Now we have reached the part of divorce where you and your spouse divide the things you own and the things you owe between the two of you. Property includes assets as well as liabilities, real estate, and personal property, both tangible and intangible. Property can include houses, bank accounts, stock, pensions, businesses, automobiles, and country club memberships. If you have done your homework, you have a list of everything already prepared and a notebook with tabs and supporting documents. If not, now is the time to do an inventory.
If you are not able to complete an inventory because of an uncooperative spouse, you can use the discovery rules of court to obtain information and documents from your spouse and banks, employers, pension plan administrators, and other financial institutions. Of course, this is more difficult, time consuming, and expensive than exchanging financial information and documents voluntarily.
More than nine out of ten divorce cases settle before trial. Most people are able to divide their property and debt themselves. But in order to reach a settlement, or if you are involved in that one in ten that doesn’t settle, you need to know a little about the alternative, which is trial where a judge will make decisions about your property and debt.
Distributing Property and Debt
States have different ways to distribute property and debt—community property and equitable distribution.
Community Property
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and Puerto Rico are community property jurisdictions. In Alaska, you can opt into a community property arrangement if you want. Even though they share a common system, the community property laws are different in each state.
In general, property acquired during the marriage is split equally. Property owned before the marriage is the separate property of the spouse who owned it. Gifts, inheritances, and property acquired after separation are also separate property. Whether the income of separate property is community or separate depends on which state you are in. A local lawyer can fill you in on the nuances of state law.
The theory behind the community property system is that because both spouses contributed to the marriage equally, each spouse has an interest in the property acquired during the marriage.
Property acquired during the marriage, except for inheritances and gifts, is community property owned by both parties jointly. It will be divided equally in the event of a divorce. There is a presumption of joint ownership unless there is specific evidence proving otherwise. Property owned by a spouse before the marriage is separate property and it stays with the spouse who owned it.
What Is Community Property?
All the earnings of both spouses during the marriage and everything acquired with those earnings is community property. Likewise, any debts incurred during the marriage are community debts.
What Is Not Community Property?
Separate property is property that the court will not divide in a divorce. After the divorce, it remains the property of the spouse who owned it. Gifts and inheritances, personal injury awards, and parts of pensions acquired before the marriage are separate property. Assets acquired with separate property are separate property. A business started prior to the marriage is separate property. However, if the business increased in value during the marriage due to the efforts of one or both spouses, a part of it may become community property.
If you or your spouse have acquired property with a combination of separate funds and community funds, the property will be part community property and part separate property.
If you mixed separate property with community property, the result may be that it becomes all community property.
Community Property Distribution
The court may divide items by splitting them or by the value of the items. In some states, the court must divide community property equally. In others, the judge has more discretion to divide community property unequally.
California requires a strict 50/50 division of community property by statute, so most disputes are over whether an item should be classified as community property or separate property. This is not an insignificant question. In the McCourt divorce in 2011, a prenuptial agreement was voided, and the dispute became whether or not the Los Angeles Dodgers baseball team was community property or not. The issue was settled before trial for around $130 million.
All of the other states and the District of Columbia use equitable distribution of marital property. Marital property is that which is acquired during the marriage. It does not include separate gifts, inheritances, and property made marital property by subsequent agreement. It may or may not include property acquired after separation, depending upon the laws of the jurisdiction. Equitable does not mean equal in this context. It means fair. Fair to whom? Why, the judge, of course.
In some states, the judge can use separate property to make the division equitable. In others, the judge cannot transfer title to property and uses a marital award to adjust the equities in the property division, ordering one party to pay the other a dollar amount. Again, consult a local divorce attorney for the lowdown on your state.
In most equitable property jurisdictions, the legislature has given the judge a set of factors to consider in deciding whether a property distribution is equitable or not. The factors are vague enough to give the judge considerable leeway in making a decision.
Here’s how it works if you take your case to trial:
- The court first identifies all the property owned by the parties, together or separately.
- The court then values the property.
- Then, the court decides which property is marital and which is not.
- Next, the court distributes the marital property. The nonmarital property stays with the person who owns it.
What Is Marital Property?
In equitable distribution jurisdictions, marital property means most property that is acquired during the marriage. Legal title doesn’t matter. If one spouse buys a car, starts a business, or opens a bank account during the marriage, it is marital property. It doesn’t matter whose name is on the title or account.
What Is Nonmarital Property?
Property that you owned before the marriage is nonmarital, or separate, property. Nonmarital property also includes property acquired outside the marriage, like an inheritance or gift from someone other than your spouse.
Tip You will probably be able to keep any property you brought into the marriage or acquired by inheritance or gift from a third party.
Changing Property Classification
You can change marital property into nonmarital property, and vice versa, by a written and signed agreement. You can also do it unintentionally. If you have a bank or stock account that is your separate, nonmarital property, and you have put it into joint names with your spouse, you may have converted that non-marital bank or stock account into marital property. Or you may deposit non-marital funds into a joint account, or deposit marital funds into your non-marital separate accounts. This can mingle marital and nonmarital funds to such an extent that you can no longer tell which part is marital and what part is nonmarital.
Tip Make sure you don’t change separate property into marital property inadvertently.
Part Marital and Part Nonmarital Property
It is possible for something to be part marital and part nonmarital property. Pensions are a good example. If you had a pension plan when you entered the marriage and you made contributions to it during the marriage, it is part nonmarital and part marital.
Earnings and Appreciation on Nonmarital Property
The passive earnings and appreciation on nonmarital property, such as the dividends and the increase in value of IBM stock for example, are also nonmarital property. However, if you and your spouse both actively managed your stock portfolio, it may be argued that the income and appreciation are a result of marital efforts and therefore a portion of the earnings and appreciation should be marital.
Another example is a house that was owned by one spouse prior to the marriage. After the marriage, that spouse used his income to pay the mortgage, maintain the house, and make repairs. In a divorce, does the other spouse have any claim to the proceeds if the house is sold? The payments made to pay the mortgage were from marital funds. The same is true for repairs and maintenance. Therefore, it is considered that both spouses should share in that portion of appreciation resulting from these payments.
A similar situation can arise in the case of a business owned before the marriage that grew during the marriage. The difference in the value of business at the date of marriage and at the end of the marriage may be marital if the efforts of either party were responsible for that appreciation.
Date of Valuation
The date of valuation is important. It is the date the court identifies and values the property owned by the parties. The court can only value the property that is still there. In other words, if your spouse spent $10,000 on a vacation, that money is gone and not part of the assets on the valuation date.
Some states use the date of trial. Others use the date of separation. That can make a big difference in the results of your divorce. If you make pension plan contributions during your separation or deposit money in your bank account, it will be marital property or separate property according to the date of valuation in your state.
Tip Find out the date of valuation in your state. It can make a big difference in property division and planning.
Debt
Debt can be distributed by a divorce court, just like property. Some courts will only distribute debt that is used to acquire a marital asset, like a mortgage for a house or a car loan for an automobile.
No matter what the court orders, it only has jurisdiction over the debtors, not the creditors. So if you have debt in joint names, like a credit card, the creditor can still sue both of you, even if the court orders only one of you to pay it. It’s better to pay off the debts at the time of divorce if you are financially able to do so.
One of the biggest joint debts is usually the mortgage on the marital residence. If you sell the house for more than the mortgage, the liability goes away. But if one spouse gets the house, the other may have to stay on the mortgage until the house is refinanced or sold some time in the future. This is called a contingent liability, and it may make it difficult for the spouse that doesn’t live in the marital residence to purchase a new house.
Equitable Distribution Factors
Some courts use what’s called a marital award to adjust the balance after distributing the marital property if it is not distributed equally. A marital award can be in the form of a judgment. However, the spouse who obtains a judgment must take additional legal actions to collect the award.
In determining a marital award, the court will look to certain factors, including duration of the marriage; the age, health, skills, and abilities of the parties; the separate property owned by each party; the ability of the parties to acquire future property; the financial needs and debts of the parties; taxes; and contributions (both monetary and nonmonetary) to the marriage. Fault, such as adultery or cruelty, can play a role as well, even in no-fault jurisdictions. But a lot of litigants spend 90 percent of their time on fault and 10 percent on the finances. Judges usually see it the other way around.
Note Most parties in a divorce are way more interested in establishing fault than dividing assets and debt equitably. Judges are far more interested in the latter.
Case Study
The divorce lawyer's office is quiet, dark, and wood paneled with burgundy leather chairs. There are bottles of water, sparkling glasses, and ice cubes on a tray in the side cabinet of the refrigerator. There is not a speck of dust anywhere. The lawyer asks Joe Green what his contributions were to the marriage as well as his wife’s.
“I worked 70–80 hours a week to support the family,” said Joe. “I was a good provider. I gave up all my time so my family could have a nice house in a good neighborhood. I did everything. My wife? My wife did nothing. She stayed at home the whole time.”
As chance would have it, across town, Joe’s wife, Ida Green, is meeting with her lawyer, whose office is all chrome and glass.
When they get to the same question, Ida says, “I took care of the house, the laundry, the meals, and the cleaning. I raised two kids, took care of them when they were sick, bandaged their scrapes, ferried them back and forth from sports events and after-school activities and programs, bathed them, put them to bed, and helped them with their homework. My husband? He did nothing. He just worked all the time and he was never home.”
Monetary and nonmonetary contributions to the marriage are both factors in the equitable division of property, and a judge will rule accordingly.
Note Fault can be a factor in property division even in no fault states.
Who Gets Rover?
People can get very attached to their pets. There have been fights in court over pets that have run up legal fees many times the cost of the pet. When couples have children, it makes sense to let the pets stay with the parent who has primary physical custody of the children. When couples have no children or grown children, the judge might look at who purchased the pet and who cares for the pet. One judge had the parties bring the dog to court. Then he had them both call for the dog to come to them. He awarded the dog to the party that the dog approached first. But, in general, the law views pets as personal property, like a chair or a sofa. The court will decide who gets the chair and will not give the other party visitation.
Marital Dissipation
If a spouse gambled away marital funds to avoid distribution in a divorce, the court may penalize that spouse by giving more of the property to the other spouse. The same is true if a spouse spends the money on gifts, dinners, vacations, and so forth with a paramour.
Hiding Assets
Don’t try hiding assets. There is usually a paper trail that will lead to them. It is bad idea, and if you are caught, you will be worse off than if you just bite the bullet and divide the assets with your spouse. The judge will not believe anything you say after that and will likely assess attorney fees against you.
When it comes to assets, don’t take your spouse’s word for it in a divorce. You need to see the statements. And if you suspect your spouse may be hiding assets, the following list contains the best place to look for them. You can obtain these documents by discovery in the litigation if you do not have them or your spouse will not give them to you voluntarily.
- Interest income and stock dividends: These earnings are reported on tax returns. You may be able to identify secret accounts in this way.
- Business investments, partnerships, trusts, and real estate holdings: These financial assets are all reported on an income tax return as well.
- Bank account statements: Review these statements to see if there are any accounts you did not know about during the marriage.
- Savings account statements: Check these statements for unusual deposits or withdrawals.
- Copies of canceled checks: Canceled checks can also show investments and amounts written to cash.
- Loan applications: Applications for loans contain a balance sheet where a person lists all of her assets and provides a value for each.
- Real estate: Check the courthouse and the county tax assessor’s office for real estate owned by your spouse. Some jurisdictions allow you to access this information online.
- Stock options, retirement funds, and salaries: If your spouse works for a publicly traded company or an organization like the county school system, the federal government, or the World Bank, you can find a lot of information online about many of these types of benefits.
Use the rules of court discovery to find out whether your spouse has prepaid his expenses, like taxes, only to seek a refund after divorce; deferred his income, like bonuses or raises; or loaned money to a relative or a friend to hold until the divorce is over.
Tip If your spouse works for a publicly listed company, you can find a description of her benefits online.
Summary
Now you know how property and debt is divided in equitable distribution and community property states. I have explained the difference between marital property and nonmarital property and the difference between community property and noncommunity property. You have some tips on how to find hidden assets. Next, we will be looking at particular assets, starting with the marital residence.