When a couple decides to divorce, all of the property acquired during the marriage, and even some of the property acquired before the marriage, will be divided up. This can be a significant and stressful part of the divorce process. As a result, in recent years more and more couples have decided to establish property division agreements before the marriage begins, in a prenuptial agreement. Others negotiate the division of property as part of a marital settlement agreement reached by the parties during the divorce proceedings.
If the parties are unable to make an arrangement together, the courts will divide the property for them. Laws governing property division vary by state and can be quite complex. Whether you are contemplating marriage or divorce, it is a good idea to consult a family law attorney to make sure your rights are protected.
Step 1: Identify Assets and Liabilities
The first requirement for division of property is a full and complete list of the parties' assets and liabilities, including:
- Real property, which may include business, vacation, or rental property and undeveloped land
- Personal property such as jewelry, furniture, artwork, antiques and collections
- Business assets, which may include professional degrees, practices and partnerships
- Financial assets, including cash, bank accounts, CDs, cash value of life insurance policies, and profit sharing plans
- Debts such as mortgages, credit cards and loans
It is not uncommon for a spouse to accidentally or intentionally withhold financial information. An example of this would be if an owner of a closely held business manipulated company expenses and income to "hide" assets. A spouse may also "waste" assets, examples of which may include excessive withdrawals from bank accounts or running up large credit card bills. An attorney can help ensure all property is accounted for, if necessary hiring an investigator or forensic accountant to help perform asset tracing.
Step 2: Classify All Property
Once the list is complete, the court will begin classifying each item as either non-marital (also known as separate) or marital (also referred to as community) property.
Non-Marital Property. Most states leave non-marital assets and debts with their rightful owner after the marriage is over. Non-marital property is generally limited to property acquired prior to the marriage and kept separate during the marriage. For example, a pension that has vested prior to the marriage would be considered separate property.
There are only a few exceptions where property acquired during the marriage and kept separate during the marriage may be considered separate property:
- Property inherited during the marriage through a will or estate laws
- Gifts from a third party to one of the spouses (other than gifts from the other spouse)
- Property acquired using only separate funds of that spouse
- Property excluded by legal agreement between the parties
Marital Property. Marital property is generally all assets and debt acquired individually or jointly during the marriage. For example, wages earned during the marriage are considered marital funds. Besides wages, common marital property includes:
- Family owned business
- Pensions earned during the marriage
- Life insurance, 401(k) plans, annuities and other financial instruments
Keep in mind that even if property is placed in the name of only one spouse it may be considered marital property. To be sure, a title can be used as evidence of intent to own (and may influence how the marital assets are distributed) but it is not the only factor considered in determining whether property is separate or marital.
Importantly, there are times where a non-marital asset may "transmute," or change, into a marital asset, either in whole or in part:
- If marital and non-marital assets are co-mingled. For example, if one spouse deposits paychecks earned during the marriage into a non-marital bank account, the bank account may in whole or in part become marital property.
- When there is a substantial change in value. For example, if a business that was acquired by one spouse prior to the marriage substantially increases in value, the increase in value or even the business itself may be considered marital property.
The decision on whether there has been a transmutation from separate property into marital property will depend on the degree to which the property has been kept separate and the laws of the state you are in. To learn more about property classification, you will need to speak with a divorce attorney familiar with the laws in your state.
Step 3: Distribute the Property
Marital property is divided equally in states that employ the community property theory. All other states follow the theory of equitable distribution, which means property is divided fairly but not necessarily equally. Marital debt such as mortgages, credit card bills, and loans acquired during the marriage are divided under the same rules that guide division of property in that state.
Community Property. Community property states believe marriage is a joint undertaking and each spouse contributes in different but equally valuable ways to the acquisition of the marital property. Accordingly, each spouse is usually awarded 50 percent of the marital assets. Each asset may be divided equally, or each spouse may receive different marital assets that in their totality have the same value.
Equitable Property. Equitable property states believe that marriage is again a joint undertaking and both parties contribute significantly though not necessarily equally to the acquisition of property. As such, these states divide property based upon what the court feels is just and fair under each circumstance.
In determining the percentage to allocate each spouse in an equitable property division, most states consider a variety of factors such as:
- Value of non-marital property
- Future earnings potential
- Who earned the property
- Homemaking and other supportive roles in the marriage
- Age and health of parties
- Duration of marriage
- The respective fault in demise of marriage
- The wasting of assets by either party during the marriage
When You Need an Attorney
Many issues settled in a divorce, including child support and spousal support, can be modified as needs change, but in the absence of subsequent evidence of fraud or duress, property division is final. Consult an attorney specializing in divorce and family law to protect your financial interests and avoid a settlement you'll regret for years to come.
Only nine states divide marital property 50/50 under the community property theory: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Most states consider lottery winnings marital property, even if the ticket was purchased after the couple separated but were not yet divorced.