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Marital property and separate property

Marital property is generally everything either spouse acquired during the marriage, regardless of whose name is on it. The paycheck, the house, the retirement contributions, the car, the furniture, the debts. Whose name is on the title usually does not decide it.

Separate property is generally:

• Anything you owned before the marriage.
• An inheritance left to you alone, whenever it arrived.
• A gift made to you alone by someone outside the marriage.
• Compensation for personal injury, in many states, at least the part for pain and suffering.
• Anything a valid prenuptial or postnuptial agreement designates as separate.

The two systems

Community property

A minority of states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, with Alaska offering it by election — treat marital property as owned equally by both spouses. The default is a 50/50 division.

This is simpler but less flexible. The split is on the value of the whole pot, not item by item: one spouse can keep the house and the other receive assets of equal value.

Equitable distribution

Every other state divides marital property in a way the court considers fair, which is not the same as equal. Judges weigh factors that commonly include:

• How long the marriage lasted.
• Each spouse's age, health and earning capacity.
• What each contributed, including non-financial contributions such as raising children or supporting the other's career.
• The standard of living during the marriage.
• What separate property each spouse keeps.
• Who will have the children most of the time.
• Whether one spouse wasted marital assets.

In practice equitable distribution in a long marriage often lands near equal. In a short marriage, or where one spouse brought substantially more in, it may not.

How separate property becomes marital

This is where most of the real money is decided, and it catches people out constantly.

Commingling

Separate property mixed with marital property can lose its separate character. An inheritance deposited into a joint account and used for household expenses is the classic example. Depending on the state and how thoroughly it was mixed, it may become entirely marital.

Appreciation through effort

If a separate asset grows in value because of work either spouse did during the marriage, the increase is often marital even though the asset is not. A business owned before the marriage that one spouse then ran for fifteen years is the common case.

Passive growth — a share portfolio that simply rose — is more often treated as remaining separate, though states differ.

Marital money spent on a separate asset

Paying the mortgage on a pre-marital house out of joint income, or renovating it with marital funds, usually gives the marital estate a claim on part of its value.

Putting a spouse on the title

Adding your spouse to the deed of a house you owned before the marriage is frequently treated as a gift to the marriage, converting the whole thing.

Tracing

If you want to keep something separate, you have to be able to show where it came from and that it stayed apart. That means documents: the account statement showing the inheritance arriving, the statements showing it was never mixed, the pre-marriage valuation of the asset.

The burden is generally on the person claiming an asset is separate. Without records, a court may simply treat it as marital. This is the single strongest argument for keeping inherited and pre-marital money in its own account.

What is easy to overlook

• Retirement accounts, which are often the largest marital asset and need a specific court order to divide.
• Pensions, including the portion earned during the marriage of a pension not yet being paid.
• Stock options and restricted stock, particularly unvested grants.
• A business interest, and any goodwill attached to it.
• Deferred compensation and bonuses earned but not yet paid.
• Tax refunds and loss carry-forwards.
• Frequent flyer miles and other points, which some states treat as divisible.
• The tax cost built into an asset. A $100,000 retirement account and $100,000 in savings are not worth the same, because one has tax owed on it.

Property division is generally final

Unlike support and parenting arrangements, which can be modified when circumstances change, the division of property is usually permanent. It can only be reopened in narrow circumstances — typically fraud or concealment.

That asymmetry is worth holding on to while you are negotiating. A support figure that turns out to be wrong can be revisited. A property split that turns out to be wrong usually cannot.

Warning:  This post is neither financial, health, legal, or personal advice nor a substitute for the advice offered by a professional. These are serious matters, and the help of a professional is recommended as it can impact your future.