March 11, 2014
In the event of a divorce, property that was acquired during the marriage or with marital funds is typically deemed “marital” and is equitably divided. However, there are certain exceptions for property that is considered “separate” or “non-marital” in nature. Separate (non-marital) property is defined as one of the following:
(1) Property that was acquired prior to the marriage.
(2) Property that was received through inheritance.
(3) Property that was acquired through a gift from someone other than the spouse.
(4) Compensation for personal injuries.
(5) Property acquired in exchange for or the increase in value of separate property (except to the extent that such appreciation is due in part to the contributions or efforts of the other spouse).
(6) Property deemed separate by written agreement between the spouses.
(7) Income from separate property not due to the efforts of either spouse (e.g. passive interest from separate bank account).
Often unwittingly, people will make decisions that can change the characterization of property. For example, if a spouse owned a home prior to the marriage, that would be considered non-marital property. But if the property appreciated over the course of the marriage, that increase in value can become marital in nature, particularly when looking at the efforts made by the other spouse, such as home improvements, renovations, and the like.
Property can also be deemed marital when there is a clear intent to share the property. For example, placing a spouse’s name on a property deed or opening a joint bank account can “transmute” property from separate to marital. Additionally, “commingled” accounts, where marital property is added and mixed in with separate property, can be considered marital property.
How would one make sure non-marital property maintains that status?
(1) Keep a very clear paper trail. Property acquired during the marriage is assumed to be marital, and the burden of proof is on the party claiming otherwise. Keep all records of separate property – such as deeds, inheritances, gifts, and the like. It is important to establish a clear time line as to when the property was acquired and under what terms. If the asset changes over time, keep these records (See #3 below).
(2) When possible, deposit and keep separate, non-marital property in a separate account. Be careful not to mix this with marital property – including regular pay checks. Keep in mind that if these funds are withdrawn and used for marital purposes (such as home remodeling or the purchase of a family vehicle), the property may lose its non-marital characterization.
(3) When exchanging one fund for another, keep all documentation. For example, if one spouse has funds in a separate savings account and decides to instead purchase stocks, that spouse must show that the stocks were acquired in exchange for the savings account to preserve the non-marital characterization. The best way to do this is through bank statements, purchase agreements, etc.
The Court may consider certain factors when making this determination, such as how closely the sales/purchase price matches, the timing of the sale/purchase, other sources of funds available to make the purchase, and the title on the purchased asset. The more clearly these facts are established, the better the chance of preserving the separate property characterization.
(4) Keep separate assets titled in your name only. Title is not necessarily determinative, particularly with regard to equitable distribution of marital assets. However, when non-marital assets are retitled jointly, or placed into a jointly-titled account, the Court may deem that there is intent to make the non-marital property a gift to the marriage (i.e. make the property marital).
(5) Have both spouses sign an agreement regarding the characterization of the property, such as prenuptial agreement or a separation agreement. It is recommended that both parties be represented by their own counsel for such important documents.