My Forbes.com Articles

Archive for June, 2011

How Are Appreciated Assets Divided in a Divorce?

posted by admin 5:21 PM
Tuesday, June 28, 2011

In an earlier blog post, I explained the difference between separate and marital property.

Now, it’s time to delve a bit deeper and discuss some of the financial nuances you may encounter as the division of separate and marital property proceeds during your divorce. For example, it’s likely your case will involve assets that have appreciated in value during the course of your marriage. Here’s the issue:

In many states, if your separately owned property increases in value during the marriage, that increase in value may be considered marital property. What’s more, the division of this particular subset of marital property can be further complicated by the differentiation between active and passive appreciation of the assets.

Let’s take this step-by-step.

First, understand that an asset can increase in value in one of two ways.  An asset can either

  • Actively  appreciate –as a result of actions by the owner of the asset  . . . or it can
  • Passively appreciate –as a result of changes in the market.

While there are many complex rules that govern division of property and asset appreciation, here are a few fundamentals, in very general terms:

In community property states, where both spouses are typically considered equal owners of all marital property, the division of appreciated assets is often computed based on a series of formulas. The calculations can prove enormously complex, but here’s a short summary of the most salient points by David M. Wildstein, Esq. in his brief, Allocating Active and Passive Appreciation of a Separate Business Asset for Equitable Distribution:

“If the increase in a separate asset is passive, it is not a part of the community estate as long as no community resources were used for the asset. If the asset increases due to the effort of either party, it is part of the community. The time, toil and talent of each spouse is perceived to be a community asset. To reach a fair result, community property law created the doctrine of reimbursement: ‘The fundamental purpose of the doctrine is to bring back into the community estate value which was created by community contributions, but which took the form of appreciation in the value of a separate asset.’”

In equitable distribution states, it’s not as “straightforward” because none of the equitable distribution states use a formulaic approach as described above for community property states. In equitable distribution states, passive appreciation on separate property remains separate property.  But, active appreciation on separate property can be considered marital property.

What can qualify as active appreciation on separate property? That’s a very good question, and courts often struggle to make this determination. Typically, the judge will use a three-pronged test to evaluate active appreciation in separate property.  The judge must find that:

1.     The separate property did, indeed, appreciate during the marriage.

2.     The parties directly or indirectly contributed to the appreciation.

3.      The appreciation was caused, at least in part, by the contributions.

Of course, as with other aspects of divorce proceedings, the rules governing the determination of asset appreciation can vary from state to state.  In some states the burden of proof is on the spouse who claims the appreciation is passive. In other states, it’s the reverse –the burden of proof rests on the spouse who claims the appreciation is active.

Clearly, asset appreciation is a complicated topic that demands thorough and thoughtful consideration.  It’s essential that you seek guidance from a qualified divorce team concerning the particular circumstances of your individual case.

All articles/blog posts are for informational purposes only, and  do not constitute legal advice. If you require legal advice, retain a  lawyer licensed in your jurisdiction. The opinions expressed are solely  those of the author, who is not an attorney.

 

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter  Pin It

Divorce laws differ from state to state, and so the simple truth is this:

Where you live impacts how assets and debts will be divided in your divorce case.

So, in addition to recognizing the difference between separate and marital property, you also must understand the laws that govern your place of residence.

The first step is to determine whether you live in a Community Property State or an Equitable Distribution State.

There are nine Community Property States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Couples living in Alaska can “opt in” for community property, and Puerto Rico is a community property jurisdiction.

(You may be interested to know that the Community Property system is derived from Spanish law, and that’s why it’s found predominantly in the southwestern states.)

The remaining 41 states are known as Equitable Distribution States (or Common Law States).

What’s the difference between a Community Property State and an Equitable Distribution State?

In a Community Property State, both spouses are typically considered equal owners of all marital property. In other words, if you live in a Community Property State, whatever you earn or acquire during the marriage is co-owned by both parties, regardless of who earned it or whose name is on the title. That means whatever you earn or acquire during the marriage is spilt 50-50 during a divorce.

If you live in an Equitable Distribution State, the law “sees” assets somewhat differently.  In an Equitable Distribution State, if your name appears on an asset (the deed to a house or the title to a car, e.g.), you are considered the owner. However, in an Equitable Distribution State, your spouse has the legal right to claim a fair and equitable portion of those assets in a divorce.

The equitable distribution of assets may result in a 50-50 split of marital property, or it may not. The goal in an Equitable Distribution State is not a 50-50 split. The goal is a fair (equitable) distribution of family property.

A variety of different factors are considered when dividing family property in an Equitable Distribution State. For example, equitable distribution may be based on:

  • the length of the  marriage
  • the age and health of the parties
  • the income and future earning capacity of parties
  • the standard of living established during the marriage
  • the value of homemaking and childcare provided during the marriage
  • the value of the investment one party made to help with the education, training of the other party
  • other factors

Please keep in mind that the entire discussion above involve marital property. Separate property is a different matter.

Whether you live in a Community Property State or an Equitable Distribution state,  assets that you bring into the marriage or receive individually (an inheritance or your grandmother’s diamond ring, e.g.) remain yours. This separate property is exactly that –separate –unless you co-mingle it with marital property. For instance, if you deposited the inheritance from your parents into a joint bank account, it’s likely that those funds would no longer be considered separate property. Instead, once co-mingled, these funds would be considered marital property and subject to division as required  by your state’s laws.

In a nutshell, here’s the difference between a Community Property State and an Equitable Distribution State:

In a Community Property State, marital property is divided 50-50.

In an Equitable Distribution State, marital property is divided equitably, based on a variety of factors.

Assets aren’t necessarily the only thing acquired during marriage. Debt is often acquired, too. And just as assets are divided in divorce, debt is divided, as well. Generally speaking, the division of debt follows the same principles as the division of assets. For example, in most Community Property States, both spouses are equally responsible for the repayment of debt acquired during the marriage, even if only one spouse enjoyed the benefit. (I’ll discuss the division of debt in more detail in a future blog post.)

Okay. Are you now feeling comfortable with the distinction between Community Property and Equitable Distribution States? You are? Great! Then, I won’t feel too badly about offering this one last wrinkle:

A few states have laws with both Community Property and Equitable Distribution characteristics.

(As I’ve said before, the division of assets can get complicated quickly!)

Please, consult with your divorce attorney to learn which laws are specific to your state, and remember, when it comes to divorce, geography is critically important. Regardless of where you live, it’s essential that you seek guidance from a qualified divorce team concerning the particular circumstances of your individual case.

All articles/blog posts are for informational purposes only, and  do not constitute legal advice. If you require legal advice, retain a  lawyer licensed in your jurisdiction. The opinions expressed are solely  those of the author, who is not an attorney.

 

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter  Pin It

The Difference Between Separate and Marital Property

posted by admin 4:44 PM
Wednesday, June 8, 2011

Divorce involves dividing the family’s property, and I’m sure you won’t be surprised if I tell you that this process can be extremely complicated and contentious –especially if there are significant assets to be considered, such as houses, rental property, retirement/pension plans, stock options, closely-held businesses, professional practices and licenses, etc.

Because it’s so complex and often emotional, many women find the division of assets quite overwhelming.

But, that doesn’t have to be the case.

Over the years, I have seen that the feeling of being overwhelmed typically stems from a lack of understanding about how assets are divided. Most women aren’t even familiar with the terms used –and why would you be, unless you’ve gone through this process before!

So, let’s start with the basics.  Let’s discuss one of the key factors divorcing women need to understand: 

The difference between separate and marital property.

States differ in some of the details, but typically, separate property is rather limited in scope. Generally speaking, separate property only includes:

• Property that was owned by either spouse prior to the marriage
• An inheritance received by the husband or wife (either before or after the marriage)
• A gift received by the husband or wife from a third party (your mother gave you her diamond ring)
• Payment received for the pain and suffering portion in a personal injury judgment
All other property that is acquired during the marriage is usually considered marital property, regardless of which spouse owns the property or how the property is titled.

As you can see, compared to separate property, marital property is a VERY broad category.

In other words, don’t think you’re not entitled to a specific asset (such as a 401K, stock options, etc.) simply because it is titled only in your husband’s name.  Typically, all property that is acquired during the marriage is considered marital property, even if your spouse “owns” the property or it is titled in his name.

In fact, even separate property can lose its separate property status if it is co-mingled with marital property. For instance, if you re-title the condo you bought when you were single and add your husband as a co-owner, that property will most likely now be considered marital property. Likewise, if you deposited the inheritance from your parents into a joint bank account, it’s likely that those funds would now be considered marital property.

A qualified divorce team can help you sort through all the details of your particular case. As you can see, even a case that seems relatively simple at first can get quite complicated once you start scratching the surface. Keep in mind that understanding the difference between separate and marital property is only Step #1 in approaching the division of family property. You must also recognize that:

• Divorce laws differ greatly from state to state. Do you live in a Community Property state or an Equitable Distribution state? Where you live impacts how your assets and debts will be divided during divorce.
• In many states, if your separately owned property increases in value during the marriage, that increase in value may also be considered marital property. The division of this particular subset of marital property can be further complicated by the differentiation between active and passive appreciation of the assets.
• Debt is also handled in accordance with state laws, and Community Property states and Equitable Distribution states deal with debt quite differently.
But, wait. Take a deep breath. Please don’t let all this information fluster you. I know it can all seem a bit daunting initially –and that’s why I’ll walk you through each of these topics in upcoming blog posts. Understanding the fundamentals of how assets are divided will help you feel less overwhelmed and help you start on your way to a successful settlement.

If you still have questions after reading these blog posts, please call one of our Divorce Financial Strategists™, who will be able to help you with your specific situation.

All articles/blog posts are for informational purposes only, and  do not constitute legal advice. If you require legal advice, retain a  lawyer licensed in your jurisdiction. The opinions expressed are solely  those of the author, who is not an attorney.

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter  Pin It

Everyone wants to survive divorce with their finances –and their emotions –intact. So, I suppose it’s not surprising that the question I get asked most often is this:

Jeff, what can I do to ensure the best possible outcome for my divorce?

That’s a great question, and I love responding to it because the answer is quite simple and direct.

If you want to ensure the best possible outcome for your divorce do this:

Build a winning divorce team.

Granted, the words “divorce team” may sound a little strange at first. Years ago, a couple didn’t need a “team” to help them navigate the divorce process. Typically, lawyers were the only professionals required. Over the past decade or so, though, our day-to-day lives, our careers, our finances –and the rules and restrictions that govern all of these –have grown much more complicated.

To ensure the best possible outcome for your divorce today, you’ll also need the support of other professionals, particularly those who can help ensure your financial protection both now and in the future.

Sure, hiring additional professionals will cost you more in fees, but it will be more than worth it to protect your long-term financial well-being. Take my advice: Get all the help you can, and use this help to plot a course strategically.

Who should be on your winning divorce team?

Individual circumstances vary, but in general, I find that these three players are the cornerstone of an optimal divorce team:

• A Matrimonial/Family Law Attorney
• A Divorce Financial Planner
• A Therapist/counselor

Here’s some advice about how to go about finding each of these team members.

1. A Matrimonial/Family Law Attorney. Look for an attorney who exclusively handles divorce cases or one who devotes at least 75% of their practice to divorce. Ideally, your lawyer will be a Fellow of the American Academy of Matrimonial Lawyers, which requires their members to fulfill a variety of stringent requirements. For instance, a Fellow of the American Academy of Matrimonial Lawyers, must:

• have at least a 75% specialization in matrimonial law
• be admitted to the Bar for at least 10 years
• pass both oral and written exams
• pursue continuing education

There are both state and national legal organizations that offer Board Certifications in Matrimonial/Family Law, but I do not believe that their requirements are as rigorous as the American Academy of Matrimonial Lawyers.

I suggest you interview at least three attorneys for this critical position, and during the interview, please talk openly about the individual complexities of your case. I realize this may seem painful, or embarrassing, or stressful, but it really is best for you to have all your cards on the table from the very start.

Of course, you’ll want to talk openly about each lawyer’s qualifications and fees, as well. Ask each candidate:
• How many divorce cases have you recently handled?
• How many have been settled and how many have gone to trial?
• What were the outcomes of the cases that went to trial?
• Do you typically represent the husband or wife? What percentage of each?
• Will you personally handle all aspects of the case, or will you pass responsibility for the case to a more junior attorney and/or paralegal (and at whose rate will you be charged)?

Ultimately, you should hire a qualified divorce lawyer who has sufficient experience in cases like yours (e.g. custody, high-net-worth, etc.).

And, here’s one more important piece of advice to keep in mind when selecting a divorce attorney: Remember to make certain you feel personally at-ease with whomever you choose. By its very nature, divorce is a delicate and emotional experience. You need your attorney to be a trusted, supportive and forward-thinking resource before, during, and even after, the divorce is complete.

2. A Divorce Financial Planner. The divorce financial planner is the financial expert on your divorce team, the person who is responsible for creating the comprehensive financial analyses and the projections that you and your divorce attorney will need to fully understand the short- and long-term financial and tax implications of each proposed divorce settlement offer.
Divorce financial planners should work hand-in-hand with divorce attorneys, but their job is to take care of the critical financial tasks that are beyond the scope of the divorce attorneys’ expertise. Those tasks can range from preparing the financial affidavits to projecting the financial and tax implications of each divorce settlement option.

At a minimum, your divorce financial planner should have the Certified Divorce Financial Analyst (CDFA) designation. Do not use a regular financial advisor, financial planner, CPA or accountant. Instead, you need someone who has a complete understanding of, and specialized training in, divorce.

Ideally, your divorce financial planner also will have additional advanced training in divorce financial planning strategies and asset protection. The CDFAs with advanced training here at Bedrock Divorce Advisors™ are called Divorce Financial Strategists™.

Think of the divorce financial planner like the quarterback of your financial team. Your attorney will use analyses and projections prepared by the divorce financial planner to substantiate and justify his/her positions when negotiating with your husband’s attorney. If needed, your divorce financial planner also can bring in additional specialists, including:

• A forensic accountant. Are you concerned about hidden income/assets/liabilities and/or the possible dissipation of marital assets (vacations taken by your husband with his girlfriend and gifts he might have bought her)?  A forensic accountant helps explore these concerns and may also be very useful when one or both spouses own a business or professional practice where, unfortunately, it is rather easy to hide income/assets and/or delay revenues and increase expenses (pad the payroll, fictitious charges, etc.).
• A valuation expert. Once you have “real” numbers from the forensic accountant, a valuation expert can determine the worth of a business or professional practice. A valuation expert can also establish the value of an advanced degree or training, stock options and/or restricted stock, etc.
• A real estate appraiser. The marital home and other real estate are often among the largest assets that need to be divided. A real estate appraiser determines the value of the marital home and can also appraise vacation home(s), commercial real estate, land, etc.

3. A therapist/counselor. Many people describe divorce as an emotional rollercoaster. A qualified therapist can help you cope with your feelings as you navigate the ups and downs along the way. As with the other members of your divorce team, choose carefully. You want to feel comfortable with your therapist, and you want to work with someone who is qualified to meet your needs. You will need to choose among:

• Psychiatrists. These doctors have medical training and are licensed to prescribe drugs.
• Psychologists. These professionals have PhDs or PsyDs in psychology. They specialize in cognitive behavioral therapy.
• Licensed professional counselors. These mental health professionals are licensed by the state. Most have a master’s degree or doctoral degree in counseling or a related field.
• Social workers. Social workers offer psychosocial services for the treatment of emotional concerns.

Ask your primary care physician for recommendations of therapists who work in your area, and be sure to inquire with your health insurance provider to determine the mental health coverage provided by your plan.

No one thinks divorce is easy. But, you don’t have to go it alone. Build a top-notch divorce team, and you’ll have the professional expertise and support you need to survive with your finances –and your emotions –intact.

All articles/blog posts are for informational purposes only, and  do not constitute legal advice. If you require legal advice, retain a  lawyer licensed in your jurisdiction. The opinions expressed are solely  those of the author, who is not an attorney.

Share this:
Share this page via Email Share this page via Stumble Upon Share this page via Digg this Share this page via Facebook Share this page via Twitter  Pin It