By Judith L. Poller, Esq. of Pryor Cashman LLP
When a couple gets divorced in New York, the rules of “equitable distribution” will be applied to divide the property earned or acquired during the marriage. While this may sound relatively straight forward, what is “ownership” of marital property and what is “equitable” can take on quite a life of its own and are quite frankly, far from straight forward. The premise of equitable distribution is that marriage is, among other things, an economic partnership of equals. But, equitable does not mean equal and New York law requires that the contributions of each spouse be considered in determining a fair distribution. In the heightened tensions of divorce, “fair” can be challenging and elusive.
As a starting point, there is a presumption under New York law that any property acquired from the date of the marriage through and until the date of the commencement of a matrimonial action (not just physical separation) is marital property. In certain instances, parties may enter into a signed agreement in which they determine some other ‘end date’ for the accumulation of marital property.
Marital property is very broadly defined under New York law. If someone claims that an asset is their “separate property,” and should not be shared, the burden shifts to that person to prove such claim. Separate property includes:
- Any property that was owned by either spouse prior to the marriage, including real property or personal property;
- Any inheritance or gift received by a party during the marriage from a third party;
- Compensation received for the pain and suffering portion of a personal injury award;
- Property acquired in exchange for separate property;
- Any increase in the value of separate property, except to the extent that the increase is due to (i) the active efforts of the titled spouse, or, (ii) the non-titled spouse’s contributions during the marriage;
- Property described as separate property in a written agreement (i.e. prenuptial or post-nuptial agreement).
Unless separate property has been mixed or commingled with marital property during the marriage, it remains the separate property of the title holder. If, however, it is mixed or comingled with marital assets, it is then “tainted” and will probably be fully treated as marital property. So, if you retitle your premarital house by adding your spouse as a co-owner or you deposit the inheritance from your parents into a joint account with your spouse, then such separate property becomes marital property. The important piece here is to have documentary evidence to support the separate property nature of the asset. If you do not, it may be hard to be successful in such a claim.
Even if you keep separate property separate but it increases in value during the marriage, the appreciation may or may not be marital. This depends on whether the growth is “active” or “passive.” “Passive” is appreciation that is due to market forces – your premarital real estate that increases in value because the real estate market is strong, for example. “Active” is appreciation that is due in part to the direct or indirect contributions of the titled spouse.
Here’s an example: After Jennifer marries Mark, she is offered a job as an investment advisor at Merrill Lynch. Jennifer already has an investment account that she started before she got married and the account grows during the marriage. Since the increase in value is from the active efforts of the spouse who goes to work in this industry, the growth (increase in value) is marital and that would be subject to equitable distribution in Jennifer and Mark’s divorce.
All other property that is acquired during the marriage is considered marital property regardless of how the title to the property is held. So, while it may be possible that you have no joint bank accounts or jointly held real estate, for purposes of determining marital property, all such bank accounts and real estate would be considered part of the marital pot and subject to equitable distribution.
Once you have determined the marital assets and their value (the valuation date of an asset can be an agreed upon date, the date of the filing of a divorce action, or the court can decide the appropriate date, including the date of trial), New York law considers 14 factors in determining what is fair and equitable on a case by case basis:
- The income and property of each spouse at the time of the marriage, and at the time of the divorce;
- The length of the marriage and the age and health of both spouses;
- If there are minor children involved, the need of the spouse who has custody of the children to live in the marital residence and to use or own its household effects;
- The loss of inheritance and pension rights of each spouse because of the divorce;
- The loss of health insurance benefits upon a divorce;
- Any award of support or maintenance the court will be making;
- Whether one spouse made contributions to marital property that such spouse does not have title to through joint efforts, contributions as a parent, wage earner or homemaker and to the career potential of the other party;
- The liquid or non-liquid character of all marital property;
- The probable future financial circumstances of each party;
- The impossibility or difficulty of determining the value of certain assets, like interests in a business, and whether one spouse should be awarded the business so it can be run without interference by the other spouse;
- The tax consequences to each party;
- Whether either spouse has wasted or used up any of the marital property;
- Whether either spouse encumbered, transferred or disposed of marital property at less than market value, knowing that the divorce would be happening,
- Any other factor that a Court finds to be relevant.
In shorter marriages, it is very unlikely that marital property will be divided equally. Even in longer marriages, while there may be a greater likelihood that there will be an equal division of marital property, this is far from guaranteed and assets will be closely scrutinized to determine the appropriate percentage to be shared between the spouses. Residential real estate and financial accounts are easier to argue for an equal distribution. But if the asset is a professional practice (like a doctor’s office) or a business (like a restaurant or construction business), the non-titled spouse will generally be awarded between 10 to 35 percent of the value of such asset - not a piece of the business itself - but a sum of money or an offset to the other assets. Much testimony will have to be heard to establish the percentage and why the non-titled spouse should get a share of the sweat, tenacity and efforts of the titled spouse who goes to work and has built a value to the business. The non-titled spouse will argue that there is no way that could have happened without his or her efforts to take care of the kids, entertain the colleagues, help with the books and records of the business, etc. Equitable Distribution of these kinds of assets is highly charged and a very emotional part of the process. If there are assets that require valuation or a determination of the appropriate percentage share to each party, it’s over easy has a useful directory of legal and financial professionals to help. Once the parties reach an agreement on the assets in question, that agreement is then provided to it’s over easy. From there, that agreement will ultimately be included as part of the divorce judgment.
New York does do things its own way. When you go down the road of divorce with assets involved, just be prepared for some bumps, swerves and unknowns along the way.