How Property Is Distributed In A Divorce

One of the principal functions of the divorce courts is to distribute the property acquired by the spouses during their marriage. Generally, the property owned by each spouse prior to entering into the marriage remains exclusively theirs. This rule does not apply if:

• The property is commingled with marital property so that it can no longer be identified.
• The court finds that the owner made a gift of some interest in the property to the other spouse.

Because marriage is seen as a partnership, any property acquired during the marriage is subject to distribution, regardless of whether it was earned or acquired by one or both of the spouses. This applies in:

• community property states where such joint ownership existed during the marriage
• separate property states where the joint interest in marital property does not become manifest until the marriage is at or near an end.

Community Property

Community property law is followed in several states in the west, southwest, and in Louisiana. Under this law, all marital property is jointly owned by the spouses and, while they can agree to have a particular item of property managed or controlled by one of them, that person is responsible to the other for the results of that management. This responsibility usually does not exist under a separate property regime.

Separate Property

Most states apply a separate property approach to the division of property in a marriage termination. Most states allow each spouse to own and manage both their premarital property and property that they have individually acquired during the marriage. Additionally, under this approach, the spouses can determine for themselves how their jointly acquired property will be managed and can commit its management to either or both of them.

Equitable distribution, the process of dividing the property, is similar from state to state although the details of the process vary. The courts generally follow a three-step process:

1. Determining what property is subject to distribution (that is, was a particular item acquired during the marriage or did it become part of the estate in some other way)
2. Valuing the property and assigning a cash value to all major items.
3. Allocating, or distributing, the property between the spouses.

Types of Property

The types of property subject to distribution are quite diverse and include every kind of property that it is possible to own:

• tangible property and intangibles
• real estate and hard assets such as cash an jewelry
• interests in pension plans, stocks, bonds, stock options and other items of actual or potential value
• the debts of the parties

Valuing the Assets of the Marriage

Some of the most difficult items for the courts to deal with in property division cases are:

• assets on which it is difficult to place a value
• determining how and when the assets were acquired

Pension plans pose serious issues of this kind, as do closely held businesses, whether in corporate, partnership, or sole proprietorship form. For example, it is difficult to determing:

• the value of the good will of a business
• the values of stock options and tax shelters
• early stage businesses that have not begun to show a profit

Determining whether the earning power of a spouse should be subject to distribution has been of special concern.

In some states, celebrity and professional good will have been treated as distributable assets, thus allocating the anticipated earning power of the holder of that asset.

A few states also treat an educational degree or professional license earned during the marriage as property, arguing that doing so similarly provides for effective distribution of the earning power gained by the education, or obtaining of the license during the marriage. Most states feel that the value of such a degree or license is too speculative to be dealt with directly. However, many of the states not allowing distribution of degrees of licenses will allow the other spouse to be reimbursed for the expense to the marital estate of obtaining the degree or license.

Distribution of Assets

The manner in which property is distributed between the spouses is very much dependent on the assets owned by the particular couple. Equitable distribution means, at a minimum, that the courts have the authority to decide which particular parts of the marital estate go to each of the spouses. Individual property items do not have to be divided, but the court is responsible for seeing that they are distributed, providing each of the parties with an appropriate share of the marital estate.

In some states it is presumed that each spouse will receive one half of the value of the marital estate in that distribution. In other states, the courts are expected to consider the entire situation of the parties at the time of the divorce in order to best meet the real needs of the parties in their post-divorce lives. Considerations include:

• earning power
• responsibility for child care
• physical and mental capacities

In states choosing to make the above considerations, an equal distribution is not required nor anticipated. Courts will often balance-out earning versus non-earning assets to compensate for limitations on the earning capacity of a party. In some cases, to create an equivalent distribution, the spouse with the lesser earning capacity may receive additional property. Other considerations often include:

• the interests of the children of the marriage
• the immediate need of the parties to establish their new lifestyles