How It Works & Factors Affecting It
Even in amicable divorces, deciding which spouse gets what can be a challenge. Often divorce cases or divorce mediations can be derailed by discussions of property division.
The division of assets in divorce is an important process for each spouse to understand before you start tagging who gets the sofa versus the antique rug.
Separate vs. Community Property
When thinking about dividing your assets, the first important distinction to be aware of is the difference between separate and community property (also known as marital property in certain states).
Regardless of what state you live in, separate property is anything you or your spouse owned before you got married.
Separate property also includes gifts given to one spouse during the marriage, an inheritance received by one spouse during the marriage, or compensation from a personal injury to one spouse.
If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, you live in a community property state.
The other type of property in community property states is aptly called community property. This type of property includes anything accrued during the marriage up until the date of physical or legal separation.
Some examples of community property include pension plans, retirement benefits, or brokerage accounts. That means you may be entitled to a portion of your former spouse’s retirement benefits that were accrued during your marriage.
Retirement benefits are usually obtained through a qualified domestic relations order (QDRO) along with your divorce agreement. A QDRO is a legal document that grants a spouse, former spouse, or child a predetermined portion of the retirement account owner’s retirement plan assets.
It’s important to note for community property states that if the property was acquired during the marriage, even if bought with only one spouse’s income or titled in one spouse’s name, the property will still be considered community property.
Also beware—a spouse’s separate property may become community property if you commingle it with marital property.
If you’re worried the comingling of funds may have changed the character of your property, you may want to consult a divorce attorney to help you navigate your divorce proceedings.
If you live in any other state, you live in what is called an equitable distribution state or common law property state.
In these states, property acquired by one spouse during the marriage is considered to be owned solely by that one spouse and is non-marital property. However, if the title or deed of a property is put in the names of both spouses, then the property is considered marital property.
Marital vs. Non-Marital Assets
When you are filing for divorce, either with the help of an attorney or if you are doing it on your own, you are going to list all your assets and debts for the court.
When thinking about your marital estate, this may have you wondering which of your assets are marital assets and which are non-marital assets.
Whether you live in a community property state or a common-law property state, marital assets are those that are considered to belong to both spouses. Generally, this refers to property acquired during the marriage, such as a marital home.
Marital assets also include interspousal gifts given during the marriage and the appreciation of the value of a non-marital asset during the marriage (such as a retirement account).
Non-marital assets are best thought of as property that was brought into the marriage by one spouse. In other words, it was acquired before the date of the marriage.
However, non-marital assets or separate property can also be gifts made by a third party to one spouse during the marriage or an inheritance received by a spouse during the marriage.
Which Assets Can Be Divided in a Divorce
Now that you have a handle on what’s considered a marital versus a non-marital asset it’s important to know the implication of those classifications.
A marital asset is subject to be divided by the court during divorce proceedings. Whereas a non-marital asset is not considered divisible property and therefore will not be subject to the division by the court in the divorce decree.
However, non-marital assets or separate property may be looked at by a court as a source of funds from which one spouse may use to pay for child support or spousal maintenance.
Consequently, making sure you properly characterize your assets and debts when you disclose them to the court is essential.
Division of Marital Assets and Debt
Property division is an inevitable part of the divorce process. How property gets divided depends on several factors.
If you’re proceeding with an uncontested divorce, you and your spouse may work out the property division on your own (or with the help of a lawyer or two).
In an uncontested divorce, the parties are free to divide up the property in whatever manner they wish and will likely submit a property settlement for the court’s approval.
However, if you’re seeking a contested divorce, the way marital property is divided will be up to the court.
In a community property state, each spouse is considered an equal owner of all community property. The default rule is to split the community’s marital assets and marital debts 50/50 unless there is financial marital misconduct.
Again, since separate property is not subject to division of the court, each spouse retains 100% of their own separate property.
In a common-law property state, which is the majority of states, the court will use an equitable distribution system for property division.
In these states, the court will attempt to make an equitable division of the marital assets and debts. This means that the property division will be based on “holistic fairness”.
Factors Taken Into Consideration When Dividing a Property
If you live in a common-law property state that uses equitable distribution you may be wondering what factors the court uses to decide what property division is fair to both parties.
The factors considered by courts vary from state to state. Some common factors include:
- Duration of the marriage
- Income and property of each spouse when they married
- Income and property of each spouse when they filed for divorce
- Age and health of each spouse
- If the divorcing couple has minor children together, the need of the custodial parent to retain the marital residence
- Value of benefits that a spouse may lose due to the divorce (such as health insurance)
- Any loss of inheritance or pension rights of either spouse as a result of the divorce
- Any award of spousal support or child support the court will be making
- The degree of liquidity of marital property
- Tax consequences of the distribution
- The wastefulness of either spouse
- The future financial circumstances of each spouse
- Any other factor relevant to fairness
It’s important to note that the above factors apply to the equitable division of property, not the division of things like child custody, child support, or spousal support. However, child custody may be implicated by the factors of your state’s equitable distribution laws.
Which Property Ownership Laws Apply
Again, only nine states (see above) use the community property system. All other states are common law property states. However, some couples may get married in one state, move sometime later on, and seek their divorce in another state.
For example, let’s say you and your spouse get married in Virginia, a common law property state, and you live there for ten years. Eventually, you both decide to move to California, a community property state.
Unfortunately, after a year, you decide to get a divorce. You haven’t lived in California very long, so which state’s family law applies? Do you get a Virginia divorce or a California divorce?
So long as you meet the residency requirements for the state in which you currently reside you can get divorced there, even if it is not the state that you got married in.
Some states do not require any specific length of residency if both spouses live in the state. Other states have relatively short residency requirements, and some may have longer time periods.
If you and your former spouse are living in different states, it may be helpful to consult an attorney if you’re not sure which state’s court system is more advantageous for you to file in.
As the divorcing spouse, which state you choose to file will determine which state’s law will govern.
Many spouses going through the divorce process are surprised to find out an asset they thought was a separate asset is actually jointly owned.
Can a prenuptial agreement protect my assets?
Yes, a prenuptial agreement can help protect your assets. If you’re coming into a marriage with separate property already, you may want to protect that property by drafting a prenup.
A prenuptial agreement is a written contract created before you marry your soon-to-be spouse. It typically will list all property owned by each person and specify each person’s rights to the listed property.
Note, every state has its own laws on what can and cannot be included in a prenup. In order to draft a valid one, it’s important to consult an attorney to make sure the terms of your prenup are valid.
What does equitable distribution mean in a divorce case?
Equitable distribution means the court is going to divide the marital property in a fair manner. This may mean that the split of marital assets might not be 50/50.
Equitable distribution laws vary by state, so if you live in a common-law property state, it’s useful to consult an attorney or look up the factors your state considers when dividing marital property.
How do I make sure my spouse isn’t hiding any assets from me?
If you’re worried about your spouse hiding assets, during the divorce proceedings, both parties will have an opportunity to conduct discovery.
During this period, your lawyer can send requests for information to the other party’s attorney, to third parties such as banks, or conduct depositions if necessary to make sure every asset has been disclosed before the court’s final decree.