Let’s move to another topic in our series on the complexity of joint finances: that of marital versus non-marital property.
These terms are defined differently by each state and the rules are very different between “community property” states and “equitable distribution” states. The differences can be summarized in a couple key sentences. In community property states, unless there is a prenuptial agreement that says otherwise, when parties get married, any real estate or other property held by either party prior to the marriage gets transformed into joint property held by both of the partners.
In ”equitable distribution” states, real property held by one party prior to the marriage, unless later transformed by putting the asset into joint names, stays as the original owners’ sole property. However, if the parties share finances, or if the property increases in worth during the term of the marriage, a portion of the value of the property will be treated as joint property and may be divided up by a family court.
Husband owned a house, bought prior to the marriage in his own name, and it was worth $250,000 on the date of the marriage, with no mortgage or improvements. Its title is never changed. On the date of the divorce, it is still worth $250,000. It is set aside to the Husband as his sole non-marital property.
However, using the same assumptions, if the value of the house has increased to $350,000, things are more complex. The first $250,000 is non-marital, but the increase in value of the additional $100,000 is presumptively marital, and subject to equitable distribution by the court. However, on these facts, the husband can argue that there was no marital contribution to the increase in value, and could well succeed in overcoming the marital presumption, and having the court allocate the whole $350,000 to him.
Alternatively, let’s assume that the house was put into both parties’ names as part of a refinancing. Now the husband’s non-marital interest in the $250,000 has been transmuted into a joint marital interest, so if the house is now worth $350,000, all of that $350,000 is subject to division by the court. Depending on the other assets and circumstances, the court might split it in half, give all of it to the husband, or all to the wife.
I had a case early in my judicial career where the husband and wife were jointly operating a farm, on which they raised purebred livestock. The husband’s father had given them a large sum of money, which they invested into the farm, including putting a new roof on the barn. After the divorce began, the three of them met and agreed that the wife would sell some of their animals to raise cash for the farm operations. The most valuable animal was thought to be worth more than $7,500, but the top bid at the auction was only $5,000. However, the next day, the wife sold it for $2,000.
Husband’s theory at hearing was the wife had deliberately undersold the livestock to cheat him and his father. That seemed right to me at first. However, there are always two sides to every story.
When the wife testified it came out that the husband and a friend went to the farm when they knew she was gone, and broke in, “to get his stuff.” As they had fortified themselves for this adventure with a little liquid courage, their thinking might have been a bit confused. In any event, husband reflected on the discussion he had with this lawyer on marital vs. non-marital property, and reached the [incorrect] conclusion that the new roof on the barn was non-marital property.
So, he and his friend got out their chain saws, revved them up, and surgically dissected the roof off the barn. The real story was that the wife heard about this from a neighbor the night after the auction. The next day she sold the remaining animal for what she could get so she could come back home right then!! It made sense to me!
I still have this mental picture of two tipsy guys at the top of their ladders, waving their chain saws around. I think they were both lucky to come out of all this with their arms and legs intact.
Of course, if the cash for the roof had ever been non-marital property, the materials were transmuted into marital property as soon as they were incorporated into the jointly owned barn.
So, this is an area where it is easy to make errors, and decisions about the status of property, whether it is real estate or another kind of investment, should be made 1) after talking with an attorney, and 2) only when sober!
Senior Policy Advisor