Problems with Classification, Division and Distribution

Problems with the classification of assets frequently arise when one party places his or her separate property in joint names, when one partner commingles separate property in an account that contains marital property, or in the case of a business, when one partner made active contributions to the growth of a business the other owned before the marriage.

In general, however, when separate and marital funds are commingled, regardless of which came first, the resulting mixture is presumptively marital. The partner who made the separate contributions can establish a claim to it by proving the nature and amount of the separate contribution.

Much, if not even most, separate property becomes commingled to one degree or another during the life of a marriage. "Married persons do not live their financial lives expecting that a divorce will occur," as one legal observer wrote.

Moreover, states treat the appreciation of assets, separate and marital, in different ways. Some states make a distinction between active and passive increases in income from separate property and active and passive appreciation in the value of separate property.

In general in all jurisdictions, and almost without exception, "[w]hen marital and separate funds are mixed together, regardless of whether the marital or separate contribution was made first, the entire mixture is presumptively marital property." One spouse must prove separate contributions to establish his or her interest in the presumptively marital property. However, courts have entertained arguments that suggest a weakening of the joint title presumption for interspousal gifts of both real and personal property, particularly in short marriages.

The classification of livestock illustrates the difficulties in defining separate and marital property. Livestock, unlike other assets, is self-replacing. A herd can be quite valuable and a large part of farm family's marital estate. A herd of cattle, when it is sufficiently large and properly tended, produces enough offspring to maintain it. Thus, in the Oregon Court of Appeals case, the court ruled that a herd of cattle owned by an individual as his separate property becomes marital property as the animals are replaced during the life of his marriage. In this, the courts have said that the animals of a herd, which are mortal, are not the same as the stocks in a mutual fund, which are not. Thus, for example, a mutual fund brought to the marriage and its income is separate property and remains separate. A herd, which replaces itself even as it creates the income from its milk production, becomes marital during its lifetime when its lifetime is coincidental with at least part of the length of the marriage.

On the other hand, the classification of employee bonuses is fairly straightforward. A bonus, which is payment in compensation above an employee's usual salary or wages, is marital property to the extent that it is earned during the marriage, and it is separate property to the extent that it is earned outside of the marriage. The date of receipt is not important. Thus, a bonus received after a couple has separated may, for example, still be marital property. Suppose Rufus, who parted from Rhonda in the fall, receives a 2007 year-end bonus for his continuing good work at XYZ Company payable in January 2008. Rufus and Rhonda, for purposes of classification, agreed to a formal separation date of December 31, and began negotiating the terms and conditions of their divorce during January. The timing of this bonus is bad news for Rufus since he earned it during his marriage and the bonus is marital property.



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COMMUNITY PROPERTY VERSUS EQUITABLE DISTRIBUTION -- There are two basic ways to handle divorce property division: Community Property: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin and Puerto Rico are community property states. This means that all marital property is typically defined as community property or separate property. When divorcing, community property is typically divided evenly, and each spouse keeps his or her separate property. Equitable Distribution: All other states follow equitable distribution. This means that a judge decides what is equitable, or fair, rather than simply splitting the property in two. In practice, this may mean that two-thirds of the property goes to the higher earning spouse, with the other spouse getting one-third.
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