non-marital value);
• Prenuptial Exclusions. An asset excluded by a valid prenuptial agreement;
• Personal Injury Proceeds. Personal injury settlements are generally considered personal to the injured party and are non-marital in nature. Some states also include Social Security benefits, Worker’s Compensation and Disability in this category;
• Inheritance. Any proceeds or assets from an inheritance;
• Gifts. Any asset acquired as a gift to one, but not both parties.
• Property Acquired After Separation. Any assets or property acquired after a decree of legal separation.
The list above is not meant to be exclusive or comprehensive and may vary from State to State. It is important to recognize that all assets are considered part of the marital estate unless proven otherwise by a “preponderance of the evidence.” This places a significant burden on any person making a non-marital claim. It is essential that any and all documents including documents of title, receipts, or canceled checks that support your non-marital claims must be provided. Any failure to provide documentation may result in the division of the asset in the divorce.
Losing Non-marital Value
It is possible for non-marital assets may have both a marital and non-marital value. In some cases, non-marital assets may lose their non-marital characteristic. This can occur in several ways:
Co-mingling. If non-marital proceeds are co-mingled with marital proceeds so that is becomes difficult to identify the non-marital asset, the non-marital characteristic may be lost. For example, placing non-marital proceeds in a joint bank account may not immediately eliminate a non-marital interest. However, if marital proceeds are added to the bank account or if proceeds from the account are paid out for regular living expenses, it is more likely that the non-marital value will diminish since it is impossible to determine which proceeds came out first – the marital proceeds or the non-marital proceeds.
Marital Improvements. Additionally, spending marital money (any money earned by either party during the marriage) to improve a non-marital asset may also create a partial marital interest in an otherwise non-marital asset. The increase in the value of the asset attributable to the improvement is likely to be considered marital.
Appreciation. The Courts make a distinction between “active” and “passive” appreciation. Passive appreciation of a non-marital asset remains non-marital. Passive appreciation occurs when an asset increases in value without any action by the parties. For example, if the value of real estate increases without the parties improving the property, it is considered passive. Active appreciation is a marital asset. Active appreciation occurs when the value of an asset increases because of an act by the either of the parties during the marriage. Capital improvements to real estate during a marriage may create a marital interest since a capital improvement is likely to add to the property’s value. Manipulating a stock account or transferring a mutual fund from one account to another resulting in an increase in value may also be “active appreciation” which creates a marital interest in an otherwise non-marital asset.
Tracing Non-marital Value
Non-marital assets may often be “traced” into later acquired assets giving the party with the original non-marital interest a non-marital interest in the new asset. For example, if one spouse owned a vehicle before marriage and that vehicle is later traded in for a new vehicle during the marriage, that party may be able to trace a non-marital interest in the new vehicle. Tracing is really the process of establishing a sufficient paper trail to claim a non-marital interest in a subsequently purchased asset.
Often, presenting a persuasive property case depends on clear cut documentation, and expert testimony. It is important to consult with a lawyer regarding significant non-marital issues.