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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.

 

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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.

 

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