During a divorce, certain assets will be divided between the two spouses. The spouses may control how their assets will be distributed through mutual assent prior to or after the marriage. In the event that they do not come to an agreement or if the agreement is not legally enforceable, the burden of distributing their belongings will fall to the court. Whether their belongings are divided in the first place will largely hinge upon whether they are considered to be premarital or marital property.
Voluntary Agreement
Before marriage, both parties may craft a prenuptial agreement. Among other provisions, the prenuptial agreement may limit the rights of each party to receive certain assets, or guarantee payment in the event that the couple’s marriage ends early.
There are strict limits on enforceable prenuptial agreements in most jurisdictions. Many jurisdictions will not enforce a prenup that shocks the conscience of the court. Some states have laws that prevent such agreements from taking effect. For example, California requires a seven-day waiting period, and both parties must be provided the opportunity to review the prenup with their individual attorneys.
In the absence of an enforceable prenuptial agreement, the divorcing couple may agree to divide assets in a certain manner during their divorce. This is an efficient option; it allows both individuals to select the assets that are most important to them or necessary to maintain their livelihood. It also greatly reduces legal expenses, and reduces the disruption into each spouse’s life before and after the dissolution of marriage occurs.
Drafting a divorce agreement is as simple as disclosing one’s financial assets and collaborating when filling out the necessary court forms. While a divorce agreement is most effectively drafted with the assistance of an attorney, it may be done without lawyers.
Courts will generally enforce the spouses’ divorce agreement provided that each spouse knowingly and voluntarily signed it. Both parties have the freedom to contract and the freedom to waive certain rights and privileges if they understand the consequences of doing so.
In rare circumstances, a court will not approve the asset distribution portion of a parties’ divorce agreement. This usually occurs if the outcome would be grossly unfair to one spouse or if the agreement fails to comport with the best interests of any children involved in the divorce.
Marital Property Vs. Separate Assets
If there is no enforceable prenuptial agreement and if a dispute still exists as to the couple’s assets, a court will determine how their holdings will be distributed. This first requires determining which holdings were acquired during the marriage and which holdings were acquired before the marriage.
Marital assets are those acquired during the marriage, subject to certain exceptions. These exceptions include but are not limited to gifts, inheritance, assets acquired following the separation, and portions of certain civil judgments. Holdings that would ordinarily be classified as separate, such as belongings acquired prior to the marriage, may become marital assets if they are comingled during the marriage.
Premarital assets that appreciate do not entirely remain premarital assets in all situations. The value of the appreciation is considered marital property in some states if the spouse who did not own the asset actively contributed to its appreciation. Spouses do not have a claim to premarital assets like real estate or financial holdings that passively appreciate due to changing market conditions. However, if the spouse improves the land or buildings thereupon or contributes to the business, any appreciation on those holdings may be considered marital property.
Community Property Vs. Equitable Distribution
Generally, marital assets are subject to division; however, that principle is applied differently depending upon the jurisdiction. When determining which assets are subject to division, the court will default to state law. States fall into two categories: equitable distribution states and community property states. In a community property state, the court will divide the value of marital assets equally between the two partners. Nine states follow that simple rule.
The other 41 states follow the equitable distribution rule. Courts in equitable distribution states do not attempt to effect an equal distribution of assets, but to distribute assets in an equitable manner. In determining which assets should be distributed, a court will consider many different factors, including each party’s available income and assets, their respective standards of living, their employability, and the length of the marriage.
The nebulous nature of such an analysis and reliance upon a single judge to determine all of these factors may result in some unexpected decisions. Some equitable distribution states take the analysis a step further and include premarital assets as assets which may be distributed.
Spouses who wish to retain property should seek alternative dispute resolution methods; litigation is expensive and can whittle away at both parties’ standards of living. Both spouses should discuss settlement options with their respective lawyers before relying upon a judicial decree.