When a marriage ends, some person or entity must determine how assets and liabilities acquired during the marriage should be distributed. In many cases, this requires a court to rule on the issue. Distributing assets when a couple divorces requires an understanding of the difference between community property and separate property.
The parties to a divorce may decide how their assets are distributed prior to the marriage or prior to the divorce. If the couple mutually agrees to divide their assets in a certain manner, the distinction between community and separate assets matters little. Couples who are not yet married and who wish to prepare for the possibility that their marriage may not last forever may draft a prenuptial agreement.
A prenuptial agreement is a document that describes each party’s rights and obligations should the marriage end under certain circumstances. Most states have stringent requirements that must be met before a prenup will be enforceable. These include granting each party the opportunity to consult with his or her own attorney and instituting waiting periods before signing. Persons wishing to have an enforceable prenuptial agreement should seek legal counsel to discuss the requirements in their respective states.
In the absence of an enforceable prenup, the couple may still dictate how marital assets and liabilities are distributed by drafting a divorce settlement agreement. There are relatively few restrictions on settlement agreements in most states. Generally, courts will not enforce anything that is grossly unfair to one person or anything that fails to act in the best interests of any children involved. Beyond that, the couple has the right to determine how their assets and liabilities are divided between them.
Community Versus Separate Property
If the couple cannot reach a consensus before or during the marriage, a court must determine whether a given asset constitutes a marital asset. Community property includes assets that are acquired during the marriage, subject to certain exceptions. The law treats assets and liabilities acquired and incurred (respectively) during the marriage as jointly owned. Hence, they are subject to division between the two spouses pursuant to state law.
Separate property includes most types of property acquired prior to the marriage or after the date of separation. Assets acquired during the marriage may also be considered separate under certain circumstances. For example, gifts and inheritances are treated as separate regardless of when one spouse receives them. When a divorce occurs, each party retains his or her separate assets and liabilities subject to any reassignment that is necessary to effect an equitable distribution.
Commingled assets generally remain separate, but can prove problematic nonetheless. For example, consider the income produced during the marriage from revenue-generating or appreciating separate property (e.g. real estate) that was acquired prior to the marriage. Such income is usually considered separate. However, spouses are entitled to earnings they generated as a part of their marital efforts. This can cause disputes if one spouse helped expand a business or improve a property that was owned by the other spouse before the marriage.
Community Property Versus Equitable Distribution
Once a court has determined which assets qualify as community property or separate property, the court must then determine how to divide them. A minority of states follow community property rules; all community assets are equally divisible between the two persons, and separate assets remain separate subject to certain aforementioned exceptions. Each spouse will be awarded the value of half the marital property. Other matters like alimony and child support are handled separately.
The majority of U.S. states follow equitable distribution rules; courts attempt to create an outcome that is equitable under the circumstances. It’s worth underscoring that equitable does not mean equal. Instead, the courts attempt to create a fair distribution. In determining whether a distribution would be fair, a court will consider factors such as the length of the marriage, relative incomes and expenditures, the standard of living enjoyed by both persons, each person’s contribution to the marriage, and various other factors.
State law varies considerably on this topics. Some states allow the courts to award separate assets or liabilities to the other party in order to effect the equitable outcome. Separate assets and liabilities have varying levels of protection. Some states allow the trial judge to consider spousal misconduct, either during the marriage or during the legal proceedings, in determining whether a particular distribution would be equitable.
Equitable distribution states place great power within the hands of the judge to weigh a variety of subjective factors to reach a subjective goal. As such, each person involved in a divorce should retain an experienced and motivated family law attorney to represent his or her interests.