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Dividing Marital, Separate and "Hybrid" Property

"Marital property," it should be explained, is all property acquired by either or both spouses (regardless of titling) during the marriage prior to the final (physical) separation,"(16) which is not "separate property." "Separate property" is presumed to be property which falls into one or more of the following categories, as long as, if it is "titled," it is not at some point titled in the names of both spouses (even if the property is converted into another form, as long as it is not titled in the names of both spouses, it is still, at least initially, presumed to be "separate property"):

  • Property acquired before the marriage by either spouse;
  • Property inherited by one of the spouses;
  • Property given to one of the spouses only, by someone other than the other spouse (gifts between spouses during the marital coverture are presumed to be marital property!);
  • Property acquired by either spouse after the final separation;
  • Increases in value of separate property.

1990 legislation also established in Virginia the concept of "part-marital and part separate" (i.e., "hybrid") property. Even before then, our Courts frequently found instances of initially or "presumptively" separate property having been "transmuted" into marital property, by "active participation" in the management, preservation or increase in value of the property, or assumption of financial risk in connection with the same (e.g., separately-titled houses in which the parties resided together as and for their marital residence and businesses "owned" solely by one of the spouses)"(17). In factoring out the separate "contributions" of each spouse in these connections, though, two very important principles should be borne in mind.

First, even if you have placed income you have earned during your marriage (prior to the final separation) into a separately-titled account, and it is from that account that you have expended funds for which you wish "separate contribution" consideration, you must bear in mind that the income you thus earned was "marital property." Accordingly, these allegedly "separate contributions" essentially are worth no special consideration whatsoever (at least in this respect).

Second, the "legislative history" of the new "hybrid property" provisions (and subsequent Court decisions) makes clear that, primarily, only contributions from truly "separate" property sources toward acquisition, improvements, and diminutions in encumbering debts -- as opposed to tax, interest and other "maintenance "-type payments -create "part separate" property claims.

The "Magic Formula" for the method of calculation of such ("hybrid property") interests has been expressed, as follows:

    nonmarital property =

    marital property =

    nmc
    tc x e

    mc
    tc x e

Nonmarital contribution (nmc) is defined as the equity in the property at the time of marriage, plus any amount expended after marriage by either spouse from traceable nonmarital funds in the reduction of mortgage principal, and/or the value of improvements made to the property from such nonmarital funds.

Marital contribution (mc) is defined as the amount expended after marriage from other than nonmarital funds in the reduction of mortgage principal, plus the value of all improvements made to the property after marriage from other than nonmarital funds.

Total contribution (tc) is defined as the sum of nonmarital and marital contributions.

Equity (e) is defined as the equity in the property at the time of distribution. This may be either at the date of the decree of dissolution, or if the property has been sold prior thereto and the proceeds may be properly traced, then the date of the sale shall be the time at which the equity is computed.

Applications of this formula can be shown by the following examples:"(18)

EXAMPLE: Real estate - generally

H purchases a $50,000.00 home titled in his sole name just prior to marriage with $10,000.00 of separate funds as a down payment and a $40,000.00 mortgage. All mortgage payments are made with marital funds, being the wages of either or both parties during the marriage. At the time of trial, the house is valued at $80,000.00, and the principal mortgage balance is $20,000.00, creating an equity of $60,000.00. The separate estate of H has contributed $10,000.00 to the equity in the home. The marital estate has contributed $20,000.00. Thus, the separate and marital estates have a 1/3 and 2/3 interest in the home, respectively. The increase in value reflecting the contributions of the "marital" contributions under the proposed language would be 2/3 of the equity, or the sum of $40,000.00 (2/3 of $60,000.00 equity). The Court would classify the H's 1/3 interest in the property as H's separate property, or the sum of $20,000.00 (1/3 of $60,000.00 equity).

A summary using the formula set forth above is as follows:


Value:
D/T balance:
Equity:

DOM
$50,000.00
40,000.00
10,000.00
DOT
$80,000.00
20,000.00
60,000.00
Part separate
property=

Part marital
property=

$10,000.00 x $60,000.00 = $20,000.00
$30,000.00

$20,000.00 x $60,000.00 = $40,000.00
$30,000.00

EXAMPLE 2: Real estate with additions

Assume the same facts as in Example 1, except assume that, during the marriage, the parties added a sunroom to their home for the cost of $8,000.00, which was paid for from W's pre-marital savings account. The analysis would change, since the total contributions to value would be the sum of $38,000.00 ($ 10,000.00 down payment of H; $20,000.00 debt reduction from marital wages; $8,000.00 from W's funds for improvement).

The respective interests of the parties would be the following:

H - part separate property=

W - part separate property=

Part marital property=

$10,000.00 x $60,000.00 = $15,600.00
$15,600.00

$15,600.00 x $60,000.00 = $15,600.00
$15,600.00

$20,000.00 x $60,000.00 = $31,800.00
$38,000.00

Finally, it should be emphasized that, notwithstanding these property-division generalizations, and the fact that, if need be, eventually "rip-offs" from joint accounts may have to be (can be made to be) "accounted for,"(19) as a practical matter, for your own self-protection and in "strategic" terms, do not underestimate the importance of "titling" and control of assets at this time (prior to written settlement of the financial and property matters). Especially bearing in mind the maxim, "often an ounce of self-help is worth a ton of lawyer's cure, " unless yours is a friendly mediation case, be wary of "exposed" joint bank accounts (especially those entailing "direct deposit" of paychecks) and unused credit card authority. . . On the other hand, so as not unnecessarily to force your case into a "divorce war," it is recommended that you not take action in this connection prior to thorough consideration of such matters with counsel.

(16) The biggest distinction between D.C. and Virginia property division principles is that, in D.C., the final separation does not serve as a presumptive cut-off point for acquisition of "marital property. " In D.C., all ("non- separate") property rights accumulated up to the date of the divorce ruling are subject to division by the Court! Other key distinctions are that D.C. does not have a statutory distinction of "hybrid" property; there such contributions are much less likely to be treated as "analytically" as in Virginia. Also, in Virginia, now the "pain and suffering" components of personal injury case awards (as opposed to the portion of the award attributable to economic losses) are statutorily designated as " separate property "; while, in D. C., the " whole thing " is deemed marital property -- even if the personal injury case has not yet been settled, and even if the accident occurred after separation!

(17) (Even temporary) "co-mingling" of funds which constitute marital property into/with accounts which otherwise would be presumed to be separate property is the most frequent cause/example of "transmutation" of such categories of property.

(18)These examples actually appear in the relevant "legislative history" of the 1990 "hybrid property" amendments.

(19)Do not, on the other hand, assume that an "accounting" will, as a practical matter, be available at the end of the case. Although the date of separation is usually the date for determining what (portions of) assets are marital and separate (i.e., for 'classification' of assets); for equitable distribution purposes, usually assets are valued as of the date of the hearing. Consequently, if the spouse who "helped" his or herself to an inappropriate portion of marital liquid assets expends most or all of the funds in the months prior to the hearing, there may be little or nothing for the Court to divide. And our cases have clarified that use of marital funds for living expenses and/or counsel fees does not constitute sufficient "waste" or dissipation" of assets to warrant in effect reconstituting an account for equitable distribution purposes. indeed, in one case, even allegedly gambling away funds in Atlantic City did not qualify!

It is for this reason that, in many litigated cases, entry of a "freeze order" is one of the first orders of business. This is also one reason that, where litigation is necessary at the outset, the lawyer's initial "retainer fee" may be very substantial (i.e., after entry of the injunction on liquid assets, further attorney's fees and expenses will have to be funded wholly out of future income, or permission will have to be obtained from the Court to invade the frozen funds for such purposes).


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