A legal separation is when a married couple decides to live apart, and one or both ask the court to oversee the separation process. One of the acts that the court will need to consider is the distribution of property. Depending on the couple’s state, the court will divide their assets under one of two overarching schemes: community property or equitable distribution.
In a community property state, “community property” is defined as all property and money the couple acquires when they are married. When spouses get divorced, each spouse gets half of the assets. Property that is not community property (separate property) belongs 100% to the spouse who acquired it.
In non-community property states, courts will divide property based on “equitable distribution.” Under these laws, the property will be divided in a case-by-case manner according to what the court determines to be “fair” or “equitable.” This can be determined through an examination of various factors, including:
- How long the marriage arrangement lasted
- Whether any specific property agreements between the spouses might affect the property distribution (such as a prenuptial or postnuptial agreement)
- The financial condition of each spouse at the time they entered the marriage
- The overall character and disposition of each person’s estate
Thus, property division in an equitable distribution state might not follow an exact 50/50 property division. The court is trying to determine what property division is fair rather than using a mathematical formula.
How Does Community Property Function?
There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, all of a married person’s property is deemed to be either community property (owned jointly by both spouses) or the separate property of one spouse. Marital property refers to all property acquired by either or both spouses during the marriage.
Separate property refers to any property the spouses accumulated separately before the marriage or after the separation. Separate property also includes any gifts or inheritances either spouse obtains at any time.
How Does Equitable Distribution Function?
In the states that do not follow a community property distribution plan, assets and earnings acquired during the marriage are divided equitably (justly) but not equally. In some states, the judge may order one party to use separate property to ensure the settlement remains fair for both spouses.
Neither spouse must hide assets to shield them from property division. If a party is guilty of committing this type of fraud, a court could punish them with sanctions or by awarding a percentage of the value of the hidden asset to the other spouse. In California, that can be as much as 100%.
How Does a Court Establish a Fair Division of Marital Property?
A court will review several factors in determining how to distribute the marital property. Below are some factors that a court will examine:
- How long the marriage lasted
- Whether any specific property agreements between the spouses might affect the property distribution (such as a prenuptial or postnuptial agreement)
- The financial condition and earning ability of each spouse
- The value of each spouse’s separate property, including a spouse’s business, business interests, retirement plans, 401(k) plans, stocks, bonds
- The degree to which each spouse contributed to the accumulation of marital property
- The degree to which each spouse contributed to the education and earning ability of the other spouse
- Future financial needs and liabilities of each spouse
- The ages and overall health of each spouse
- The liquidity of marital property
- Spousal maintenance or alimony obligations
How and When Does a Court Value Marital Property?
Marital property is usually valued at fair market value on the day the suit for divorce is filed. If a period of months or years has passed before a divorce decree becomes final, some states will have the parties share in the appreciation or depreciation of marital assets between the date of separation and the date of divorce.
Marital property is generally classified by state law. Typically, marital property includes that property obtained during the marriage from marital funds regardless of whose name is on the legal title to the property.
Marital property differs from separate property, which is usually not divided during the divorce or separation. Separate property is the property that was owned before the marriage, and that was acquired through the use of separate funds. It also can be property that was received as an individual gift or inheritance.
Sometimes, the property is commingled, such as an account with separate funds before the marriage, and then used as a joint bank account. If the source of funds cannot be traced to separate funds, the asset is generally considered marital property.
What are Property Settlement Agreements?
A married couple may enter a property settlement agreement as part of a legal separation or contract before their divorce is finalized. To be enforceable, usually, the parties will have provided financial disclosures to each other so that they can make informed, reasoned decisions.
Typically, a property settlement agreement will indicate that the parties have received the advice of counsel and are voluntarily agreeing to the terms. It may also state that the agreement can be used as evidence in the divorce case or be incorporated into a final divorce decree.
The property settlement agreement will detail what personal and real property the couple owned and specify its agreed-upon value. The agreement will discuss arrangements concerning vehicles, retirement accounts, and other specific assets. The agreement will indicate who gets what.
The couple’s agreement can also have provisions that are not economic, such as provisions concerning child custody or visitation. Usually, this agreement will not have to be filed with the court to be effective and will stand as an independent contract until it is incorporated into a formal legal order.
As mentioned earlier, property is considered separate if one party owned it before the marriage, inherited it, or received it as a gift during the marriage. However, separate property can lose its separate nature if it is commingled with marital property. For instance, if one of the spouses had a separate bank account before the marriage and then paid some marital expenses out of it or increased it by making deposits from marital funds, the property may have lost its separate status.
When Do I Need to Contact a Lawyer?
If you are considering entering a separation agreement, it is in your best interest to seek advice from an experienced family law attorney before signing anything.
Often, these issues can become complicated because a couple failed to do some research and had unrealistic expectations regarding how their property would get distributed. If you have any questions about how property will be divided in your legal separation agreement, seek a lawyer before the issues become more complicated.
