Before valuing and distributing property in a divorce, the Court must first classify the property as separate, marital or divisible. This first step is, arguably, the most important because if property is not identified and properly classified, the Court is unable to distribute the assets. In properly classifying the property, the Court will consider, among other things, the date the property was acquired, who acquired the property, and whether the property was acquired by gift, inheritance, or purchased.
Real and personal property is considered separate property if it was acquired by a spouse before the marriage or was acquired by inheritance or as a gift during the marriage. Separate property also includes property acquired during the marriage in exchange for other separate property, increases in value and income from separate property, and any professional licenses that would terminate if transferred.
Marital Property includes all real and personal property that is presently owned by the spouses that was acquired by one or both spouses during the marriage and before the date of separation. This includes vested and nonvested pension, retirement, and deferred compensation rights.
In some cases, property that was once separate can unintentionally become marital as a result of one spouse’s actions. Most commonly, one spouse will purchase a home prior to the marriage and, during the marriage, will refinance or retitle the property as tenancy by the entirety. Once titled as tenancy by the entirety, the property loses its separate property identity and is presumed to be a gift to the marriage to benefit both spouses.
As if classifying property was not already complicated enough, some property may have both, marital and separate, components. We refer to this property as “mixed” property when classifying assets. Property can become mixed when the value of separate property increases due to the efforts and actions of the other spouse or when property is acquired from marital and separate estates. To identify the marital and separate property components, the Court will look to the source of funds used to acquire the asset.
The final classification is divisible property, which includes property received after the date of separation but before the distribution as a result of efforts made during the marriage, passive increases and decreases in marital property, passive income from marital property, and passive increases and decreases in marital debt and financing charges. The most common examples of divisible property are changes in property value due to market forces, and bonuses or deferred compensation rights that were earned by work done during the marriage, but not paid until after the date of separation.
Classification of property as part of equitable distribution can be a contentious area for couples, especially those with significant assets that were owned prior to the marriage. It is important to have an attorney that understands the complexities involved in equitable distribution to protect your interests and entitlements.