Divorce And Property Division: The Complete Guide

During a divorce, the task of dividing up property and other assets can be a formidable and even contentious one for many couples. While arriving at an agreement without the need for anyone else to intervene is usually the ideal outcome for everyone involved, it can be very difficult for one person or the other to part with a cherished object or valuable asset, so every state has laws on the books governing how assets – and some debts – are to be split up. Regardless of the jurisdiction, separate property will remain in the possession of the spouse to whom it originally belonged, so differentiating separate property from marital property is a crucial part of the property division process that can have far-reaching implications when it comes to assets that share elements of both categories like businesses and affiliated proceeds.

Marital Versus Separate Property

Broadly speaking, marital property consists of items of value acquired during the marriage, whether purchased jointly or in one spouse’s name with proceeds in a shared bank account, that will be divided during the divorce either in accordance with the terms of a prenuptial or postnuptial agreement or by the court as determined by the laws of the state in which the divorce is taking place. Examples of common marital property include:

  • Income acquired by either spouse during the marriage from wages, pension plans, stocks, bonuses, commissions, brokerage accounts, tax refunds and real estate
  • Real property such as the marital home and any rental properties purchased during the marriage as well as mortgages
  • Items of value purchased during the marriage, such as cars, boats, antiques, artworks, furniture and collections of items
  • Income from interest accrued on business investments
  • Gifts made to one spouse by the other

Retirement and pension plans like IRAs and 401(k) plans are also commonly considered marital property since they are funded by income accrued during the marriage. In addition, should any marital assets appreciate, the increase in value itself could be considered subject to division since courts value marital property in accordance with its fair market value at the time of the divorce as opposed to its original value.

While the definition of what constitutes separate property can vary depending on whether a state applies community property or equitable distribution rules, the following are by and large considered separate regardless of jurisdiction:

  • Gifts furnished to one spouse from a third party
  • Inheritances, including funds, real property and items like cars or computers, in most circumstances
  • Property owned by either spouse prior to the marriage and kept separate during it

It is important to note that, in community property states, some items that may intuitively seem to be separate are actually legally considered marital property and will thus be subject to division. For example, if one spouse bought a vehicle with his or her own wages and titled it in his or her own name, it would still likely be deemed community property in a jurisdiction observing community property rules. The reasoning behind this is similar to the reason why retirement accounts are considered marital property; since the item was purchased with community property income, it is thus jointly owned. In equitable distribution states, on the other hand, a title bearing only one spouse’s name could be considered sufficient evidence to prove that the vehicle is separate rather than marital property.

Equal Distribution vs. Equitable Distribution

After gaining a firm understanding of what constitutes marital property and separate property, it is important to know the laws on the books determining property division in the state in which the divorce is taking place. In nine states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin – as well as the Commonwealth of Puerto Rico, most marital property amassed during a marriage is treated as “community” property – that is, it belongs to both spouses equally and should generally be divided as such. In Alaska, couples can choose to sign an agreement that designates certain marital assets as community property. Community property, including debts, each spouse’s income and shared property, is usually divided evenly while separate property continues to be retained by its legal owner.

Some community property states recognize quasi-community property, which falls in a bit of a gray area between community and separate property. Such property may start out as separate but become marital property because of commingling of funds or other circumstances. For example, if one spouse inherits a classic car at the beginning of the marriage, it is initially classified as separate property. However, if one or both spouses use income accrued during the marriage to restore the vehicle to increase its resale value, the car and its increase in value are both likely to be declared community property by the courts in the event of a divorce. In general, property purchased or maintained with commingled funds will be defined as community property unless the spouse who originally purchased or inherited it makes sure to keep it separate, whether by using inherited funds to maintain it or storing it, for example, for the duration of the marriage.

All other jurisdictions in the U.S. apply some variation of equitable distribution laws to the division of property in a divorce. While an “equitable” divorce settlement may sound like a positive outcome for both spouses, this is not always the case; since deciding what constitutes a “fair” division of marital property is at the court’s discretion and hinges on several factors, it is possible for one spouse to walk away with a greater share of the marital goods. More often than not, however, an equitable distribution will turn out to be equal if both spouses are forthcoming about their assets and had legally binding prenuptial or postnuptial agreements in place governing who gets what in the event of a divorce. Equitable distribution states take a more lenient stance on separate property – in most cases, a valid title or other such document recognizing one spouse as the legal owner of the property is sufficient evidence of legal ownership, and items bought with one spouse’s funds typically belong to that spouse where a community property state would declare it jointly owned.

When determining an equitable division of marital property, courts may consider the following factors:

  • Whether one spouse has been granted primary physical custody of the minor children of the marriage
  • Income or earning power disparity between the two spouses; a significant age gap between the two could influence earning power as well
  • Health conditions that either spouse may have that may affect how the property is divided
  • The size of the marital estate
  • Whether one spouse is expected to come into a substantial inheritance
  • The total value of each spouse’s separate property
  • Anticipated financial needs and liabilities for each spouse
  • The liquidity – that is, how easily an asset could be sold in the market without affecting its price – of the marital property
  • The degree to which each spouse contributed to the acquisition of marital assets as well as to the other spouse’s earning power
  • Spousal maintenance obligations
  • Any prenuptial or postnuptial agreements that may be in place
  • Whether fault-based grounds for the divorce are present, such as domestic or child abuse
  • The length of the marriage

An uneven distribution of marital assets is most likely in cases in which extenuating circumstances like abuse were present or there is a large disparity in earning power or income present between the spouses. If one spouse is found to have concealed or fraudulently transferred assets, he or she may be awarded a smaller percentage of the marital property.

It’s important to note that, in community property and equitable distribution states alike, an asset that would normally be considered separate can be reclassified as marital property if it is retitled in the other spouse’s name or the other spouse is added to the title as a co-owner. This can also happen in any situation where a separate asset is commingled with a shared one, such as if an inheritance is deposited in a joint savings account or both spouses contribute payments toward the mortgage on a property originally belonging to one spouse.

Active Versus Passive Appreciation

As aforementioned, some states will consider an asset’s increase in value to be marital property itself. There are, however, two distinct types of appreciation; in some states, the type of appreciation that has occurred can influence whether or not it is considered marital or separate property.

Active appreciation

Occurs when the asset increases in value on account of the direct or indirect influence of the other spouse. For instance, if one spouse enters the marriage with a fresh business venture and the other spouse offers advice that helped grow the business and draw in more clients, that spouse’s guidance caused the business to appreciate actively. Even if the other spouse does not directly influence the business’s growth positively but takes on domestic tasks so that the spouse running the business could dedicate himself or herself to the well-being of the business, the other spouse’s actions still caused active appreciation.

Passive appreciation

Occurs when outside forces have a direct bearing on the asset’s worth. Market forces such as supply and demand could contribute to a business’s growth, for instance, while a new development near a property could cause it to appreciate in value. In cases where appreciation is deemed passive in nature, that appreciation could be declared a separate asset. However, if passive appreciation occurred but commingled funds were invested in the asset, the other spouse might be able to argue that the appreciation should be considered shared and divided accordingly; such a ruling could depend on the jurisdiction.

While the rules governing property division during divorce proceedings can be quite complicated depending on the assets at hand and the jurisdiction, it’s important to note that all of these rules can be bypassed if a couple creates a legally binding agreement in advance or at the beginning of the divorce that declares which assets are to be considered separate and lays out a plan for disposing of marital property. A state’s property division protocol only kicks in when such an agreement is absent and the spouses disagree or certain key assets are omitted. In either situation, robust legal counsel can help clarify the implications of retaining certain assets and potentially help the spouses come to an agreement of their own.

Dividing Debt During Divorce

As a part of a divorce judgment, a family court usually tries to divide debts and assets as fairly and equitably as possible. Sometimes, this means splitting everything right down the middle. Other times, one spouse may receive more property to make up for being saddled with more debt. Of course, a prenuptial agreement can have a major impact on how the matter unfolds too.

Community Property States versus Equitable Distribution States

The way in which debts are divided during a divorce largely depends on the laws of the state in which the divorce is taking place. In community property states, for instance, both spouses are responsible for all marital debts regardless of whether their names are on them or not. In equitable distribution states, on the other hand, each spouse is only responsible for debts on which his or her name is listed.

How Debts are Divided During a Divorce

During a divorce, debt division may be handled in a number of different ways. A few examples include:

  • By Income – The court may decide to assign more debt to the person with the higher income or who is more capable of paying down the debt.
  • By Who Benefits from the Debt – Sometimes, debts are divvied up based on who benefits from the source of them. For instance, the spouse who stays in the marital home will most likely assume the mortgage because he or she is directly benefiting from that debt. Similarly, the spouse who is the primary driver of a vehicle that still has a loan will most likely be assigned responsibility for that loan.
  • By Who Brought which Debt into the Marriage – This option doesn’t apply in community property states, in which all debts are considered to belong to both spouses.

Common Types of Debt

Many different types of debt can accumulate during the course of a marriage. During a divorce, the court must determine how they will be divided. Some common examples of debts that are acquired during a marriage include:

Credit card debt
Mortgages
Car loans and leases
Child support and/or spousal support arrearages
Taxes owed
Renovation loans
Student loans
Unpaid fines and tickets
Past-due utility bills, cellphone bills and similar debts
Personal loans from relatives
Consumer loans

It is generally easier for courts to divide secured debt, or debt that’s backed up by a tangible asset like a car or house, than unsecured debt, which includes credit card debt. In the case of secured debt, the spouse who benefits from the underlying asset is typically assigned the associated debt. With unsecured debt, courts usually divide things up based on each spouse’s ability to pay.

What if One Spouse Doesn’t Pay?

Dividing up debt during a divorce is one thing; actually paying it as agreed is another. Even if both spouses have good intentions, one may be unable or unwilling to hold up his or her end of the agreement. This can wreak havoc on the other ex-spouse’s credit rating because creditors may come after him or her for the money. In that case, the court can be petitioned to enforce the agreement. If the other spouse still fails to do so, he or she may face fines or jail time.

Division of Debt and Credit Ratings

After the dust has settled following a divorce, many ex-spouses are left with terrible credit ratings. Even if the debt is divided as equitably as possible, lenders don’t recognize divorce decrees. Debts that aren’t paid as agreed can continue to haunt ex-spouses long after a marriage ends. Not surprisingly, many divorced couples end up filing for bankruptcy.

Paying Off Debt Prior to Divorce

The best way to handle debt when splitting up is by paying it off before filing for divorce. This allows both spouses to make a truly clean break, and neither has to worried about the other’s actions coming back to haunt them in the future.

Who Gets the House In A Divorce?

In most marriages, the house is the largest asset, and the associated mortgage is the largest debt. Determining who gets to keep the house and figuring out how the debt from the house will be handled are often pivotal issues during a divorce.

What if One Spouse Owned the House Prior to Marriage?

Sometimes, one spouse already owned the house that became the marital home. In most cases, the house is then considered to be outside of the marital assets, and the spouse who originally owned it gets to keep it. However, if the other spouse contributed anything that increased the value of the home, such as remodeling funds, or helped to pay down the mortgage, he or she is usually entitled to compensation from the other spouse. The compensation is typically outlined in the divorce judgment or decree.

Occupancy Issues when a House is Joint Marital Property

If a house is deemed to be joint marital property, one spouse cannot force the other to leave without an order from the court. Once an order of exclusive occupancy has been issued, however, the locks can be changed, and the other spouse can be denied entry.

Options for Determining Who Gets the House

There are several options when it comes to handling the ownership of a house and the assignment of home loan debt during a divorce. A few of the most common examples include:

  • Co-Ownership – Sometimes, both spouses decide to keep the house in order to provide stability for the kids. Under this arrangement, both ex-spouses continue to be responsible for the mortgage until all children reach age 18. Even if kids aren’t in the picture, one spouse may want to stay but can’t afford to buy out the other, so a co-ownership agreement is made. This agreement is included in the divorce decree or judgment and outlines how costs related to taxes, maintenance, repairs and payments will be handled. Downsides to this arrangement include the fact that both people’s names continue to be on the mortgage, so the spouse who no longer lives in the home may struggle to obtain new credit. Sometimes, he or she can present the co-ownership agreement to the bank in order to qualify for credit.
  • One Spouse Keeps the Home and Refinances – If one spouse is to keep the house, he or she usually refinances the mortgage to remove the other person from the loan. The divorce judgment will mandate the date by which this must occur. If this condition is not met, the house may be sold.
  • The House is Sold – This is usually the fairest and easiest option, but a poor market can preclude it. The court usually dictates a timetable by which the house must be sold, and the ex-spouses must work together during the course of the sale and be in agreement along the way. The proceeds are then divided according to the terms of the divorce.
  • One Spouse Buys Out the Other – This can be handled through refinancing, or one spouse can give up claims to other marital property in order to stay in the home and effectively pay the other spouse for his or her share of the home’s fair market value.
  • One Spouse Assumes the Mortgage – Loan assumption is exceedingly rare, but some lenders will allow one spouse to assume the home loan and remove the other of all obligation.

In almost all of the above scenarios, the fair market value of the home needs to be determined. If it’s to be sold, an appraisal will occur as a matter of course. If one spouse is buying out the other, assuming the loan or will continue to co-own the home, however, a special appraisal may need to be ordered. Sometimes, a family court judge must determine a fair value if the ex-spouses can’t come to an agreement.

Important Assets to Protect in a Divorce

Splitting the value of tangibles like cars and furnishings is a fairly straightforward matter. However, many of the most important assets of a marriage, such as pensions, financial accounts and business interests, are intangible. Careful consideration and good counsel ensure that each party receives fair compensation for such assets.

Retirement Accounts

Accounts that grow throughout a person’s years of employment include 401(k)s and company pensions. Because such accounts are potentially like money in the bank, most courts consider them to be marital assets, even though they may not be fully funded or fully accessible for many years.

If the judge rules that all of the accrued interest in a retirement account should be transferred to one spouse, simply changing the name on the account may be the only action required. When the parties must divide a retirement fund, the process is more complicated. Although early withdrawal from IRA accounts and retirement funds such as 401(k)s typically triggers a tax payment, division of property in a divorce is a special situation.

As long as a specific order for the division of a retirement account is on the record, the parties can transfer the designated sum or percentage of funds from one account into another without the assessment of taxes or penalties. The account holder should directly communicate to the financial institution that dividing the IRA is a transfer incident to divorce.

Divorcing spouses with pension plans should request a qualified domestic relations order (QDRO) from the court. This legal document outlines the judge’s division order and facilitates the process while bypassing taxes and fees.

Financial Accounts

Financial accounts include such deferred employer compensation as stock options and restricted stocks. Stock options give the recipient the opportunity to invest in company shares during a set time period for a lower than average price. This could translate to instant earnings if the stock’s market price is much higher. The court determines the value of unexercised stock options and decides upon an equitable division.

The court handles restricted stock holdings in a similar manner. This type of compensation is a payment or bonus from employer to employee, but it comes with restrictions. For example, an employee might have to stay with the company for a specific time period before cashing in the stock.

An annuity is a financial investment account that yields either consistent or variable yearly payments to the investor. If variable, the payment total depends on the year’s interest earnings on the annuity portfolio. Annuities are tax-deferred until the owner withdraws funds from the account. The court can opt to divide an annuity into two separate accounts, one for each spouse.

Business Interests

A family-owned business is another marital asset to be divided. Determining the value of the enterprise, both at present and in the future, is likely to require a professional evaluation. If both spouses are equal partners in the business, one may opt to buy out the other. If only one party to the marriage works in the business, he or she must impart a portion of its value to the other but typically will retain proprietary control. If the business has the potential for rapid growth, a long-term payment schedule that adjusts according to the actual business income is a good option for the recipient.

Property with Special Meaning

Heirloom items and inherited property that a couple acquired during the marriage are included in their assets. For example, the couple’s wedding china may have been handed down through several generations on the wife’s side of the family. Although it technically qualifies as community property, the wife values it more than the husband. If possible, the parties should come to an agreement about who retains special items like this prior to going to court. Otherwise, the judge may order an equitable split.

Other Assets to Be Divided

Couples acquire plenty of possessions during their years of marriage, making the division of assets a complicated task. Some of the types of property they own jointly may include:

Intellectual property
Life insurance policies
IRS refunds
Retained earnings
Jointly issued loans
Collections and keepsakes
Rewards program points
Club memberships
Reciprocal gifts
Prize winnings
Pets
Burial arrangement plans

Intellectual Property

All copyrights, patents or trademarks that either spouse registered during the term of the marriage are part of their marital assets. Intellectual property includes current and future royalty earnings as well. Even if none of these items has generated much income at the time of the divorce, each has the potential to become more lucrative in the future.

Life Insurance Policies

Dealing with an existing life insurance policy is crucial in a divorce. Putting provisions in place that ensure continued coverage after the dissolution is often necessary. Increasing the coverage level to compensate for new child support and maintenance payments should the paying spouse die helps protect the economic future of family members. Alternatively, the parties can divide any cash value of an existing policy and each obtain their own coverage after the divorce.

Tax Refunds

Outstanding IRS refunds from jointly filed tax returns are marital assets. Any tax refunds due from other years of the marriage are joint assets too. The judge will include them in the property division order.

Retained Earnings

If the family business is a corporation, the controlling spouse may opt to reinvest some of the proceeds back into the enterprise rather than declare them as income. These retained earnings are assets to be divided.

Outstanding Loans

Any loans the couple made consensually while married should be counted as marital assets. Otherwise, only one party is likely to benefit when the borrower repays.

Collections

Collecting vintage or antique items that appreciate in value is both a labor of love and an investment strategy. Even if a collection is the exclusive passion of one spouse, items acquired during the marriage are joint assets. The same is true of sports memorabilia and keepsakes.

Rewards Program Points

Airline or credit card rewards programs can accrue significant value during a marriage. Free flights, seating upgrades and free merchandise are some of the rewards available, and dividing up these programs can be contentious. Some programs have rules that prevent point transfers of any type, so the court may assign a monetary value to the point total. Other rewards programs will put one-half of the total points into a separate account for each party.

Club Memberships

Whether the family has an athletic club membership or a grocery co-op membership, each has a value in terms of registration fees and membership dues already invested. Such memberships belong on the assets list.

Reciprocal Gifts

Any gifts given between spouses during the term of the marriage qualify as joint assets to be divided. Any premarital gifts, such as jewelry, are the property of the recipient.

Prize Winnings

If one or both spouses acquired any prize winnings while married, these are marital assets as well. Winnings include both merchandise, like a new car, and cash, such as a lottery jackpot. Even if one party bought the ticket a week before the divorce hearing and has not yet received the winnings, the spouse is entitled to half.

Burial Plots and Plans

Forward thinking couples who pre-purchase cemetery plots or funeral arrangements must divvy them up when divorcing. If they own adjoining plots, it may in their best interests for one spouse to buy the other out.

Pets

Many jurisdictions consider pets adopted during the marriage to be assets. Ideally, the couple will work out a compromise in advance of going to court. Otherwise, the judge must decide the issue of ownership.

Conclusion

Because the average couple acquires so many tangible and intangible assets during a marriage, it is critical that divorcing spouses make a complete list of their total assets prior to a property division agreement. Otherwise, they might discover later that they forgot to include something of value. Such a personal accounting makes the property division process as fair as possible. Those who are able to work together in dividing their assets are likely to be satisfied with the outcome. For those who cannot agree between themselves, a judge will make the final determination.

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