What is marital (or community) property and what is separate property? What is the difference between the two?

Most states in the United States are equitable division states (or non-community property). However, the answer to this question varies from state to state. Generally, in equitable division states, marital property is everything that either of you earned or acquired during your marriage unless you agree otherwise. So, for example, the money you earned at work, put in a joint checking account, and used to pay household bills is marital property. So is the car you bought and paid for with money from that account.

Separate property belongs only to one spouse. States define separate property differently, but the same general rules apply. The most common forms of separate property are:

  • Property one spouse owned before the marriage
  • Gifts received by one spouse before or during the marriage
  • Property acquired during the marriage in one spouse’s name and never used for the benefit of the other spouse or the marriage
  • Inheritances received before or during the marriage
  • Property that the spouses agree in writing is separate, as long as the writing meets your state’s standards for that type of agreement (called either a transmutation agreement or a post-nuptial agreement)
  • Property acquired by one spouse using separate property assets with the intention of keeping it separate, and
  • Certain personal injury awards (in general, the portion of the award that repays you for lost earnings is marital property, while any award for pain and suffering is separate)
 

The difference between community and separate property varies by state.  In community property states, community property generally includes all property accumulated during the marriage, including debts, unless the property or debt is designated otherwise (e.g., a loan made out specifically to one person based on their separate property). Separate property can include property acquired before the marriage, gifts, court awards, inheritance, and pension proceeds. Also, property acquired with separate property remains the separate property (e.g., a boat bought with inheritance money). Be aware, however, that some separate property items may become community property, such as a business started before marriage but sustained by the marriage (this type of situation is usually referred to as commingled property). If you purchase or maintain items with a mixture of separate and community property, it is likely that a court will decide it is community property. If you want to keep your property separate, you need to work to keep it completely separate; otherwise, it will become commingled and converted to community property.

What is the difference between an “equitable distribution” state and a “community property” state? Which one do I live in?

As stated above, most states are equitable division states. However, in community property states, community property is defined as “all property acquired by the spouses during the marriage belongs not to either spouse individually but to a third entity, marital community.” The fact that legal title rests within the community; there is no future expectancy, which rests upon divorce or death. The community holds a real legal title interest.

When a divorce or death occurs, the community equally divides the property. Although this community is not an “entity,” the rationale for this equality is deeply embedded in the community. The principle behind this “equality” is that all wealth acquired by the joint efforts of the husband and wife shall be common property. Marriage is a community in which each spouse is a member, equally contributing by his or her industry to its prosperity, and possessing an equal rights.

A jurisdiction that enforces community property law based on “equitable distribution” functions in a different manner. In the statutorily-mandated equitable distribution of community property, some courts permit a divorce distribution that substantially deviates from an equal split. The basis for an “equitable distribution” is evaluated on a case-by-case basis. There is a possibility that the starting point for an equitable distribution starts with equal division, however, a divorce court has discretion concerning the such matter.

Additionally, courts have addressed equitably distributing debt. Marital debt incurred based on both spouses’ income-earning capacity, split equally, may pose problems for a spouse with lower post-divorce income prospects. Courts have broad discretion to divide and distribute the marital estate in a manner that is “just and equitable.”

For example, in Geldmeier v. Geldmeier, 669 S.W.3d 33 (Mo. Ct. App. 1984), the husband challenged the trial court’s division of marital property, which left him with more debts than property. Mr. Geldmeier worked at a bottling plant, while his wife was a homemaker. She worked as a secretary for part of the marriage. The Missouri Court of Appeals affirmed the trial court’s decision holding that the court does not need to divide debts and assets equally in making a fair distribution. Rather, the court “may charge a spouse with debts based on his ability to pay.” Here, Mr. Geldmeier had been the only spouse with a source of income and was better able to assume marital debts than the wife.

In nine states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — all property of a married person is classified as either community property (owned equally by both spouses) or the separate property of one spouse. In the 41 remaining states assets and earnings accumulated during marriage are divided equitably (fairly), but not necessarily equally.

I’m the custodial parent. Should I keep the house?

It depends on the circumstances. For instance, if you have children, then the parent who does the majority of the child-raising generally keeps the marital home. If one partner purchased the house with separate funds and there are no children, then they can keep it and legally require the other partner to vacate.

If there are no children involved, then courts vary considerably on how they distribute the marital home. Neither party typically has a legal right to ask the other to leave, but one partner can always request it. If you and your spouse cannot agree, the court will decide based on the rules in its state and which kind of property system your state has.

Ultimately, every divorce is different and often depends on the spouses’ personal circumstances. In some cases, one spouse will buy out the other and keep the house. In others, it becomes clear that neither spouse can afford the house alone, so the court will order it sold and the profit split between the spouses.
There are other issues that need to be addressed with regard to the marital home. If one spouse bought the house prior to marriage and made the entire down payment with personal funds, we can seek to recover it. If one spouse made significant improvements to the house, the other spouse may be awarded compensation for the skill and labor involved.

I inherited a summer home from my parents. Is this home still my separate property now that we’re getting a divorce?

As long as the inherited property remains in your name alone and has not been transmuted to community property, it remains your separate property upon divorce.

My husband received annual bonuses during our marriage, which he put in a savings account in his name only. Are these funds considered marital or separate property?

Bonuses received during the marriage are marital property even if they were put into his name only. Therefore, the proceeds of this account in your spouse’s name alone are half yours.

I inherited $30,000 and used it to buy a car, titled solely in my name that we use as the family car. Is it still a separate property?

This is a tough call and could depend on your state and the judge. Although the inheritance itself would most likely be considered separate property, you could argue it was commingled with a marital asset when you used it to buy the car. Although the car is titled in your name only, it was used to benefit the family as a family car and, therefore, could be argued as no longer separate property.

Keeping your inheritance separate from marital property throughout your marriage is the only way to ensure it remains part of your property settlement. Commingling assets can become an important issue in property division matters. One common example of commingling is when one spouse puts his or her own money into a marital asset.

Transmutation occurs when one spouse adds the other spouse’s name to property previously held in only the first spouse’s name, such as a house. Adding the second spouse’s name essentially transfers the property from sole ownership by one spouse to joint ownership by both spouses. Once the property has been transmuted, it becomes a part of the marital estate in the eyes of the court. As a result, the spouses have a right to an equitable share of its value if the couple divorces, even if one spouse paid for the property with personal funds.

Is a degree earned during the marriage a marital asset? How about a medical license or license to practice law earned during the marriage? How would these be valued?

State laws vary, and courts can assess the value of a degree or license in four general ways. The reimbursement Basis focuses on the duty of the professional spouse to repay the supporting spouse or to replace marital assets used to pay for education or training. A degree or license may or may not be marital property in which both spouses have rights. This approach recognizes a supporting spouse’s investment. There doesn’t have to be an express right to part of a professional spouse’s future earnings. Repayment can cover education and living expenses, even though the general rule is that spouses have a duty to support one another. Reimbursement could be treated as alimony, alimony in gross, lump-sum alimony, property division alimony, or property division.

A second method is treating career expenses as an Alimony Factor. Under this method, professional education isn’t marital property, but pursuing it during the marriage may factor into spousal support decisions. In some states, a specific form of alimony is awarded when one spouse supported the other during school and training. In other states, courts treat past support as a factor in setting alimony. Some states use a “threshold of needs” test, in which a judge decides whether the spouse seeking alimony from the professional spouse lacks the assets and job skills to support themselves at a reasonable level post-divorce.

A third method is the Value Basis Approach. The value basis approach places a value on professional education tied to its capacity to increase future earnings. The degree or license is viewed as a business investment. The value of the degree is the present value of the difference between what its holder will earn with it and what could have been earned without it. It measures the present value of the increase in earnings due to the degree. Most states don’t follow this approach.

A fourth approach is the Quid Pro Quo Investment. In this approach, a spouse’s professional education and/or license may not be marital property. Instead, the supporting spouse is given a similar chance for education and training after the divorce.

To learn more about dividing property during a divorce, you can view our article: Mistakes in Valuing and Dividing Real Property.

Contact a Property Division Attorney Today to Schedule an Initial Consultation

If you are going through a property division matter, Stange Law Firm, PC can help. Call us at the number below or contact us online to schedule your initial consultation with one of our attorneys. You can reach our team at 855-805-0595.