Marital Property vs. Separate Property In A Divorce: Part Three

In divorce law when one person owns property or an asset as "separate property" (acquired before the marriage or received during the marriage but an exception is made for gifts, inheritance or monies from a personal injury lawsuit) and then during the marriage adds their spouse's name to the title or asset it is technically referred to as the "transmutation" of property. However, the simple explanation is that adding your spouse to what was your separate property now creates "marital property".

When the couple divorces the question that always comes up is what credit, if any, should the original owner of the property receive since it was separate property that has now become marital property. There are different examples of the transmutation of an asset that will likely lead to different results when the time comes to distribute the value of the property. The results will often vary dependent upon what type of an asset was changed from separate to marital property.The examples below will assume that after proper credits the balance of equity is divided equally between the parties (although there is no presumption of 50/50 it is often the result.) Confusing...absolutely.

Real Estate: If one person owns a house at the time of the marriage and the house is worth $500,000 and has a mortgage balance of $300,000 then the original owner would be entitled to a credit of $200,000 if the couple were to later divorce and the house was still worth $500,000. If the mortgage upon divorce was reduced to $150,000. The original owner would receive the $200,000 credit plus half of the mortgage pay down that took place ($150,000/2 = $75,000) for a total of $275,000. The spouse that was added to the deed would receive $75,000 (half of the mortgage pay down.)

Another way of showing the math above which can be simpler is to take the $500,000 minus the mortgage of $150,000 leaving a balance of $350,000. The original owner gets their separate property credit of $200,000 off the top of the $350,000. The remaining money after closing is divided equally between the spouses and they each receive $75,000.

However if the house were at the time of divorce worth $600,000 and the mortgage balance was $150,000 leaving after closing $450,000 then the original owner would receive the $200,000 initial credit plus half of the remainder ($250,000) after closing for a net amount of $325,000 and the other spouse would receive $125,000.

Bank Accounts: The courts treat adding your spouse to a bank account very differently then adding your spouse to real estate. Because of the law regarding joint bank accounts and the right that each party can access the funds and withdraw all or a portion of the money the separate property credit no longer applies however the court can exercise its discretion in determining what percentage to give the original owner and the spouse whose name was added to the account.

If the bank account at the time of marriage was in one person's name and was worth $150,000 and during the marriage the account grows solely because of interest and is worth $175,000 when the spouse's name is put on the account as a joint owner, if the parties get divorced the court can divide the $175,000 between the parties however it deems fair. That may mean that there is a full, partial or no credit back to the original owner of the account. This is because of certain banking laws and how the matrimonial courts have applied that law to divorce law. There is an exception to this result which will be explained in the next blog. It is known as the "convenience" exception.

As I have previously written this is a complex area of matrimonial law and my strongest recommendation is to retain an experienced matrimonial attorney for guidance.