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Understanding How Assets Get Divided In Divorce (Part 1)

Dividing the family's property during divorce can be quite difficult, especially if there are significant assets such as houses, rental property, retirement and pension plans, stock options, restricted stock, deferred compensation, brokerage accounts, closely-held businesses, professional practices and licenses, etc. Deciding who should get what can be quite a challenge, even under the most amenable of situations. But, if your divorce is contentious, then this can be especially complicated.


Assets should not necessarily be divided simply based on their current dollar value. You need to understand which assets will be best for your short- and long-term financial security. This is not always easy to discern without a thorough understanding of the asset itself--its liquidity, cost basis and any tax implications associated with its sale.


However, before we go any further, we need to discuss the differences between Separate and Marital Property and why that's critically important to you. This is an area that is not well understood by most people.
States differ in some of the details, but generally speaking, Separate Property includes:

  • Any property that was owned by either spouse prior to the marriage;
  • An inheritance received by the husband or wife (either before or after the marriage);
  • A gift received by the husband or wife from a third party (your mother gave you her diamond ring);

Marital property consists of all income and assets acquired by either spouse during the marriage. In many states, if your separately owned property increases in value during the marriage, that increase is also considered marital property. However some states will differentiate between active and passive appreciation when deciding if an increase in the value of separate property should be considered marital property.


So what's the difference?


Active appreciation is appreciation that is due, in part, to the direct or indirect contributions or efforts of the other spouse (e.g. your husband helped you grow your business by giving you ideas and advice; he entertained clients with you; he helped raise the kids and did some household chores, which allowed you to work late, entertain clients, travel to conventions; etc.).


Passive appreciation is appreciation that is due to outside forces such as supply and demand and inflation. For example, a parcel of land increases in value even though you and your husband made no improvements to it. However, if you used marital income and/or assets to pay the mortgage and/or taxes on this parcel of land, you might have a very good argument that this property, or at least the increase in value during your marriage, should now be considered marital property. As you can see, this can get quite complicated and convoluted.


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