Contributed by: Jacki Roessler, CDFA®
It’s Complicated!
Here in Michigan, divorce cases occur in what’s referred to as an “Equitable Division” environment. This distinction separates us from “Community Property” states like California, where the presumption is that all property acquired during a marriage is subject to equal division. In an equitable division property state, there’s a presumption that a property settlement should be equitable or FAIR…not necessarily equal. Marital property, including any asset (or debt) that accumulates during the marriage, no matter in whose name, is subject to equitable division between the parties.
But what about assets that don’t fall neatly into the proverbial marital pie? How, if at all, are they divided?
In general, assets considered the “separate” property of one spouse include those that were:
Brought into the marriage and left in the party’s name
Gifted during the marriage and left in the party’s name
Inherited during the marriage and left in the party’s name
Simple, right? Wrong.
In fact, although I’ve been a practicing divorce financial planner for nearly 25 years, lately I’ve noticed the distinction between separate and marital assets has gotten more complicated and difficult to navigate.
As an example, suppose John and Jane have filed for divorce after 20 years of marriage. Five years ago, Jane inherited $100,000 from an aunt in the form of an Inheritance IRA, from which the IRS requires her to take minimum annual distributions. She has been using the distributions to fund family vacations, and she and John have paid taxes on their joint return for all distributions.
For purposes of the divorce, is her $100,000 separate or marital property? In other words, is John entitled to an equitable share of any part or does it go to Jane, free and clear?
The answer: It depends. It depends on the length of marriage. It depends on whether Jane’s inheritance was co-mingled in any way. Let’s suppose the funds distributed were put into an account only in Jane’s name and weren’t used for family vacations. That might make a difference, depending on other circumstances.
Let’s take the example above and consider the parties’ marital home. John made the down-payment with proceeds from the sale of his pre-marital home, but both names are on the new home’s title. This is generally considered John’s gift to the marital estate. Because his separate property has been co-mingled, the house becomes part of the marital pie and up for equitable division between the parties.
Looking at a more complicated example, let’s also suppose that John had $200,000 in his 401k when he and Jane got married. He never moved the money into an account in both names, took a distribution or loan during the marriage. With the account now grown to $1,000,000, Jane concedes that the original $200,000 isn’t in the marital pie, but believes the entire $800,000 increase should be. John’s attorney says no, only the contributions made during the marriage, and earnings on those funds, should be part of the marital pie. The rest is separate.
Who is correct? Once again, it depends on several factors and on the specifics of the case. It’s important to understand, though, that no cut-and-dried answer can be applied to every case. These complex legal questions must be addressed by a qualified family law attorney. Keeping in mind that only a lawyer can help a client determine what is separate and what is marital property, there’s also the question of proof. That’s where a financial expert comes into play. Working within the framework of the legal strategy, the financial expert’s job is to reasonably quantify what is separate and what is marital.
The take-away for clients? When facing an issue of separate or marital property, bring it to the attention of an attorney and ask a lot of questions. Next, are there financial records to prove the case? This is key to determining whether it makes sense to pursue a claim in favor of or against separate property. Last, it may be possible to invade separate property based on need or other relevant factors.
As always, clients need to work closely with their attorneys and financial experts to explore all the options available to them – and the costs.
Jacki Roessler, CDFA®, is a Divorce Planner at Center for Financial Planning, Inc.® and Branch Associate, Raymond James Financial Services. With more than 25 years of experience in the field, she is a recognized leader in the area of Divorce Financial Planning.
Any opinions are those of Jaclyn Roessler and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. The case studies included herein are for illustrative purposes only. Individual cases will vary. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Raymond James and its advisors do not provide tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
