By JoAnne C. Holt, Divorce financial analyst
First, please know all states have their own unique divorce statutes and case law that influence the outcome of a divorce. As those statutes and case laws change over time so do the results.
Most states operate under the “Equitable Distribution” concept as opposed to the “Community Property” states. Part of either of these approaches to dividing assets is the recognition of separate or non-marital property. This can take the form of “pre-marital” property or “non-marital property.” The importance of these types of property is the ability to exclude them from division of the “Marital Property,” often referred to as the Marital Estate.
More and more couples are entering into Prenuptial (a.k.a. Antenuptial) Agreements to attempt to define and protect pre-marital assets and keep them outside of the marital assets in order to protect them if a divorce occurs.
I am routinely hired to trace assets from date of marriage to date of filing for dissolution. My task is to see if there has been any “co-mingling” of these pre-marital assets with marital assets. It is rare, sadly, that even with a Prenuptial, the party with the pre-marital assets maintained the integrity of the pre-marital account and kept it separate. The common problem is the lack of understanding of what is marital and what is not.
One common misunderstanding is with earned income. Where I live, in Florida, this is considered marital. If you deposit paychecks, business distributions and other earnings into your pre-marital account, you may have co-mingled the account and thus create a situation where the entire account is deemed marital and subject to equal division. Think of the account like a glass of water. You have a glass half full of pre-marital water when you get married. You then periodically deposit business distributions into this account since you owned the business prior to marriage; you think this is still non-marital income. Maybe it is and maybe it isn’t. If you are the owner of the business, and you work the business you are using marital efforts to create the income. An attorney can argue that this is marital income and thus the account has been co-mingled. Once you pour marital water in – it is impossible to separate out the account since it is all in one glass.
Another common problem occurs when someone inherits a large sum during the marriage and fails to maintain that sum in a separate account without co-mingling it with marital funds. In Florida, your inheritance is considered non-marital. So if you inherited a million dollars and put it into a separate account in your name only when you receive the check and/or securities, you can keep this as a non-marital asset that would not be divided with your spouse in case of divorce. However, you MUST not deposit any other money into this account except other non-marital funds.
Depending on your state, the underlying case law, sometimes if we can trace and identify each source of non-marital funds we can persuade a judge to at least consider an unequal division. So please consult your attorney and make sure you identify all sources of income and assets prior to marriage and be knowledgeable on how to manage both during a marriage to keep the integrity of the non-marital status.
JoAnne C. Holt is a Florida-based CPA, certified family mediator, and certified divorce financial analyst. She also founded www.standbyhousing.com, an organization that presents alternative housing solutions to fathers going through a divorce. Her columns on finances and divorce will run monthly on DadsDivorce.com.