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The Divorce Encyclopedia
Classification of Assets

Term Definition Classification of Assets - in a divorce, a preliminary to distribution of property.
Application in Divorce In a divorce, everything a couple owns and owes is classified into one of two categories -- marital or separate property. In twelve states -- the so-called all property or kitchen sink states -- both kinds of property is subject to distribution. In most states, however, only the marital property is divided.

Different jurisdictions have different shadings to definition of marital and separate property. Generally, marital property is everything a couple earned or acquired during the marriage. Generally, separate property is property that belongs only to one party, such as property owned before the marriage, gifts and inheritances, property acquired using separate assets.

Needless to say, deciding what is marital property and what is separate property often becomes contentious when couples divorce. Couples who want to avoid slugging it out in court (and making lawyers rich) should remind themselves that courts will approve any reasonable division of property that the divorcing spouses fashion.

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

After the assets are classified, they can be divided and distributed based on the applicable law in the jurisdiction where the couples divorce. Twelve states are all property; nine states are community property; and the rest are equitable distribution states.

The classification of assets can become problematic. In general, however, when separate and marital funds are commingled, regardless of which came first, the resulting mixture is presumptively marital. The spouse 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 martial property. A spouse must prove separate contributions to establish an 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 the case of 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 itself. Thus, in the Oregon Court of Appeals case, the court ruled that a herd of cattle owned by an individual when he marries as his separate property becomes marital property as the animals are replaced. 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 during a marriage, are separate property and remain 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 duration of the marriage.

On the other hand, the classification of employee bonuses in fairly straight forward. 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 it not important. Thus, a bonus received after a couple have 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 Corporation 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. This timing of this bonus is bad news for Rufus since he earned it during his marriage and the bonus is marital property.

The benefits of future employment contracts -- the kind normally extended to movie stars and sports figures -- are distributed along "established principles." Compensation for work during the marriage is marital, even when the compensation is received after the marriage is over; compensation received after the date of classification is normally separate, except when it is in exchange for property "which existed on the date of classification." Thus, compensation received during a marriage for efforts before the marriage is separate.

In recent years, some workers, particularly those in state and local government, have elected to participate in DROP retirement programs. DROP means deferred retirement option program. Under DROP, the worker no longer accrues service, and he is treated as if he retired. Benefits he has earned ar paid into an account in his name, which is paid interest and any cost of living increases he would have received if he had been retired. DROP permits an employee to postpone collection of benefits he has earned, and they are classified, in the event of a divorce, in the same way they would have been classified if the DROP route had not been taken.

See also Appreciation of Assets; Commingling; Interspousal Gifts; Prenuptial and Antenuptial Agreements; Separate Property; Equitable Distribution; Community Property; Kitchen Sink States; Dual Classification States.

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