Most property that is acquired during marriage is considered marital or community property. For example, wages earned by the hu*****and and wife during marriage generally are considered marital property. If one or both spouses buy a house or establish a business during the marriage, that usually will be marital property, particularly if the house or business is purchased with the hu*****and's and wife's earnings.
Separate property is property that each spouse owned before the marriage. Separate property also includes inheritances and gifts (except perhaps gifts between spouses) acquired during marriage. During and after the marriage, each spouse may keep control of his or her separate property. Each spouse may buy, sell, and borrow money on his or her separate property. Income earned from separate property, such as interest, dividends, or rent generally are classified separate property. However, in some states that recognize community property, these profits may become marital property.
Separate property can become marital property if it is mixed with marital property. If, for example, a wife owned an apartment building before the marriage and she deposited rent checks into a joint checking account, the rent money probably would become marital property, although the building is likely to remain the wife's separate property as long as she kept it in her name. If the wife changed the title on the building from her name alone to the names of both herself and her hu*****and, that probably would convert the building into marital property. In addition, if one spouse put a great deal of work into the other spouse's separate property, that could convert the separate property into marital property, or it could give the spouse who contributed the work a right to some form of payback.
Debts: Hu*****ands and Wives
Hu*****ands and wives may be responsible for debts incurred by the other depending on the nature of the debt as well as where the couple resides. If both hu*****and and wife have co-signed for the debt, both will be responsible for paying it. For instance, assume the hu*****and and wife apply together for a charge card. If both sign the application form and promise to pay the charge bills, both will be responsible for paying off the balance to the credit card company or store, even if only one of them made the purchases and the other disapproved. Similarly, if a hu*****and and wife co-sign on a mortgage for a home, both of them are potentially liable to the mortgage company, even if one of them no longer lives in the home. In community property states, a hu*****and and wife may likewise be responsible for debts incurred by the other.
A hu*****and and wife also can be responsible for each other's debts, even if they have not co-signed, if the debt is considered a family expense. Some states have family expense statutes that make a hu*****and or wife liable for expenses incurred for the benefit of the family, even if the other spouse did not sign for or approve of the expense in advance. Still other states impose the family expense obligation by common law without a statute. Thus, if the wife charged groceries at a local store or took the couple's child to a doctor for care, the hu*****and could be liable because these are expenses for the benefit of the family.
On the other hand, if the wife runs up bills for a personal holiday or the hu*****and buys expensive coins for his coin collection, the other spouse normally would not be liable unless he or she co-signed for the debt. Again, in community property states, a hu*****and or wife generally is liable for the debts of the other.
Each spouse, however, generally is not liable for debts the other spouse brought into the marriage. Such debts belong to the spouse who incurred them.
In many states, however a debt incurred before marriage (including a child support debt) could be collected against marital property of a new marriage. Thus, for example, if a man was $15,000 behind in support to children of a first marriage, but the man owned a house or bank account in joint tenancy with his second wife, those assets might be taken by a court to pay off the old debt. If the second wife is worried about the first wife or other creditors from the first marriage placing a claim on assets of the second marriage, the second wife should keep most of her property in her own name rather than in joint tenancy with her hu*****and.
If one spouse owns a business and the other does not, the spouse who does not own the business normally would not be liable for business debts unless the non-owner co-signed on the debt or the couple resided in a community property state.
It is common for institutions that lend money to small businesses to want personal guarantees of payment from the owner of the business, and not just from the business itself. In the event the debt is not paid, lenders would like as many pockets to reach into as a possible. If the owner of the business owns a home, the lender may want to use the home as collateral for the business loan. That means that the spouse of the business owner, along with the business owner, may be asked to sign a paper allowing use of the home as collateral. Thus, the home could be lost if the business cannot pay off its debts.
Wives and hu*****ands are entitled to open credit accounts in their individual names. Creditors cannot require a spouse to co-sign on an account unless the party seeking credit lives in a community property state, in which case both signatures can be required since spouses are liable for each other's debts incurred during the marriage.
Taxes and Marriage
If the hu*****and's and wife's names and signatures appear on a state or federal personal income tax return, both are liable for the taxes. If a couple files jointly, the Internal Revenue Service generally holds each spouse responsible for the entire debt.
In some circumstances, a spouse who signed a joint tax return can be excused from liability if the spouse can prove that he or she is an innocent spouse. A wife or hu*****and can be considered an innocent spouse if he or she did not know--and had no reason to know--that the tax return understated the true tax.
That is often hard to prove. For example, the Wall Street Journal reported a case in which the wife of an IRS auditor did not know that her hu*****and was taking bribes, but neither did she ask how they could afford expensive education for their children and country club dues on his government salary. The wife, as well as the hu*****and, was found liable, for $150,000 in unpaid taxes and penalties. (The hu*****and also went to jail.)
On the other hand, a wife who relied on her hu*****and and a certified public accountant to file a proper tax return, was held not to be liable when a deduction for one of the hu*****and's tax shelters was not allowed by the IRS.
If a married person wants full protection against possible liability for inaccurate tax returns filed by his or her spouse, the best approach is to file as "married filing separate return." That, however, usually results in a higher combined tax payments for the hu*****and and wife than if they filed a joint return.
A married couple's income tax payments may be higher or lower than the taxes would be if the couple remained single depending on the income levels of each spouse. If one spouse has a high taxable income and the other spouse has a relatively low taxable income, they will generally pay less income tax if they are married and filing a joint return than if they are single and filing as single persons.
For wives and hu*****ands who both have high incomes, their combined tax will be higher when they file as married persons than if they file as two single persons. Members of Congress periodically promise to remove the "marriage penalty" from federal income tax laws, but as of June 2000, that has not happened.
Gifts Between Spouses
One spouse may make gifts to the other spouse in any amount without paying federal gift taxes if the spouse is a U.S. resident. However, it must be an outright gift or set up as a proper trust. Most, but not all, state laws have done away with taxes on gifts between spouses.
The same is not true with respect to gifts to other family members or to persons outside the family. Gifts to children, other relatives, people outside the family, and trusts may be taxable if they exceed a certain amount per year. Under federal tax law, one person may give someone other than a spouse up to $10,000 per year without paying any tax on the gift. A married couple could give $20,000 to a person each year without paying a gift tax. Both single people and married couples can make an unlimited number of tax-free gifts each year. However, if some or all of the gifts are made above the allowable dollar amounts, the overage will be deducted from the $675,000 federal estate tax credit that all Americans have as of 2000 and 2001 (it will go up by increments to $1 million by 2006). So, if the annual gifts exceeded the permissible amount by $30,000, then the gift maker would have only a $645,000 credit, and his or her estate would be liable for taxes on that $30,000 to the extent that the estate exceeded $645,000.
Managing Marital Property - Do's and Don'ts
THE DOs
DO consider entering into a prenuptial or premarital agreement prior to marriage, to make clear which property is not subject to division upon your death or divorce.
DO maintain accurate and complete books and records to establish the separate nature of property you wish to keep independent from the marital estate -- such as property held by you prior to marriage, or property received by you alone as a gift or inheritance during the marriage.
DO continue to keep all separate property separate throughout the marriage if you are concerned about keeping it in your family (or as your personal asset) upon your death or divorce. Generally, this means you should not "commingle" property you owned prior to marriage with property you and your spouse acquire during the marriage, or it may become difficult -- if not impossible -- to legally determine which is which.
DO be aware that the increase in value of nonmarital property may be considered marital, so that each spouse is entitled to a share of the increased value upon divorce or the death of the property owner. This is especially if the increase (or "appreciation") in value is considered "active" rather than "passive." Passive appreciation is, for instance, the increase in value of a bank account as a result of interest earned, or the increase in property value that results from standard inflation. Active appreciation, on the other hand, occurs as a result of some form of actual effort, such as by repainting rental property or actively managing a stock portfolio.
DO use only your nonmarital property to purchase other property that you want to be considered nonmarital property. In other words, a boat that you pay for with money you had before marriage and kept in a separate account after marriage will be considered nonmarital property, but if your spouse pays for part of it, or even helps maintain it, the boat could lose characterization as nonmarital property.
DO keep separate the proceeds acquired from any personal injury case during marriage, if you want those funds to retain their nonmarital property character. The money you get from a personal injury lawsuit is yours alone, except for any portion that reimburses you for your lost income, or compensates your spouse for the loss of your services or companionship.
THE DON'Ts
DON'T use nonmarital funds to pay off a marital debt, or those funds could lose their nonmarital character.
DON'T make deposits of income earned during the marriage into nonmarital accounts. Income earned during marriage is usually considered marital property, and depositing that income into nonmarital accounts can result in "commingling," so that the nonmarital account is no longer construed as separate property.
DON'T open a joint bank account with nonmarital funds, even if you intend to keep track of which portion is nonmarital. It is much more prudent to maintain separate accounts if you wish to keep nonmarital assets separate.
DON'T assume that just because you owned property prior to marriage, no portion of it will be deemed marital property. For example, if the home you owned before marriage increases in value during the marriage as a result of you and your spouse's efforts to maintain and improve it, your spouse may be entitled to a portion of that increase in value.
DON'T assume that a business you owned prior to marriage remains entirely a nonmarital asset after marriage. If your business or professional practice increases in value throughout the marriage due in part to your spouse's contributions, your spouse may be entitled to a share of the increase in value upon divorce or your death. Such contributions can be obvious -- i.e. bookkeeping or entertaining clients -- but they can also be more subtle -- i.e. taking care of the home and children so that you can focus on running the business.
Property and Debt Division FAQ
How property and debts are divided when you get divorced.
How are property and debts divided at divorce?
It is common for a divorcing couple to decide about dividing their property and debts themselves (with or without the help of a neutral third party like a mediator), rather than leave it to the judge. But if a couple cannot agree, they can their property dispute to the court, which will use state law to divide the property.
Division of property does not necessarily mean a physical division. Rather, the court may award each spouse a percentage of the total value of the property. (It is illegal for either spouse to hide assets in order to shield them from property division.) Each spouse will get personal property, assets, and debts the total net worth of which add up to his or her percentage.
Courts divide property under one of two basic schemes: community property or equitable distribution. Community debts are divided according to the same principles.
• Community property. In Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington,Wisconsin and Puerto Rico, all property of a married person is classified as either community property (owned equally by both spouses) or the separate property of one spouse. At divorce, community property is generally divided equally between the spouses, while each spouse keeps his or her separate property.
• Equitable distribution. Assets and earnings accumulated during marriage are divided equitably (fairly). In practice, often two-thirds of the assets go to the higher wage earner and one-third to the other spouse. Equitable distribution principles are followed everywhere except the community property states listed above.
How do we distinguish between community and non-community property?
Very generally, here are the rules for determining what's community property and what isn't:
• Community property includes all earnings during marriage and everything acquired with those earnings. All debts incurred during marriage, unless the creditor was specifically looking to the separate property of one spouse for payment, are community property debts.
• Separate property of one spouse includes gifts and inheritances given just to that spouse, personal injury awards received by that spouse, and the proceeds of a pension that vested (that is, the pensioner became legally entitled to receive it) before marriage. Property purchased with the separate funds of a spouse remain that spouse's separate property. A business owned by one spouse before the marriage remains his or her separate property during the marriage, although a portion of it may be considered community property if the business increased in value during the marriage or both spouses worked at it. If separate property is commingled with community property during the marriage, it may become community property, either in part or entirely, depending on the circumstances.
• Property purchased with a combination of separate and community funds is part community and part separate property, so long as a spouse is able to show that some separate funds were used. Separate property mixed together with community property generally becomes community property.
Who gets to live in the house during the divorce?
If children are involved, the parent who spends the most time with the kids, or who provides their primary care, usually remains in the marital home with them. If you don't have children and the house is the separate property of just one spouse, that spouse has the legal right to ask the other to leave.
If, however, you don't have children and you own the house together, this question gets tricky. Neither of you has a legal right to kick the other out. You can request that the other person leave, but he or she doesn't have to. If your spouse changes the locks, or somehow prevents you from entering the home, you can call the police. The police will probably direct your spouse to open the door and let you back in. When you both own the home, the only time you can get your spouse to leave is if your spouse has committed domestic violence and a judge grants a restraining order.
Whatever you do, do not claim domestic violence has occured, just to get your spouse removed from the home. (Some people have resorted to this extreme tactic.) Once a judge realizes this has occurred, the party claiming violence may be asked to vacate the home, and the judge may be biased againt him or her during future negotiations.
If you believe you are a victim of domestic violence, but are not sure, go to the Yellow Pages and call your local domestic violence hotline.
Dividing Marital or Community Property
A few states, such as California, take a rather simple approach. Lawmakers in those states believe property should be divided equally because they view marriage as a joint undertaking in which both spouses are presumed to contribute equally to the acquisition and preservation of property. The contributions may be different in nature, but they are treated equally. The wage earner does not receive more property than the homemaker, and vice versa. All marital property will be divided fifty-fifty, unless the hu*****and and wife had a premarital agreement stating otherwise.
The California community property approach saves resources. Hu*****ands and wives do not have to spend time and money arguing about who should get more property since the law of that state already has determined that community property will be divided fifty-fifty. (In California, there still may be issues to dispute, such as: What is and what is not community property? What is the value of a particular piece of community property? For example, if an actress divorces mid-way in production of a film, how does one value her interest in the film?)
Although California may save resources by declaring an automatic fifty-fifty split, it deprives courts of the opportunity to fine-tune property divisions to meet the needs of individual cases. In several other community property states and in all equitable distribution states, courts are allowed to fine-tune property divisions. (That may or may not be an advantage, depending on the cost of fighting over what is "equitable" and one's faith in judges to make fair decisions regarding property.)
"Equitable distribution" means a court divides marital property as it thinks is fair. Like community property states, states applying principles of equitable distribution view marriage as a shared enterprise in which both spouses usually contribute significantly to the acquisition and preservation of property. Unlike the community property approach of California, however, equitable distribution states are not locked into a fifty-fifty split. The division of property could be fifty-fifty, sixty-forty, seventy-thirty, or even all for one spouse and nothing for the other (although that would be very unusual). Under equitable distribution, courts consider a variety of factors and need not weigh the factors equally. That permits more flexibility and more attention to the financial situation of both spouses after the divorce. However, it also makes the resolution of property issues less predictable.
Here are some examples of factors that are considered by states applying principles of equitable distribution:
1. Nonmarital Property. If one spouse has significantly more nonmarital property than the other, that could be a basis for giving more marital property to the less wealthy spouse. As noted, courts are not obliged to give equal amounts of property to each spouse, but if the parties have sufficient assets to leave each party in a comfortable situation after the divorce, courts usually will try to do so.
2. Earning Power. If one spouse has more earning power than the other, that could be a basis for giving more marital property to the spouse with less earning power. Courts reason that the party with greater earning power can regain money lost in a divorce more easily than the party with less earning power.
3. Who Earned the Property. That can be a factor in favor of the party who worked hard to acquire or maintain the property. When courts apply this factor to a family business, it is common for a court to award all the interest, or a majority of the interest, in the family business to the spouse who operates the business. In that circumstance, the court not only is considering who earned the property, but also is seeking to disentangle the hu*****and and wife from each other's future financial affairs. If the value of the business is approximately the same as the value of the family home, it is common for the court to give the business to the spouse who primarily operates the business and give the home to the other spouse
4. Services as a Homemaker. Courts recognize that keeping a home and raising children are work. In addition, those services often enable the spouse who is working outside the home to earn more money. Thus, services as a homemaker are a factor in favor of the homemaker. Some courts also apply a related concept of considering whether one spouse had impaired her or his earning capacity because of working as a homemaker. If a party can show his or her work as a homemaker resulted in missing the opportunity for training or job experience that could have resulted in higher income, that factor can favor giving more property to the homemaker-spouse.
5. Waste and Dissipation. If a spouse wasted money during the marriage, that could count against him or her when it comes time to divide property. This factor is sometimes labeled "economic fault," and may be considered even by courts that do not consider other kinds of fault. Waste or dissipation could include gambling losses, significant sums of money given to family members (particularly over the protest of the other spouse), and money spent on pursuing romantic relationships outside the marriage. Business losses occasionally are considered waste or dissipation, but more often, they are considered an ordinary risk of doing business for which neither spouse should be penalized (particularly if the business deal would have benefited both parties had it gone better). In some states, before waste or dissipation can be a factor, it must be shown that the waste or dissipation occurred when the marriage was breaking down (a relatively short time before or after one spouse filed for divorce). In other states, waste or dissipation at any time during the marriage could be relevant.
6. Fault. Non-economic fault, such as spousal abuse or marital infidelity, is considered in some states, but most states do not consider it relevant to property division. In years past (particularly prior to 1965), divorces were based on fault. One needed to show fault by the other party in order to obtain a divorce, and fault was an important consideration in dividing property and setting support. The more modern view is that courts should focus primarily on the economic factors when dividing property and pay less attention to who-did-what-to-whom. Most courts and legislatures concluded that it was too difficult and not worth the time to try to sort out all the transgressions that may have gone on in a marriage, many of which are of a subjective nature.
7. Duration of Marriage. A long marriage may be a factor in favor of a larger property award to the spouse with less wealth or earning power. The longer the marriage, the more likely a court is to view the hu*****and and wife as equal partners.
8. Age and Health of Parties. If one spouse has ill health or is significantly older than the other, that factor could favor a larger award to the sicker or older spouse. When the factor is mentioned by a court, it most often is in connection with an older wife whose ability to earn money is diminished by her age and health. The factor can apply to men too, particularly if the man is of an age at which it is not reasonable to assume that he can go out and re-earn a substantial amount of assets if his wife were given a majority of the marital assets. In such a case, an equal division of assets would be more likely.
9. Tax Consequences. The tax consequences of property division can be considered when dividing property. If, for example, the sale of a house or the sale of stock in a company as part of a divorce will result in payment of capital gains tax, the court can consider that when dividing the property. Perhaps the person who will have to pay the tax may receive some extra property to compensate for the added tax that person will have to pay. Conversely, if a property settlement results in a tax benefit, the person receiving the benefit may receive less property because of that benefit. In order for a court to consider tax consequences, the consequences usually must be immediate and specific. The court generally does not want to speculate about possible tax consequences that may occur several years in the future.
10. Premarital Agreements. A written premarital agreement, assuming it is valid, can be a trump card in dividing marital property. By entering into a premarital agreement, the wife and hu*****and have agreed to waive their rights to have a court consider the usual cluster of factors in dividing property. Instead, the parties through their agreement have determined in advance how their property should be divided in the event of a divorce.
Checklist: Dividing Marital Property
DISCLAIMER
The following form is provided by Findlaw for informational purposes only and is intended to be used as a guide prior to consultation with an attorney familiar with your specific legal situation. Findlaw is not engaged in rendering legal or other professional advice, and this form is not a substitute for the advice of an attorney. If you require legal advice, you should seek the services of an attorney. Copy 2000 Findlaw. All rights reserved.
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When dividing marital property, it's easy to get caught up in who gets the big stuff--the cars, the house, the boat. In actuality, all of your marital property must be divided, and in the heat of a disputed divorce it may be easy for some important details to fall through the cracks. The following checklist can help you keep your bearings so that you and your attorney can work together to formulate a property settlement that is in your best interests.
• Real Property
____ Marital homestead
____ Vacation home(s)
____ Business property
____ Rental property
____ Undeveloped land
• Personal Property
____ Home furnishings
____ Rugs
____ Antiques
____ Artwork
____ China
____ Crystal
____ Coin collections
____ Stamp collections
____ Collectibles
____ Guns
____ Computers
____ Home office equipment
____ Jewelry
____ Clothing
____ Furs
____ Motor vehicles
____ Boats
____ Campers
____ Recreational vehicles
____ ATVs
• Financial Assets
____ Cash on hand
____ Checking accounts
____ Savings accounts
____ Christmas club accounts
____ Educational accounts
____ Retirement accounts
____ 401(k) plans
____ Pensions
____ Profit sharing
____ IRAs
____ Stocks and bonds
____ Mutual funds
____ Certificates of deposit
____ Annuities
____ Life insurance policy cash values
____ Trusts
• Business Assets
____ Sole proprietorships
____ Partnerships
____ Professional practice
____ Professional degree
____ Other business interests
• Other
Searching for Hidden Assets at Divorce
How to find property your spouse may be concealing when you divorce.
This list includes common ways in which a spouse may undervalue or disguise marital assets:
• Collusion with an employer to delay bonuses, stock options or raises until a time when the asset would be considered separate property.
• Salary paid to a nonexistent employee, with checks that will be voided after the divorce.
• Money paid from the business to someone close -- such as a father, mother, girlfriend or boyfriend -- for services that were never actually rendered. The money will no doubt be given back to your spouse after the divorce is final.
• A custodial account set up in the name of a child, using the child's Social Security number.
• Delay in signing long-term business contracts until after the divorce. Although this may seem like smart planning, if the intent is to lower the value of the business, it is considered hiding assets.
• Skimming cash from a business he or she owns.
• Antiques, artwork, hobby equipment, gun collections and tools that are overlooked or undervalued. Look for antique furnishings, original paintings or collector-level carpets at the office.
• Income that is unreported on tax returns and financial statements.
• Debt repayment to a friend for a phony debt.
• Expenses paid for a girlfriend or boyfriend, such as gifts, travel, rent or tuition for college or special classes.
• Investment in certificate "bearer" municipal bonds or Series EE Savings Bonds. These do not appear on account statements because they are not registered with the IRS. (The government is phasing out these bonds, realizing that it is losing a lot of money.)
• Cash kept in the form of traveler's checks. You may be able to find these by tracing bank account deposits and withdrawals.
• Retirement accounts that your spouse never tells you about.
Be advised that you may have difficulty finding some items or getting the proof you need to show they exist. Formal discovery procedures through litigation may help. For instance, you could take the deposition of your spouse's boss or payroll supervisor. But you may also need to hire a forensic accountant or a private investigator. (A forensic accountant is an accountant who is trained to look into accounting practices in order to gather evidence that can be used in court.) Usually an attorney can refer you to these specialists.
Get the Goods (on Paper) Before It Ends
If you suspect that your spouse may attempt to hide assets, it's best to start investigating your household and business finances before initiating divorce proceedings. Make copies of important documents such as tax returns from the past several years, bank account statements, pay stubs and any other documents that reflect joint assets or debts. Keep copies of these documents outside the home if you're still living with your spouse or partner. Also, as a precautionary measure, you might want to open a separate savings account in your name only. If your spouse hides assets, you may find yourself in need of a nest egg. Down the line, you may have to relinquish some of your savings to your spouse -- after all, we're not encouraging you deal with a dishonest spouse by stooping to his or her level. But having a little extra cash on hand may ward off a crisis in the wake of your divorce.
