Separate vs. Marital Property

As you investigate the divorce process and talk to attorneys about how property is divided in a divorce case, you’ll likely hear about the various factors the court must consider in dividing the assets.  However, those factors generally only come into play where a case goes to trial and rarely will a court deviate too far afield from a 50/50 division.

But a 50/50 division of what?  The marital estate, of course.  And therein lies the problem in most cases…determining what assets are marital and what assets are non-marital (separate property).  This is an extremely important distinction, because, as one might imagine, marital assets are equitably divided in the divorce case, whereas separate assets are not except in very specific situations.

So how do we distinguish between these two types of assets?  Generally speaking, there are 3 ways in which an asset can be classified as “separate”.  They are:

• Pre-Marital Assets. As the description implies, these are assets one of the spouses owned prior to the date of marriage.  Most common examples of pre-marital assets are real estate, retirement accounts, and personal property.  Usually, some evidence that the asset was owned prior to the marriage and some indication of its value at the time of marriage is helpful to establishing the asset as separate.  This is fairly simple when dealing with a retirement or investment account for which we can obtain a statement on or near the date of marriage.  Establishing value at the time of marriage can be more challenging when dealing with real estate, but this can often be overcome by looking at other information, such as tax records, appraisals done near the date of the marriage for refinancing purposes, comparable sales, etc.
• Inherited Assets. If either spouse received an inheritance, either before or during the marriage, that asset can normally be maintained as separate property and not divided during a divorce.  Of course, if the inheritance was received during the marriage, it may be necessary to demonstrate that the inheritance was to one spouse individually, rather than to both spouses.  Estate planning attorneys are usual quite careful to name only blood relations in wills or trusts to guard against a divorce situation, but in poorly drafted estate plans or in cases of very long-term marriages, the inheritance may be joint.
• Gifted Assets. This would include gifts from your spouse or anyone else to one spouse alone.  It’s most commonly limited to personal property, such as jewelry or collectibles, but could include other forms of property, including cash or real estate.  These can be more difficult to prove if contested because there are rarely any documents to verify the gift, especially Christmas, birthday or Valentine’s Day gifts.  Other gifts, such as annual tax-free gifts made for estate planning purposes will typically have some evidence.  Wedding gifts are usually presumed to be joint and, yes . . . engagement and wedding rings are usually viewed as gifts in divorce cases and, therefore, the separate property of each spouse.

Once it’s been determined what assets are separate, the burden now shifts to the other spouse to determine if there are any exceptions to the general rule that those assets should remain the separate assets of the spouse claiming them as his or hers.  The most common way in which a claim of separate property can be defeated is to prove that, although the asset may have started out as separate, the asset has been significantly commingled with marital assets that it has lost it separate property character altogether.

Consider an investment account owned by one spouse prior to the marriage.  Over many years of marriage, the spouse uses joint money to increase the value of the account and ultimately the parties combine that account into a joint investment account, which they use for home improvements, family vacations, and debt repayment.  The argument that the original investment account value should be separate property becomes murkier and murkier the longer the marriage and the more the spouses do to treat it as marital rather than separate property.

Compare this with a wife who owned a home prior to the marriage.  Upon getting married the couple purchases a new home and the wife rents her pre-marital home, using the rental income to pay all mortgage payments, insurance, taxes and upkeep.  She keeps the pre-marital home in her own name (or an LLC in her own name at the advice of her wise attorney).  This is strong evidence that it was the parties’ intent to keep that pre-marital home as the wife’s separate property and little or none of the marital money earned by the spouses during their marriage was put into the home.  Absent any other special circumstances, this pre-marital home should remain the wife’s separate property in divorce.

A Note on Active vs. Passive Appreciation

Retirement accounts such as 401(k)’s and IRA’s are usually much easier to identify and keep separate in a divorce.  However, it’s important to note that the growth in these types of accounts can be treated as marital if the growth is attributable to marital money (such as the account holder’s earnings).  The key question is whether the growth occurred as a result of the account holder’s actions (i.e., contributions and management) or was the growth the result of mere passive growth (i.e., interest and market gains).

Therefore, if a husband owned a 401(k) worth $50,000 at the time of the marriage and that 401(k) is worth $100,000 at the time of divorce (and assuming the husband contributed to this account from his earnings during the marriage), the original $50,000 would usually be viewed as his separate property and the remaining $50,000 is treated as marital property, subject to division in the divorce.  So if the marital property is divided equally, the $50,000 in 401(k) growth during the marriage would be divided $25,000 to each spouse, resulting in the husband receiving $75,000 ($50,000 being his pre-marital portion + $25,000 representing one-half the marital portion) and the wife would receive $25,000 (one-half the marital portion).

On the other hand, if the husband owned an IRA worth $50,000 at the time of the marriage and that same account is worth $65,000 at the time of the divorce, with the increase in value being the result of interest and market gains, not due to the husband’s contributions toward the account, this would likely be viewed as mere passive appreciation.  In that event, the entire account, including both the original pre-marital amount and the growth during the marriage, should be viewed as his separate property and not divided in the divorce.

Conclusion

Property division often seems like the easiest issue in a divorce until more careful examination reveals more complexities, such as separate property claims, valuation issues, and more.  Remember, every case presents a unique situation and may call into play different aspects of the law and affect property division.

For a comprehensive analysis of your situation, please contact us at please call us at (248) 290-0515 or visit us at www.chryssikoslaw.com