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Property Divisions and Non-Marital Assets
In any divorce case, there is usually a division of assets and a determination of each person’s responsibility for debts. Minnesota, like most states, is a "marital property" state. This means that any asset acquired and any debt incurred during the marriage is the asset or debt of both parties.
The Marital Estate
In a divorce, the parties divide up what is called the "Marital Estate." The marital estate includes any assets or debts that were acquired during the marriage. Each spouse is deemed to have an equal interest in marital assets or debts.
This true no matter how the property is titled or held and no matter which spouse’s job paid for the asset or which party incurred the debt. That means the marital estate includes a 401 K account or a credit card debt that is in your spouse’s name alone. In fact, marital property is inclusive and encompasses 401K plans, stock plans, stock options, real estate, frequent flier entitlements, bank account proceeds, couches, chairs, cars, utility debts, credit card debts and any other form of asset or liability.
Essentially, the law views marriage as a civil partnership with many of the characteristics of a business partnership. When you join a business general partnership, each partner has an equal interest in the ownership of the business and is exposed equally to the liabilities of the partnership. This is true even if one partner incurs the debt on behalf of the partnership or one partner performs all the work making the partnership a more valuable asset.
Where there are property disputes in divorce, Courts are not particularly fond of hearing those issues. This particularly true when the dispute involves assets that are primarily household furnishings. As a result, courts often render very unsatisfactory Orders related to the division of household furnishings. In fact, in one memorable case, the Judge gave one spouse half of the dining room table and half the chairs and the other spouse the other half. In the end, the judge stated, "if you don’t like what I did here, you will go out in the hall and find a better solution." This is certainly an aberration and not the norm. However, it does underscore the Court’s general dislike in dealing with property issues.
There are any number of ways to creatively divide household furnishings and personal property when disputes occur. In some cases, the parties may make a list and alternately choose an asset. In other cases, parties may bid on each item of property and the highest bidder both receives the asset and has that value credited to him or her as part of the property division. This may result in an payment from one spouse to the other to equalize the value of the assets received by each. In yet other cases, the one party may create two lists of assets and the second party then has first choice which list and assets he/she will receive.
Mediation is always a potential option for such divisions.
Certain assets may be excluded from the marital estate which means that they are not divided between the parties. These are called non-marital assets. Any non-marital assets that you possess remain yours and any non-marital assets of your spouse remain his assets. Under Minnesota Statutes Sec. 518.54, subd. 5 and existing case law, non-marital assets may include:
It is important to recognize that all assets are considered part of the marital estate unless proven otherwise by a "preponderance of the evidence." This places a significant burden on any person making a non-marital claim. It is essential that any and all documents including documents of title, receipts, or canceled checks that support your non-marital claims must be provided. Any failure to provide documentation may result in the division of the asset in the divorce.
Losting Non-Marital Value
Non-marital assets may have both a marital and non-marital value. In some cases, non-marital assets may lose their non-marital characteristic. This can occur in several ways:
Tracing Non-Marital Value
Non-marital assets may be "traced" into later acquired assets giving the party with the original non-marital interest a non-marital interest in the new asset. For example, if one spouse owned a vehicle before marriage and that vehicle is later traded in for a new vehicle during the marriage, that party may be able to trace a non-marital interest in the new vehicle. Tracing is really the process of establishing a sufficient paper trail to claim a non-marital interest in a subsequently purchased asset.
Real Estate and the Schmitz Formula
Tracing issues are often difficult and have led to numerous appellate court cases that still provide little guidance. One potential exception is an appellate court case from the early 1980’s which dealt with non-marital interests in real estate. From that case, Minnesota law has derived what has come to be known as the Schmitz formula.
The formula provides a simplistic model to help determine non-marital interests in real estate. Since real estate mortgages and other encumbrances against property are paid off over a significant period of time, marital interests may be created in real estate that was owned by one party before the marriage. As encumbrances are paid off during the marriage, a marital interest is created.
The formula states that the proper calculation of a non-marital interest may be derived by determining the ratio of equity to market value at the time of the marriage and then using that same fraction to determine non-marital interest at the time of divorce. For example, lets assume a spouse owns a home prior to marriage and that home has a value of $100,000 at the time of the marriage and that is encumbered by a mortgage of $75,000. The $25,000 equity (the difference between the value and the encumbrance) becomes the numerator in the Schmitz formula and the value of $100,000 becomes the denominator. As a result, the non-marital interest is 25% of the home’s value. If the home appreciates to $200,000, the spouse with the non-marital interest may claim the first $50,000 as the non-marital interest and any remaining equity would be divided as marital.
The limitations of this formula are obvious. First of all, it may be very difficult to determine with any degree of accuracy the value of real estate at the time of marriage unless an appraisal is done at that time. That value alone may become a contested issue that results in litigation and testimony of experts.
Second, In many instances, mortgages are refinanced after marriage, second mortgages and home equity loans may also be incurred. These new debts may erase or partially erase a non-marital interest.
Third, the formula does not consider the effect that capital improvements made during the marriage have on the real estate value. Capital improvements that are made during the marriage and which increase the value of the real estate may erode some of the non-marital interest represented by the Schmitz formula.
Often, presenting a persuasive property case depends on clear cut documentation, and expert testimony. It is important to consult with a lawyer regarding significant non-marital issues.
Marital property, which is all assets and debts acquired during the marriage, is divided equitably, in a manner the Minnesota court believes is fair. Separate property is not considered marital property, and it includes property acquired before marriage, gifts and inheritances. The increase in value in this property is also separate property.
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