For many couples, dividing assets and debts is one of the most difficult parts of a divorce. Although a stressful process, the valuation of assets is extremely important, particularly real estate, businesses and deferred compensation plans. For instance, if a couple speculates as to the value of a business, any agreement based upon the value may be impossible to fulfill. This may prevent the ability of both spouses to move forward financially and can even destroy a business which once provided the family with a great standard of living.
1. What Does Equitable Distribution Mean in a Divorce Case?
Equitable distribution is the process of dividing marital and divisible property in court. In a perfect world, spouses would negotiate the division of their marital property without a judge’s involvement. Of course, most spouses don’t divorce if they’re finding it easy to cooperate. If they can’t come to an agreement (which is not out of the ordinary), the court will schedule a hearing and divide marital property using a theory of equitable distribution. Marital property includes both assets and debts. Based on this theory, a judge will split the couple’s property 50-50 unless such a split would be inequitable or unfair. When a judge assesses the fairness of a split, they consider a series of factors, some of which are:
- Each spouse’s income, debts and property
- How long the marriage lasted and each spouse’s age
- Ways in which a spouse directly or indirectly contributed to the other’s educational and professional opportunities
- A custodial parent’s need to occupy or own the marital home or other household items
- Both spouses’ physical and mental health
- Tax consequences related to the property division
- Any other factors that are “just and proper”
Note that the court will not consider child support and alimony payments when dividing marital property.
2. What Is Marital Property and How Much Is It Worth?
For the purposes of property division, courts classify property into three categories:
- Marital Property: This category includes any income, assets, property and debts accumulated during the marriage. Marital property can include wages, pension and retirement funds, investment accounts, real estate, personal property, mortgages, car loans and credit card bills.
- Separate Property: Spouses typically do not get a share of their partner’s separate property, which includes pre-marriage assets and debts as well as gifts or inheritances that someone specifically gave to one spouse and not the other. It’s important to note that separate property can transform into marital property if it is commingled, meaning mixed with marital assets. For example, if a spouse uses an inheritance to buy a jointly-titled asset, it might become marital property.
- Divisible Property: There’s always some time that passes between when spouses separate and when the court gets around to handling property distribution, and this category exists to deal with assets that the spouses receive during that period as well as assets that change in value during that period. Note that an asset that was earned before the date of separation will still count as divisible property if it’s received after separation.
3. Can a Prenuptial Agreement Protect My Assets?
Nuptial agreements can occur either before (prenuptial) or during a marriage (postnuptial). In a nuptial agreement, you and your spouse define which property is marital and which is separate. This can streamline your property division process during a divorce.
Not every nuptial agreement is valid, however. Spouses can dispute the validity of a nuptial agreement if they didn’t enter it voluntarily, if it was based on fraud or misrepresentations, or if it wasn’t properly signed. Even if a couple doesn’t have a nuptial agreement, they can still negotiate a separation agreement, which is an out-of-court property settlement that divides marital and divisible property and identifies separate property. A separation agreement can also resolve child custody and support issues. However, it’s important to keep in mind that once a couple enters a separation agreement, it will become legally binding and won’t be easy to change. Couples should always get advice from a lawyer before entering a separation agreement.
4. Who Gets to Stay in Our House?
If a couple has minor or dependent children, the parent who has primary physical custody may get to stay in the marital home. However, that spouse will need to consider whether they can afford to pay the remaining mortgage and other costs before trying to stay in the house.
Sometimes, the best option for both parties is to sell the marital home and divide the proceeds.
5. How Are Businesses and Real Estate Divided?
In terms of real estate, the housing market can be a roller coaster, as the value can fluctuate based upon location and market forces. Rather than estimating the value, an appraisal is necessary to determine market value. Then, an agreement must be reached about who will be awarded specific properties.
When looking at businesses, each is truly unique. The value of a business consists of analyzing financial data for several years as well as looking at recent trends. A proper business valuation is important to ensuring a realistic and fair division of assets.
Other Factors to Consider
Frequently, executives enjoy deferred compensation based upon job performance and company loyalty. Accurately accounting for compensation benefits earned during the marriage, but not yet received, is critical to a fair division of assets. If a couple does not value such an asset, one spouse may end up with a windfall and the other shortchanged. As a result, couples facing divorce should consult with experienced legal counsel about asset valuation to ensure that the division of their assets is based in reality and not speculation.
If you have any questions, please contact a member of Varnum’s Family Law Practice Team.