In a Divorce, What Is Marital Property vs. Separate Property?
It can be a big problem for wealthy couples and those who have been married a long time: What happens when the boundary between separate assets and marital assets gets blurred?
They say that money cannot buy happiness, and the thousands of failed celebrity and CEO marriages seem to bear this out. While much may be the same across the board for divorcing couples, millionaire couples face several unique issues when separating.
The amount of money you walk away with to secure your financial future will depend on several factors, the most important being whether the family wealth was earned during the marriage or if the breadwinner made it before they walked down the aisle. State laws are relatively consistent, holding that marital property is subject to division in a divorce, and includes all money earned during the marriage, even if it is in an account solely titled in your spouse’s name.
What Is Considered Marital Property?
Specifically, any salary, bonus or earnings, retirement contributions, homes, businesses or cars purchased during the marriage by either spouse are considered marital property subject to division in a divorce. Marital property is typically divided equally (50/50) or equitably, depending on your state’s rules and whether you live in an equitable division or community property state.
What Is Separate Property?
Separate property includes all property that was owned or acquired by either spouse before the marriage. If your soon-to-be-ex had oodles of money before you got married, most likely you will not get a penny of it. You are also out of luck if your spouse received money from an inheritance or a gift from another person. A personal injury award to compensate for pain and suffering also falls in the bucket of separate property.
Wealthy individuals are also much more likely to have a prenuptial agreement. This legal document typically spells out what is separate property if the two of you split and often ensures that the lesser moneyed spouse walks away with less.
Where Things Get Complicated …
It is all relatively straightforward until it is not. In high-net-worth divorces, the distinction between marital and separate property is rarely black and white. With more wealth, lines get blurred. Commingling of assets does not happen on purpose, and usually occurs while you are living your life, not realizing that you are inadvertently creating issues.
Separate assets can quickly get so commingled with marital property so that it is virtually impossible to identify what should be subject to division and not. For instance, if income earned during your marriage is used to pay off a home originally purchased by your spouse before the wedding, a portion of its value can be considered marital property. The waters also get muddied if money from the marriage was spent to renovate this separate-asset property or to pay ongoing upkeep and maintenance costs.
Then there is the question of appreciation. As housing prices have skyrocketed recently in many parts of the country, real estate gains can be substantial. You now must grapple with calculating what percentage of the increase in the home value is marital and what is separate, also considering the amount of money that was funneled from your marriage into the property. Your head can hurt just picturing the calculation.
The same issue arises if your spouse received a gift from his parents and used the proceeds to purchase a vacation home titled in both of your names. The "what's mine is yours" outlook can cause some big financial mistakes. Was the weekend get-away in the Hamptons a gift to you by your mate … or was it a mistake? Is the beach house marital now or separate?
Commingling assets is not relegated only to the realm of real estate. If you and your spouse share a bank account that was in his sole account before your marriage, you have another commingled mess. This is also true of investment and retirement accounts that you brought to the marriage and added to after saying your “I do’s.”
Time Magnifies the Issues
The longer the marriage, the more likely commingling occurred, and the more documentation will be needed to support the separate property claim. A general rule of thumb is that the longer the time period, the greater the number of statements that must be produced and analyzed. The person making the separate property claim will have to verify what the account balance was when you got married and detail how much money was contributed to it during the marriage.
Each separate property tracing analysis is unique, based on the couple's assets, number of years married, the amount of time the assets have been owned, and many other factors. However, what all millionaire divorces do have in common is the need for a crack team of legal and financial professionals who must unravel the complicated finances and ensure that you get the assets you are entitled to.
About the Author
President & CEO, Francis Financial Inc.
Stacy is a nationally recognized financial expert and the President and CEO of Francis Financial Inc., which she founded 15 years ago. She is a Certified Financial Planner® (CFP®) and Certified Divorce Financial Analyst® (CDFA®) who provides advice to women going through transitions, such as divorce, widowhood and sudden wealth. She is also the founder of Savvy Ladies™, a nonprofit that has provided free personal finance education and resources to over 15,000 women.