Basics of Identifying Separate Property in Divorce

New York State Domestic Relations Law 236(B)(1)(d)(1) provides a list of specific types of property that may not be considered marital property and must be considered the separate property of the title-holding spouse. This property is exempt from equitable distribution. The statute addresses the following categories of property:

(1) Pre-marriage property;
(2) Gifted or inherited property;
(3) Compensation for personal injuries;
(4) Property acquired with separate property;
(5) Property identified as separate property by written agreement.

The property falling within the categories above is considered “separate property” under the Equitable Distribution Law. There may also be other types of property, in addition to the statutory list, which may not be considered “marital property”, such as property acquired after commencement of the marital action.

There is a presumption that property acquired during the marriage and prior to execution of a separation agreement or commencement of a matrimonial action is marital property. Therefore, the party who claims that the property acquired within those time frames is separate property has the burden of proof. Even though separate property is not subject to equitable distribution, it may be considered in making such distribution.

PREMARITAL PROPERTY

Property acquired before the marriage is separate property because the economic partnership created by marriage is not established until the marriage has taken place. This means that even if the parties cohabitated before marriage, the property acquired before marriage and the appreciation to that property to date of marriage, is not marital property.

Wedding gifts are considered to be marital property, unless the gift was something that could be used only by one spouse, or was specifically earmarked as exclusively intended for one spouse. Gifts given by one prospective spouse to the other prior to marriage are the separate property of the recipient spouse. As discussed in a previous post, engagement rings are the separate property of the recipient spouse.

GIFTED OR INHERITED PROPERTY

Property acquired by gift or inheritance by a party from an inheritance, is separate property. Where the gift or inheritance, however, is to both spouses jointly, the property should be viewed as marital. However, interspousal gifts are marital property. With respect to any gift claimed as separate property, the party making such claim will have to show that the property was intended for that spouse alone. Income from separate property is considered to be separate property.

PERSONAL INJURY COMPENSATION

Personal injury includes compensation for personal injury, libel, slander, and malicious prosecution; also assault, battery, false imprisonment or other actionable injury to the person.

PROPERTY ACQUIRED WITH SEPARATE PROPERTY

Property acquired in exchange for separate property is separate property, so long as it has not been commingled with marital property or an interest gifted to the other spouse.

PROPERTY BY AGREEMENT

The parties’ may by a written and acknowledged agreement define property to be separate, no matter what a court might determine.

COMMINGLED PROPERTY

Separate property co-mingled with marital property remains separate if it can be traced to its source and there has been no valid gift or agreement to the contrary. However, separate property that is commingled with marital assets, or placed in the spouses’ joint names, can become marital property. For example, if a spouse places his or her separate property into joint names, such as a house or a bank account, a presumption of a gift arises which, unless rebutted, results in the conclusion that the property is to be treated as marital property. This presumption, if not rebutted, is that the entire amount of the asset will be treated as separate property.

It should be noted that the spouse who contributed separate property may receive a credit for the amount of property contributed to the creation of the marital asset. Recent decisions have extended this concept to include the appreciation of the separate property as a credit to the spouse who contributed it. Similarly to a situation where marital property is used to pay a separate debt, where a spouse uses separate property to pay a loan on marital property, that spouse is entitled to a credit for such payment when the marital property is distributed.

Basics of Distributing Retirement Assets

In 1984, the New York Court of Appeals decided Majauskas v. Majauskas, 61 N.Y.2d 481 (1984). This is the case that decided that the portion of the spouse’s pension, earned during the marriage, is marital property subject to equitable distribution. To the extent that a pension was earned during the marriage, it is, for purposes of New York law, considered marital property. The Majauskas decision sets forth the formula that normally is to be followed in dividing a pension plan. Along with pension plans, other types of retirement assets are divided in a typical divorce case. Retirement assets are usually divided by a QDRO.

A QDRO stands for a “Qualified Domestic Relations Order”. It is an order required by the 1974 federal statute known as ERISA (Employees Retirement Income Security Act), and applies to certain pension vehicles. QDRO may transfer retirement benefits from an employee-spouse to a spouse, former spouse or child of the employee. It must comply with the requirements of state law, as well as ERISA and other federal laws. The state domestic relations law aspects of a QDRO must be approved by the domestic relations judge, while the federal law aspects must be approved by the plan administrator from which the benefits are to be paid.

QDRO’s deal with participants and alternate payees. A “participant” is an employee who participates in either an employer sponsored or a union-sponsored qualified employee benefit plan. An “alternate payee” is a person to whom benefits are transferred in a QDRO and that person must be a spouse, former spouse, child or other dependent of the participant.

Qualified plans are divided under the Internal Revenue Code into two categories:

(1) Defined contribution plans;
(2) Defined benefit plans.

A defined contribution plan is a plan that requires the establishment of an individual account for each participating employee and provides benefits only from the amount contributed to the employee’s account, together with any income, expenses, gains or losses that are attributable to the account. Under a defined benefit plan the controlling factor is the benefit that will be provided to the employee upon his/her retirement and the amount contributed each year is actuarially computed to produce the desired benefit at the time of an employee’s retirement.

It is necessary to ascertain the type of plan to which the QDRO is directed and to understand the significance of a particular plan in the context of a QDRO. The most commonly used types of qualified employee benefit plans include:

(1) Traditional pension plans (defined benefit plan);
(2) Annuity plans (defined benefit plan);
(3) Profit-sharing plans (defined contribution plan);
(4) Money purchase pension plans (defined contribution plan);
(5) Target benefit plans (defined contribution plan);
(6) Employee stock ownership plans (defined contribution plan);
(7) 401(K) plans (defined contribution plans);
(8) Savings (or Thrift) plans (defined contribution plan);
(9) Simplified employee pension plans (i.e., SEP) (defined contribution plan);
(10) Cash balance pension plans (defined benefit plan);
(11) Hybrid plans (features of both defined benefit and defined contribution) – used by many public employee and teacher retirement programs.

Where both spouses have a pension, each may get a portion of each other’s pension, or create some other arrangement that benefits both parties. It is also possible to trade off pensions for other property in the marriage, or a spouse may waive his/her right to receive the pension.

Division of a pension is not automatic. The court has discretion to award the entire pension to the earner where, for example, there is a significant disparity in income.

Basics of Equitable Distribution

The equitable distribution statute became law in July of 1980 and has evolved extensively since that time. Essentially, all “marital” property is subject to distribution except for “separate property.” Domestic Relations Law 236[B][1][c] defines “marital property” as:

All property acquired by either or both spouses during the marriage and before the execution of a separation agreement or the commencement of a matrimonial action, regardless of the form in which title is held, except as otherwise provided in agreement pursuant to subdivision three of this part. Marital property shall not include separate property as hereinafter defined.

Separate property is generally defined as inheritances, property owned prior to the marriage, gifts from non-spouses and income received in compensation for a personal injury. While appreciation of separate property is considered to be separate property, extensive case law has abrogated this concept significantly. In many cases, the courts have held that the appreciation of separate property may be subject to distribution. Domestic Relations Law §236 (B)(1)(d)(3) excludes from the definition of “marital property” … “property acquired in exchange for or the increase in value of separate property, except to the extent that such appreciation is due in part to the contributions or efforts of the other spouse.” The courts have interpreted this language rather expansively, and efforts of a spouse may include such contributions as raising children, taking care of a household, and generally supporting the other spouse’s efforts at earning a living.

Marital property can be distributed even if it is held solely in the name of one of the parties. It is important to note that in terms of splitting martial assets, equitable does not mean equal. Assets do not have to be distributed equally to each party.

A significant portion of divorce litigation involves evaluating the assets and determining what percentage each party should receive of that asset. Property can include almost everything, including the marital home, vacation homes, automobiles, household furnishings, bank accounts, stock portfolios, pensions and retirement plans, interests in businesses and professional degrees. In New York, a party’s “enhanced earning capacity” which includes the value of any degree, license or certification obtained during the marriage can be distributed as well.

The court decisions addressing equitable distribution have held that there cannot be a distribution of property without a divorce or pursuant to a valid separation agreement. As a result, one of the common strategies utilized in divorce cases by the parties who do not wish to have property distributed, involves challenging the grounds for divorce.

Litigation support experts are commonly used in cases involving valuation of significant assets, including forensic and tax accountants, business evaluators, real estate appraisers and other similar experts. The use of these experts can make an equitable distribution case rather expensive to litigate.

Wife Receives a Credit of 50% of Husband’s Premarital Debt Paid During the Marriage

In Mahoney-Buntzman v. Buntzman, 51 A.D.3d 732 (2nd Dept. 2008) the Appellate Division held that the wife should have been awarded 50% credit for student loan debt incurred by husband to obtain a doctoral degree. During the parties’ marriage, the husband took out a student loan in the amount of $48,162.90 to pay for a doctoral degree in education, which was satisfied with marital funds. The wife contended on appeal that the trial court erred in failing to award her a 50% credit with respect to the student loan. The Appellate Division agreed. The husband’s expert testified that the doctoral degree earned by the husband during the marriage did not enhance his earnings, and thus, provided no benefit to the marriage, and there was no distributive award of the value of the doctorate degree to the wife in light of its zero enhanced earning capacity value. As result, the court concluded that the student loan debt was incurred to satisfy the husband’s separate interest and therefore was his own separate obligation. Accordingly, the trial court erred in failing to award the plaintiff a 50% credit, or $24,081.45, for the student loan debt incurred by the husband during the marriage to obtain this degree.
The Appellate Division also agreed with wife’s contention that the trial court erred in not crediting her with 50% of the defendant’s pre-marital debts paid with marital funds during the marriage such as maintenance paid to the husband’s first wife in the total amount of $58,545, and $7,000 paid in 1998 as a settlement of a loan for a boat purchased by the husband before the marriage but surrendered to the bank in 1993 prior to the marriage for nonpayment of the boat loan. The husband’s maintenance obligation to his first wife and the boat loan constituted debts incurred by him prior to the parties’ marriage and were solely his responsibility. Accordingly, the trial court erred in failing to award the plaintiff additional credits of $29,272.50 as to the maintenance payments to the husband’s first wife and $3,500 as to the boat loan.
Thus, with respect to his doctoral degree, the husband was successful in convincing the trial court that the degree did not enhance his earnings. If the wife was successful in establishing that the degree resulted in enhanced earnings, those enhanced earnings would be subject to distribution. Therefore, the husband would owe something to the wife under either scenario.