A divorce inevitably means you and your spouse will need to divide your assets, everything from your vehicles to your 401k. How in the world are you supposed to figure out who owns what or, more importantly, what portion of your shared property is yours? The first place to start is to gain an understanding of what constitutes marital property (also called “common property”) and separate property.
What Is Marital Property?
In a nutshell, marital property is defined as any property a partner earns or acquires while married. Don’t let the word “property” throw you. Marital property doesn’t have to be a physical object, like a truck or a house, though those items can definitely be marital property. Items like paychecks, mutual fund investments, airline miles, and even professional licenses can all be considered marital property. Likewise, debt – like a mortgage – can also be marital property if it was acquired during the course of the marriage.
What Is Separate Property?
Separate property is solely owned by one spouse and is not considered part of the marital estate. The rules for separate property can get a little complex, but generally speaking, separate property includes:
- And property or assets a spouse owned before the marriage.
- Any inheritance received by a spouse
- Any gift given to a spouse (example: your mother gives you the family china collection)
The Risk of Co-Mingling Property
Let’s say that you owned a home before you were married. That home would qualify as separate property after your divorce, right? Not so fast. What happens if, after the marriage, you and your spouse both contributed to the monthly mortgage payments? Your spouse could argue that by paying the mortgage with marital property (i.e. their income), they are entitled to a portion of the home’s equity even if the deed is in your name.
Co-mingling of separate property and marital property can happen in all sorts of ways.
- Your spouse performed book-keeping for your business
- You owned a rental property before your marriage, but your spouse managed the property after the marriage
- Your spouse performed maintenance and repairs on a car you owned before marriage
All of these instances could lead your spouse to argue that what was originally separate property could now be considered marital property.
How You Divide Marital Property May Depend on Where You Live
Understanding the difference between marital property and separate property is only the start of determining how to divide your assets during a divorce. In most cases, each spouse will hang onto their separate property, but that still leaves all of the marital property to be divided.
Your state of residence can determine how you divide your marital property. (Learn how to determine state residency and why it matters.) Forty-one states use a model known as “Equitable Distribution,” which means a judge will try to determine an “equitable” division of your marital property. In these states, this distribution of marital assets does not need to be equal. In fact, the spouse who brings in more marital assets will typically walk away with a larger share of the pie, especially if the marriage was short and the other spouse is able to support themselves.
Alternatively, nine states use a “Community Property” model, which essentially splits marital property down the middle regardless of which spouse earned more during the marriage. The nine community property states are:
- New Mexico
(Note: Alaska lets couples determine what system they want to use.)
Do You Have to Use the Property Distribution Model of Your State?
Let’s say you live in California. Does that mean you have to divide your marital property in half to make sure each spouse gets an equal share? Not necessarily. The vast majority of couples are able to agree to a settlement outside of court. The settlement agreement can divide the assets any way you want, but a judge will have to sign off on the settlement, so it can’t favor one spouse too much! (Learn how to choose a divorce mediator.) For example, your spouse may be willing to give you the house if you agree to allow them full ownership of their pension.
However, it is helpful to understand the laws of your state, as this can form the basis of your settlement proposal. If you live in a community property state, for example, you probably can’t demand the majority of marital assets from your spouse.
Prenuptial and Post-Nuptial Agreements
Is there any way you can keep your spouse from demanding your most prized assets even if they are marital property? For example, can you protect your pension, real estate, or business holdings? The answer is yes… as long as you and your spouse signed a prenuptial agreement or a postnuptial agreement.
In a prenup or postnup, you can specifically carve out specific assets that will remain separate property in the event of a divorce. Obviously, if you are considering a divorce, then it’s usually too late for a postnup, but you may want to insist on a prenup if you should ever marry again, just to be safe!
Talk to a Divorce Attorney
This article provides a basic look at the topic of marital property vs. separate property. As always, real life is often messier and more complicated. This is why it is so important to seek out the advice of a divorce attorney in your area. Another great option is to attend a local Second Saturday Divorce Workshop, where you can meet with local divorce experts who understand the laws in your state.
Find the nearest Second Saturday Divorce Workshop.
This article is reprinted with permission from the Women's Institute for Financial Education (WIFE.org), creator of the Second Saturday Divorce Workshops. Founded in 1988, WIFE is a non-profit organization dedicated to providing financial education for women. right 2019Copy