Bedrock Divorce Advisors
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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.