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Property and Debt Allocation in Minnesota Divorce
By Eric C. Nelson, Esq.
Marital Property
In Minnesota, all property acquired during the marriage by either party is presumed to be marital property.1
This means that earnings and property acquired by either spouse are viewed as joint property. The philosophy underlying this
is that marriage is a full partnership, and that the contributions of a homemaker are equal in value to those of the
bread-winner. This marital property includes pensions and retirement investments acquired or earned during the marriage,
as well as equity in property built up during the marriage.
The controlling legal principle which determines the Court's division of marital property is the rather broad standard
of what is "just and equitable."2 In practice, however, this typically results in each party receiving half
the value of the marital estate.
Non-Marital Property
There are two main forms of non-marital property: 3
- Property acquired before the marriage (or in exchange for property acquired before the marriage)
- Property acquired as a gift or inheritance made by a third party to one spouse but not the other (or any property acquired in exchange for such property)
For example, if prior to the marriage I own a Corvette, and during the marriage I trade the Corvette in for a mini-van,
then the mini-van is my non-marital property.
Likewise, if during the marriage I am given a Steinway piano from my aunt, that piano is my non-marital property.
If I sell the piano and use the proceeds to buy a Savings Bond, then the Savings Bond is my non-marital property.
Similarly, if during the marriage I inherit $10,000, then that $10,000-or whatever I buy with it-is my non-marital property.
Why is this important? Because unlike marital property, non-marital property belongs wholly (100%) to the person who
acquired it. Although the Court has some authority to award a spouse up to one half of the non-marital property of the
other spouse, this is only in cases of unfair hardship, and is extremely rare.4 In all my years of practice,
I have yet to see it happen.
One very important caveat: the burden of proof is on the person claiming a non-marital interest in property to prove that
the property is in fact non-marital.5 Therefore, when you acquire property by gift, or want to protect
pre-marital property from being awarded to your spouse, you must be very careful not to commingle the property with
marital property-e.g., don't deposit it into any joint accounts, or it becomes very difficult to trace.
(If you have already commingled your non-marital money, don't despair; just be prepared to start digging up a lot of
old documents, and perhaps hiring an accountant).
Property That Is Partially Marital and Partially Non-Marital
Some property may be both marital and non-marital. The most common example of this is with real estate or retirement accounts.
For example, one spouse might have purchased a house prior to the marriage, but continued to pay down the mortgage during the
marriage. In this case, the house is both marital and non-marital. Likewise, one spouse might have started contributing to
a 401(k) or other retirement account prior to the marriage, and then continued making contributions to the same account
during the marriage. The account will therefore be partly marital and partly non-marital.
The burden of proof remains on the party asserting the partial non-marital interest to prove both its existence and its amount.
For a retirement account, this will ordinarily require you to obtain documentation of the account balance on the date of
marriage, and every statement thereafter (or at least every year-end statement thereafter). From these documents, an
accountant can determine the extent to which the current balance of the retirement account is composed of premarital
contributions, and the gain thereon, versus marital contributions, and the gain thereon.
A common mistake is to simply use the balance of the retirement or other account on the date of marriage as the total
premarital value. The problem with this approach is that it improperly excludes all of the gain on the premarital asset
from the date of marriage to the present. For example, assume a party has an account worth $100,000 on the date of marriage.
During the marriage, an additional $100 is added, thereby making it a partly marital account. Ten years later, the parties
are divorcing, and the account is worth $200,000. Clearly, most of the gain is from the $100,000 premarital balance,
and not the $100 marital contribution.
Income and Appreciation of Non-Marital Property
An increase in the value of non-marital property during the marriage is still non-marital.6
For example, if you buy a painting prior to the marriage for $10,000, and during the marriage it increases
in value to $100,000, the entire value of the painting remains non-marital.
However, income earned during the marriage from non-marital assets is marital.7
For example, if you own rental property prior to the marriage, the rental income received during the marriage is deemed marital,
because it was "earned" during the marriage.8 Another example would be dividends earned during the marriage from
premarital shares of stock. The dividends paid are treated as marital earnings.9
Interest on a non-marital bank account during the marriage would likewise be marital.10
Caveat: the Court distinguishes between active and passive appreciation. If the appreciation of an asset is due to efforts
or expenditures made by either party during the marriage, then the appreciation is marital.11
For example, if during the marriage, there is active management and improvement of the property -
i.e., some investment of marital money, labor, or entrepreneurial decision-making - then the appreciation is marital.
Id. Merely paying taxes on non-marital property during the marriage, however, does not create a marital interest in the
otherwise non-marital property. 12
Pension and Retirement Interests
Frequently, one party or the other has acquired a pension or retirement interest of some kind during the marriage.
The portion of such a retirement interest that was acquired during the marriage is marital property, and becomes part of the
marital estate subject to a "just and equitable" (usually 50-50) apportionment. In cases where a retirement account is
partly marital and partly non-marital, an accountant will often need to be retained to determine the marital versus
non-marital values.
If there are not enough other marital assets to compensate the other spouse for half of the marital value of the retirement
interest, then the Court will order the distribution through what is known as a Qualified Domestic Relations Order,
or QDRO (pronounced "quadro," in legal jargon). This is a way of dividing a tax-sheltered retirement account between
divorcing spouses without incurring any adverse tax consequences as a result of the division
Real Estates
It often happens that one spouse or the other has a house prior to the marriage, but with an outstanding mortgage,
which is in part paid off during the marriage. The Court has developed methods for apportioning the value of such
real estate to give one spouse credit for his or her non-marital interest, while giving the other spouse credit for half of the
value of the equity increase in the house during the marriage.
Note that it does not matter which party wrote the mortgage checks every month. Earnings by either party during the
marriage are marital earnings, and to the extent that the parties acquire increased equity in a piece of real estate
during the marriage as a result of paying down the mortgage with marital earnings, the increased equity is treated as
marital property.
The formulas for calculating these interests are complicated, but basically, a party's non-marital interest is calculated
as follows: first, one calculates his or her non-marital interest at the time the property was acquired.
This is calculated as a percentage. It is equal to the ratio of non-marital equity in the property at the time it was
acquired to the fair market value at that time. For example, if you have a house worth $100,000 on the date of marriage,
with a remaining mortgage balance of $60,000, then you have a 40% non-marital interest in the house.13
This percentage non-marital interest remains constant, regardless of whether the property appreciates or depreciates in
value during the course of the marriage.
Now, to determine your non-marital interest at the time of the dissolution as a dollar figure, you simply multiply the
current fair market value by the same 40%.
So for example: if the fair market value of the house at the time of the dissolution is $120,000 because of passive
appreciation, and the remaining mortgage balance is only $40,000 because $20,000 was paid off during the marriage,
the your non-marital interest would be $48,000 (40% of $120,000. The remaining equity of $72,000 would be the parties'
marital interest, and subject to apportionment as part of the total marital estate.
This formula applies even in cases where the original mortgage was refinanced during the marriage.14
Deadbeat Spouses
But, you say, my spouse is a lazy, good-for-nothing bum who refuses to work either at a job or around the house,
and just watches TV and drinks beer all day long! Why should he get half?!
In theory, the deadbeat spouse does not automatically get half of the marital estate.
The Court has discretion to apportion the marital estate in any manner that is "just and equitable."15
One of the factors which the Court is supposed to consider is
"the contribution of each [spouse] in the acquisition, preservation, depreciation or appreciation in the amount or value" of the marital estate.16
That said, if you have two fingers you can count the number of times this sort of deadbeat spouse argument has ever
prevailed in the history of civilization. (I'm being facetious, but only slightly. The attitude of the courts seems to be:
"Yah, yah, that's what everybody says. Just suck it up and stop making things difficult. If you thought your spouse was such a bum, you shouldn't have stayed married, etc. etc.").
Gifts Between Spouses
In some jurisdictions, gifts between spouses are still marital property. In other jurisdictions, a gift from a spouse
becomes the non-marital property of the spouse-recipient. I have as yet found no definitive answer to this question in
Minnesota case law. Should the question arise, I believe it would be treated here as marital property, because it does
not fit into any of the statutorily defined categories of non-marital property, and the "gift" category is limited to
gifts from a "third party."17
As for the engagement ring, if it was given prior to the marriage, and a marriage subsequently took place, the engagement
ring is the premarital property of the recipient.18
Debt Allocation
The Court has broad discretion to divide marital debt in any manner that has an acceptable basis in fact and
principle.19 In my experience, the marital debts are included as part of the same balance sheet that includes
the marital assets, with the total estate typically being apportioned in some configuration which results in an equal net
division.
There is some precedent for holding a spouse solely responsible for debts incurred secretly, without the other party's
knowledge or consent.20 In practice, the mere fact that the other spouse didn't know about a debt is probably
not going to be enough to keep it from being regarded as a marital debt. It is fairly common for one spouse or the other
to be more in charge of household finances. A stronger argument is made when the reason the other spouse didn't know
about it is because the spouse incurring the debt deliberately kept it secret, but even in that case, if the purpose
of the debt was to put food on the table, clothes on the children, or any other legitimate marital expense,
it will likely be treated as a marital debt.
It is sometimes asked whether a debt may be assigned solely to the spouse who incurred it, based on what the debt was for.
Again, in theory, this is entirely relevant. In practice, about the only debts I can envision the Court reliably treating
as separate are debts incurred for:
- Gambling
- Illegal Drugs
- Liaisons with Paramour
In certain cases, one might have success arguing for separate treatment of student loans, given that the party on whose behalf
they were incurred is the one who is receiving the educational benefit. Usually, however, these too will be treated as marital
debts if incurred during marriage.
Final Tip - Close Joint Accounts
Unless you have a great deal of trust remaining in your relationship, it is wise at the time of separation or imminent
dissolution to take your share of the funds in any marital accounts and put them in a separate account in your own name,
to protect them from depletion. Likewise, cancel all credit cards which your spouse has authority to use, to prevent any
running-up of debt. I see it happen all the time.
Footnotes:
1 Minnesota Statute section 518.54, Subdivision 5
2 Minnesota Statute section 518.58, Subdivision 1.
3 Minnesota Statute section 518.54, Subdivision 5.
4 Minnesota Statute section 518.58, Subdivision 2.
5 Minnesota Statute section 518.54, Subdivision 5
6Minnesota Statute section 518.54, Subdivision 5(c).
7Gottsacker v. Gottsacker, 664 N.W.2d 848, 854 (Minn. 2003).
8Campion v. Campion, 385 N.W.2d 1 (Minn.Ct.App. 1986).
9 Nardini v. Nardini, 414 N.W.2d 184 (Minn. 1987).
10 Swick v. Swick, 467 N.W.2d 328 (Minn.Ct.App. 1991).
11Swick v. Swick, 467 N.W.2d 328 (Minn.Ct.App. 1991).
12See Gottsacker v. Gottsacker, 664 N.W.2d 848, 854 (Minn. 2003) (use of marital funds to pay taxes on undistributed Subchapter S corporate income did not create a marital interest).
13Schmitz v. Schmitz, 309 N.W.2d 748 (Minn. 1981).
14Antone v. Antone, 645 N.W.2d 96 (Minn. 2002).
15 Minnesota Statute section 518.58, Subdivision 1
16 Id.
17Minnesota Statute section 518.54, Subdivision 5(a).
18Linderman v. Linderman, 364 N.W.2d 872, 877 (Minn.Ct.App. 1985) [engagement ring and wedding band are recipients' pre-marital property per 518.54, Subd. 5(b)(1984)].
19Servin v. Servin, 345 N.W.2d 754 (Minn. 1984).
20See Dahlberg v. Dahlberg, 358 N.W.2d 76 (Minn.Ct.App. 1984) (entire marital debt apportioned to husband because he incurred most of it without consulting Wife); and Bliss v. Bliss, 493 N.W.2d 583 (Minn.Ct.App. 1992) (certain debts apportioned solely to wife, where wife failed to disclose the purpose of the debts).
ABOUT THE AUTHOR
Eric C. Nelson has devoted his practice exclusively to family law, with particular focus on divorce
and child custody matters, including, but not limited to post-decree modification of custody.
Eric has successfully handled hundreds of cases of divorces (both contested and uncontested),
child custody, child support, spousal maintenance, parenting time, out-of-state moves, domestic abuse,
harassment, and other miscellaneous family law matters, both in and out of court.
Mr. Nelson has been praised by clients for a respectful attitude, promptness and honesty.
He can be contacted by phone at (612)321-9402 or or Visit Web Site
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