One of the most contentious parts of a divorce can be dividing the assets and liabilities, or in laymen's terms, the money, debt, and stuff. Who gets what? That might mean deciding who gets the car, house, and wedding china, but it also means deciding who gets the credit card debt. The first step to knowing how your property will be distributed is to understand the rules your state uses to divide property. There are two principals of thought on dividing assets: community property and equitable distribution. In order to understand how a court will divide your property you must know which one of these principals your state will follow. In a nutshell:
Community Property: There is an absolute 50-50 split of all property acquired during the marriage
Equitable Distribution: More assets may be considered "marital property," but the split is not necessarily 50-50, but fair and equitable.
Which States Follow Which Rule?
There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Puerto Rico also uses community property rules. Every other state, uses equitable distribution of the assets.
Couples in Alaska, South Dakota and Tennessee, can opt in to a modified community property approach by transferring specific assets or property into a valid community property trust.
Equitable Distribution
Equitable Distribution: Courts try to achieve a fair, but not necessarily equal, allocation of property based on a list of factors or guidelines set forth by state law.
Most states (40/50) use equitable distribution to divide assets and liabilities in a divorce. Under equitable distribution assets are divided what the court determines to be fair, even if it isn't necessarily equal. States that use equitable distribution outline factors that will be used to determine what "fair" means.
Some factors that a court may consider include:
The duration of the marriage;
The needs of the children and who is getting custody;
The health of the parties;
The value of the marital property;
Each spouse’s contribution to the marital property;
The spouses’ respective sources of income or earning capacities;
Whether one spouse sacrificed career advancement because of the marriage;
The economic circumstances of each spouse upon the division of property;
Some states may also consider marital misconduct such as adultery to be a relevant factor; and
Some states may consider financial misconduct such. as hiding, mismanaging, or wasting marital assets.
In many states, Judges will start by assuming that marital property will be divided 50/50, but after reviewing the factors above they may deviate from an equal division in the interests of fairness.
Just like in community property states, only marital assets will be divided.
Some assets may be "separate assets" which aren't divisible in divorce, such as money earned or property purchased prior to the marriage and never co-mingled. In some states, the judge may order one party to use separate property to make the settlement fair to both spouses.
Sometimes property can't clearly be divided. For example, a house may "fairly" belong to both spouses equally, but of course we can't cut a house in half. In that case, a court may determine the percentage of the property that fairly belongs to each spouse and then substitute that item with something else. For example, one person may get the whole house, but the other spouse gets a larger share of the savings. Or on the other hand, a judge could order the house be sold so that both parties can get their cash share of the sale.
Community Property
Community Property: Any income and any real or personal property acquired by either spouse during a marriage belongs to both partners of the marriage. Under community property, spouses own (and owe) everything equally, regardless of who earns or spends the income.
In community property states, all property of a married person is classified as either community property or the separate property. As a general rule:
Community Property (or marital property)- property owned jointly by both spouses, generally refers to all of the property acquired by either or both spouses during the marriage. This also includes any debts acquired during the marriage.
Separate Property: property owned individually by one spouse, any property the spouses acquired separately before the marriage or after separation (or in some states after divorce). Separate property also includes any gifts or inheritances acquired by either spouse at any time. Investment income from separate property is considered separate income.
Note: There are exceptions to these general rules, which are spelled out in each state's property laws.
In a divorce, community property is typically divided equally between the parties, while each spouse keeps their own separate property.
What is included in Community Property?
Community property includes wages, salaries and income from a self-owned business, as well as assets such as houses and cars. It will also include investment income from community property assets and, of course, it includes any debt or liabilities taken on during the marriage.
Will the courts consider "fault" in community property states?
Some community property states will consider fault, dissipation, or other factors in dividing property. "Dissipation" refers to the when one spouse has basically squandered, hidden, or mismanaged marital assets. These actions are considered to unfairly reduce the "innocent" spouse's share and a court could consider this and reduce the faulted spouse's share accordingly.
Can you convert separate property to marital property?
Separate property is money or items purchased before the marriage, or items acquired after the marriage like certain gifts or inheritances. It can also include items purchased during the marriage from separate assets. However, in order for the assets to remain separate, it can't be co-mingled with marital assets or used for the benefit of the spouse. Assets purchased with a mixture of separate and community property tend to become wholly community property, but like all things in the law, it depends on the specific circumstances of the situation.
So, what is the best option equitable division or community property?
For most people the best option is to stay out of the courts and divide your property yourself! You don't want a judge telling you to sell the house or empty your IRA at a penalty. You want to decide on your own who gets the car, dog, or antique record player. If you can, work it out.
Have more questions? Reach out!
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