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Identifying What Assets Are Subject To Split in Divorce
“Instead of getting married again, I'm just going to find a woman I don't like and give her a house.“
- Lewis Grizzard

You would think some things would be simple in life. If you have been married a while it might seem obvious to you what needs to part of your marital settlement. Not so fast! There are a host of rules, and laws, that define what is considered to be “marital property” and subject to division between you and your soon-to-be ex.

As part of your preparation you need to get a crystal clear understanding of what you own individually that is not part of your settlement discussion (separate property) and what you own as a married couple.

What state you live in, what kind of property it is, and how and when it was acquired are all factors in determining whether it is marital or separate property. Let’s take a closer look.

Community Property States vs Equitable Distribution States

If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin you live in a “community property” state. In Alaska, spouses can opt in to the community property system by signing an agreement designating specific assets as community property.

In a community property state, the spouses are deemed to equally own all income and assets earned or acquired during the marriage. It doesn’t matter who earned the money to buy the house or the plasma television. If it is acquired during the marriage it is owned 50/50 between the spouses. Equal ownership also applies to debts. This means both spouses are equally liable for debts no matter which spouse incurred it.

If you live in one of the other 41 states you live in an equitable distribution state in which property acquired during the marriage belongs to the spouse who earned it. But regardless of who owns it, in a divorce proceeding the property will be divided between the spouses in what the courts consider a “fair and equitable” manner. I talk more about this in a moment, but first we need to cover the difference between separate and marital property.

Separate Property

In most states, property that was yours before the marriage is considered to be separate property and should remain yours.

Items typically considered separate property, i.e., yours or his alone and not subject to split:

  • Items that you owned prior to the marriage
  • An inheritance received solely by you
  • A gift you received solely from a third party
  • The pain and suffering portion of a personal injury judgment
  • Your engagement ring (because it was given before the marriage)

Marital Property

If it isn’t separate property, it is marital and subject to split between the parties including:

  • Your wedding band
  • Gifts you received during the marriage for birthdays, anniversaries, etc
  • Everything else acquired during the marriage
  • All investments, IRAs, and variable annuities
  • Pension plans—the part earned during the marriage
  • Personal property
  • Real estate
  • Frequent flyer miles
  • Executive compensation, deferred compensation, stock and stock option plans
  • Cash value life insurance

Separate Property Can Become Marital Property!

Unfortunately there are some situations where assets that were clearly owned by one party prior to marriage are not considered 100 percent separate property. An example is if an asset is commingled with marital property or if it has appreciated during the marriage due to the non-owner spouse’s contribution.

Commingling Separate Assets with Marital Assets

It is so easy to accidentally take funds that are yours alone and inadvertently reclassify them as jointly owned with your spouse. For example, if you added your spouse as co-owner of your previously owned home or took Aunt Tootie’s inheritance and placed it in your joint bank account, then you have probably created a marital asset.

Similarly if you used inheritance funds to buy a jointly owned vacation home, boat or other asset in joint name, expect the court to consider that a marital asset.

Don’t assume that just because you owned property prior to marriage, no portion of it will be deemed marital property.

Appreciation of separate assets during the marriage

This is a state-by-state issue and can be complicated. Many states consider the appreciation that occurred on the asset, such as a previously owned 401(k), to be a marital asset subject to division. Others will make a determination based on whether the non-owner spouse made a direct or indirect contribution to the growth of the asset.

For example, if the home you owned before marriage increases in value during the marriage as a result of your and your spouse's efforts to maintain and improve it, your spouse may be entitled to a portion of that increase in value.v Likewise if your business or professional practice increases in value throughout the marriage due in part to your spouse's contributions, your spouse may be entitled to a share of the increase in value upon divorce or your death.

Such contributions can be obvious or subtle and are often left for lawyers to argue over between each other or before a judge. By helping entertain clients or staying home with children, it is possible for a spouse to be considered participating in the appreciation of a business and therefore entitled to some of the additional value accrued during the marriage.

Marital Debt

Over the course of a marriage you may have accumulated not only assets but a number of debts (liabilities) in the form of a mortgage, credit cards, and other types of loans.

It is paramount that decisions be made as to how those debts will be paid off or carried on after the divorce is final.

What Is Considered a Marital Debt?
Non-Community Property States

In non-community property states a person is legally responsible for paying only the debts they alone incurred during the marriage. However the court will take into account the total debt incurred during the marriage when dividing up property, so it is possible to still pay indirectly for debts your spouse incurred.

Both spouses, however, are generally responsible for debts that relate to their children's education and their food clothing, shelter, and medical care. And if debts are registered in joint name you are both on the hook to pay.

Community Property States

In community property states all debts and assets acquired during the marriage are joint, and both spouses are liable for all debts incurred by the other.

All Debts Acquired During the Marriage

All debts acquired during the marriage are subject to division between spouses.

After the separation date debts incurred are usually the responsibility of the spouse who incurred them. Education debts for children are exempt from this rule. And in general a spouse is not responsible for debts incurred before marriage or after the divorce is final.

Dividing Up Debt in Your Settlement

While most of the focus in divorce finance is on dividing up assets, it is just as important to figure out how money you owe is going to be dealt with.

There are three basic ways to divide up the money you owe in your settlement agreement.

  • One spouse can agree to pay the bulk of the debts, and an offsetting increase in alimony or marital assets can be given.
  • You and your spouse can divide joint property equally and debts equally.
  • You and your spouse can liquidate joint property and use the proceeds to pay off marital debts.

Please note that the first two options do not let you out of a legal obligation to pay creditors, even if your spouse will be writing the check. Vigilance in making sure the debts get paid on time is essential in protecting your credit rating.

Where possible I highly recommend paying off debts as you exit your marriage so that you can start your new life with a clean credit record and reduced involvement with your ex on financial issues. But I understand this is simply not feasible for many divorcing couples.

Factors a Judge May Consider

If your case ends up going before a judge (instead of being decided through a mediated agreement) he or she may consider these factors in deciding who is responsible for paying debts:

  • Debt from “family” expenses, as described above—clothes, vacations, groceries, and so on—will likely be split between the spouses.
  • If the debt was incurred by either husband or wife for their own personal use or agenda, then the debt is more likely to be assigned to the person who incurred the debt. Gambling debts and debts incurred to support an affair are likely to be assigned to the person who incurred them.
  • The person who will own the asset once the divorce is final is more likely to be assigned the debt, e.g., cars, boats, and “man cave” flat-screen TVs.

Note: Creditors Don't Care about Your Divorce Agreement!

You must understand that creditors do not care about what your divorce agreement says about who will pay the debt. They have a legal right to collect from both of you in the case of a joint debt, or just from the person whose name is on the debt.

So you may be faced with paying a debt even though your ex told you they would pay it as part of your agreement. Your best course of action may be to protect your credit rating and seek reimbursement from your ex after the fact.

This article is excerpted from “The Financially Smart Divorce”

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