Property Divisions And Non-Marital Assets

In any divorce case, there is usually a division of assets and a determination of each person's responsibility for debts. Most states, are considered 'marital property' states. This means that any asset acquired and any debt incurred during the marriage is the asset or debt of both parties.

THE MARITAL ESTATE

In a divorce, the parties divide up what is called the 'Marital Estate.' The marital estate includes any assets or debts that were acquired during the marriage. Each spouse is generally deemed to have an equal interest in marital assets or debts.

This true no matter how the 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 401K 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.

Essentially, the law 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.

Where there are property disputes in divorce, many courts and Judges 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.

NON-MARITAL ASSETS

Certain assets may be excluded from the marital estate which means that they are not divided between the parties. These are called non-marital assets. Any non-marital assets that you possess remain yours and any non-marital assets of your spouse remain his assets. Although the definition of non-marital assets may vary from state to state, as a general rule non-marital assets may 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;
• Inheritance. Any proceeds or assets from an inheritance;
• Gifts. Any asset acquired as a gift to one, but not both parties.

It is important to recognize that in most states 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 to prove it. 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

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.

Active Appreciation. Courts often 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 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.

REAL ESTATE

Tracing issues are often difficult and have led to numerous appellate court cases to help define procedures for determining non-marital value. In the state of Minnesota a case from the early 1980's dealt with non-marital interests in real estate. From that case, Minnesota law derived what has come to be known as the Schmitz formula.

The formula provides a simplistic model to help determine non-marital interests in real estate. Since real estate mortgages and other encumbrances against property are paid off over a significant period of time, marital interests may be created in real estate that was owned by one party before the marriage. As encumbrances are paid off during the marriage, a marital interest is created.

The formula states that the proper calculation of a non-marital interest may be derived by determining the ratio of equity to market value at the time of the marriage and then using that same fraction to determine non-marital interest at the time of divorce. For example, lets assume a spouse owns a home prior to marriage and that home has a value of $100,000 at the time of the marriage and that is encumbered by a mortgage of $75,000. The $25,000 equity (the difference between the value and the encumbrance) becomes the numerator in the Schmitz formula and the value of $100,000 becomes the denominator. As a result, the non-marital interest is 25% of the home's value. If the home appreciates to $200,000, the spouse with the non-marital interest may claim the first $50,000 as the non-marital interest and any remaining equity would be divided as marital.

Like most formulas, the limitations are obvious. First of all, it may be very difficult to determine with any degree of accuracy the value of real estate at the time of marriage unless an appraisal is done at that time. That value alone may become a contested issue that results in litigation and testimony of experts.

Second, In many instances, mortgages are refinanced after marriage, second mortgages and home equity loans may also be incurred. These new debts may erase or partially erase a non-marital interest.

Third, the formula does not consider the effect that capital improvements made during the marriage have on the real estate value. Capital improvements that are made during the marriage and which increase the value of the real estate may erode some of the non-marital interest represented by the Schmitz formula.

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.

Over the past twelve years, Maury D. Beaulier has developed a large and active family law practice which includes mediation and collaborative law. Mr. Beaulier has been described by his clients as "skilled", "aggressive" and "dedicated" to resolving complex and emotionally charged disputes. Mr. Beaulier is licensed to practice law in the States of Minnesota and Wisconsin as well as the Federal Courts in Minnesota and the Western District of Wisconsin. Mr. Beaulier is also a member of Minnesota's Collaborative Law Institute helping to develop new procedures in family law case.