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How do assets and debts get divided between the parties in a divorce? Does it matter if the husband’s 401K is titled in his name? What if the house is titled in the wife’s name only, but the mortgage is titled in both the parties’ names?
This article on property distribution details how Florida equitably distributes assets and debts to the parties at the time of a divorce. We will start by defining what exactly is an equitable distribution in Florida. We’ll then discuss the legal process Florida uses to classify assets, determine what is marital and not marital, and then distribute them to the parties.
After the legalese, we will then get into the practicalities of the property distribution process in Florida. For example, what happens and when.
Equitable distribution is the legal term for disposing marital assets and debts in a divorce. Equitable means fair, but fair does not necessarily mean equal. Florida law says we should start with the idea that fair is equal, but be willing to accept an unequal distribution of assets in certain situations.
This is what we mean by a presumption. A legal presumption is a starting place. It puts the burden on somebody who wants to do something different to overcome the presumption.
The Florida equitable distribution statute gives us a couple of relevant factors that a court can consider regarding giving an unequal property distribution to one of the parties. First, the court can look at the contribution of each spouse to the acquisition, enhancement, and production of income during the marriage. The court can also look at who gathered up a ton of debt and liabilities during the marriage.
So a good example is the scenario where one party makes a significant contribution financially to the purchase of the home before the marriage. Then, the parties get married and title the home in each other’s names. This makes the home marital in nature. But what if the parties are only married for a short duration? Might it be unfair to take this asset and divide it in half?
Some judges might think so. And in those cases, the judges may be willing to give an unequal property distribution of that marital asset to make it fair to compensate the spouse who put all that money into it at the beginning.
Regardless of whether there is an equal or unequal property distribution, the courts are going to have to classify the assets and debts so we know which ones are marital and subject to distribution and which ones are not.
Your divorce case judge can only distribute assets and debts that are marital assets and debts.
Marital assets and debts are assets that come from money earned during the marriage or the labor of a party during the marriage. Any property that was accumulated before the marriage and has not increased in value due to marital money or labor is non-marital and needs to be taken out of the divorce equation.
So what does that mean?
For an easy example, a husband and a wife were married during college. At the time, they didn’t have two sticks to rub together. After college, the husband went to work in medical sales. He earned a good living, then started and fed a 401(k). Three years into the marriage, the parties purchased a house together. Later, the husband opened a Scottrade account where he bought and traded stocks.
Ten years into the marriage, the husband filed for divorce from the wife. At the time, his 401(k) was valued at $200,000, the marital home had a positive equity of $100,000, and the Scottrade account had a total value of $50,000.
To classify these assets, we need to first see if any of the property is non-marital. In this example, none of the assets are non-marital, because everything was accumulated during the marriage. Even though the 401(k) account is titled only in the husband’s name, the money that went into the 401(K) was earned by the husband during the marriage, and thus marital.
Therefore in this easy example the parties have a combined net worth of $350,000. Therefore, Florida law presumes that each party should walk away from the marriage with $175,000 worth of assets.
On the flip side, assume the following example: The wife was a widower and the husband had been divorced for many years. Both long retired, they met at a social event and later married.
The wife was a career civil servant and drawing a pension and Social Security. The husband had done well during his career, and was able to live very comfortably from his investments and Social Security. During the marriage, the parties created one joint account into which they both deposited money every month to help pay bills. Other than that, the parties kept their accounts separate.
Later, the husband’s mind started slipping, as did his physical health. The wife filed for divorce in no small part in an effort to preserve her estate from the husband’s escalating medical bills.
In this case, we again need to start by setting aside the non-marital assets and debts. But in this case, almost everything is non-marital because everything was built and earned before the marriage. The only marital asset is the joint account, which is presumably relatively modest as it is a revolving account furnished with just enough money to pay the bills.
Notice that this is true even if the husband’s investment account goes up in value during the marriage. Passive appreciation due to a well-performing stock market does not create a marital asset in and of itself. Because the husband and wife never co-mingled their money and always kept their accounts separate, the money in the account continues to be non-marital.
But most cases are not as simple as the examples above. Often single assets can have both a marital and non-marital component.
Consider the following common example. The wife had established herself as a successful professional and was earning a good living. She was putting aside 15% of her monthly income into a 401(k) offered by her employer. At the time of her marriage the 401(k) was worth $100,000. When the parties divorced five years later, the 401(k) had doubled in value to $200,000.
The first step in this example is to set aside the non-marital portion of the 401K. This is not as simple as taking the current value of the 401(k) ($250,000) and subtracting the original value of the 401(k)($100,000). Why?
Because the non-marital portion will be the original portion of the 401K ($100,000) plus any active or passive appreciation of the non-marital portion. In other words, we need to figure out what the value of that 401(k) would be if the wife never added a single dime to the account after the date of marriage.
But 401(k)s contains stocks, bonds, and investments that never stay static in value, but often grow on their own. This means that we have to trace out the actual investments that existed in the account at the date of marriage and track their performance during the course of the marriage. And for the wife, the appreciation of the original investments can be substantial. In this case, the wife will want to obtain an asset valuation from a forensic accountant or CPA to determine the non-marital portion.
And what about a home solely titled in one spouse’s name prior to the marriage?
A wife purchased a home worth $400,000 before the marriage. At the time of the marriage, the home had a $400,000 positive equity and the loan against it was $350,000.
The marriage lasted seven years. The wife kept the home solely titled in her name during the marriage. She paid the mortgage payments, insurance premiums, taxes, and maintenance expenses out of her income earned. The parties even added a new kitchen.
The husband did some of the renovation work himself in order to save money. The wife filed for divorce. At the date of filing for divorce, the 401(k) was valued at $250,000, the home was worth $500,000, and the mortgage loan had been paid down to $250,000.
The house is titled in the wife’s name, so can we set the entire asset aside?
The answer is no.
The home itself will go to the wife at the end of the case because the home is titled in her name. She legally owns the asset. But under Florida divorce law, the asset will have both a marital and non-marital component. And the marital component will be subject to property distribution in a divorce case.
Now this gets a little complicated, but we are looking for any appreciation in the value of the home during the marriage that is the result of marital labor or funds.
Appreciation comes in two forms: active appreciation and passive appreciation.
In this example the parties paid for a new kitchen in the home. They paid for the new home with the wife’s income, which is marital income. The husband even put his own labor into the kitchen when he did some of the work himself.
The active appreciation in the value of the home due to this new kitchen is considered a marital asset that will be equitably divided. While not easy, the question is: How much more was the home worth because of the new kitchen? The answer is the amount of the active appreciation.
Passive appreciation is the increase in value of the home just because property is increasing in value. If the wife did not put any money into the home for a couple of the years during the marriage but the home still increased in value, then that home has passively appreciated, or gone up in value without any active work done by the wife.
And in Florida, the passive appreciation in a home becomes a marital asset if the non-owner spouse contributed to the home in some way and enhanced the home’s value as a result.
So in our example above, the home’s mortgage was paid down substantially by marital funds, or specifically the wife’s income. And again, the husband’s contribution to the kitchen helped increase the home’s value. So here, a part of the passive appreciation of the home will be a marital asset.
But how much?
Florida courts in determining equitable property distribution have spelled out a formula for determining the amount of a marital asset caused by both active and passive appreciation. First we create a fraction by dividing the value of the home at the date of marriage by the positive equity in the home at the date of marriage. So in our case above we have $350,000 (the loan at marriage) divided by $400,000 (value of home at marriage), for a fraction of 87.5%. We know the home appreciated in value due to marital efforts in the amount of $100,000.
So here, we know that the marital portion of the total appreciation in the home (active plus passive) is $350,000/$400,000*$100,000, or $87,500. That means that while the wife will keep her home as a non-marital asset, she will need to “buy out” the husband’s half of the $87,500 or $43,750.
And there is another marital asset associated with the property. The mortgage has been paid down during the marriage in the amount of $100,000! This mortgage pay down is a marital asset as well and will also be divided. This means that the wife will of course keep the remaining mortgage, but will need to pay the husband $50,000 to account for the paid down mortgage.
Sometimes spouses mix money from non-marital accounts with money in marital accounts. This can create a difficult problem.
Co-mingling is when one spouse’s property is mixed or combined with joint marital property.
For example, the husband has a money market account with $50,000 in it that existed prior to the marriage. During the marriage, the husband takes a portion of his paycheck and puts it into the money market account. The husband has now co-mingled the two accounts.
Co-mingling assets results in confusion as to how to classify the mixed money. After all, if the husband put $5,000 into the money market account above, does that transform the nature of the money market account from the husband’s separate property into a joint marital asset? Can we just “back out” the $5,000? What if the money market account is the used to invest in stocks, which then increase or decrease in value?
In Florida, the courts will assume that the newly co-mingled account is all a marital asset. The spouse who is trying to protect his or her property will need to “trace” out the non-marital funds to get the court to do otherwise. That spouse will need to gather receipts, bank statements, investment statements, and more. If the assets are substantial, the spouse will need to retain an accountant or other financial professional to do a proper tracing of the account(s) and prepare a presentation for the court.
Inheritances are considered non-marital in nature even if gifted during a marriage, provided that the inheriting spouse does not mingle marital assets with the non-marital assets. If they do, then the court will presume that the mingled assets are all marital unless the inheriting spouse traces out the intermingled funds and proves the amount that is non-marital.
For an example of how to deal with co-mingled assets after an inheritance in a divorce, consider the following example:
Husband and wife are heading towards a divorce. But a year prior to the divorce the wife’s mother passes away, leaving an inheritance in the amount of $250,000.
Now, the wife knows she is heading for a divorce and she does not move any of the inherited funds into any marital accounts. Instead, she sets up a money market account and puts the funds in the money market account.
But, the wife does have a small IRA that she “considers” her own money. The IRA is worth $5,000 and solely titled in her name. BUT the IRA was built from income the wife earned during the marriage.
The wife takes the $5,000 and also puts the funds into the same money market account that the inheritance was put into.
Next, the wife puts the co-mingled money into a Franklin Templeton mutual funds account, where she buys and sells stocks up until filing for divorce.
The wife has a big problem. She has co-mingled cash, and then transferred the cash into investment assets. The husband will take the position that the entire Franklin Templeton account is co-mingled funds, and this is all a marital asset! The wife will need to chat with a forensic accountant, and try to argue for an equitable remedy, but she is in a bad situation.
Once assets are classified, the next step is to pick the value of the marital assets. And while this seems simple (just look at the bank statement, right?), the real question is often what date to value the asset.
For example, consider the situation where the parties separate on January 1, 2016. On July 1 2016, the husband files for divorce. And on December 1, 2016, the divorce is granted.
The real estate market was doing great! On January 1, the home was valued at $400,000. On July 1, it had gone up to $425,000, and at the time of the divorce the home was valued at $450,000.
The parties agree that the wife will keep the house. The husband wants the wife to “buy him out” of the $450,000 in equity at the date of final judgment, but the wife wants to value the house at the $400,000 value of the home when the parties separated (and the husband moved out to an apartment). Who is right?
The reality is that the parties and the court have the discretion to determine a valuation date. In many ways, the question is what is fair? If the parties separated, then the fair date might be at the time of separation, especially if the wife had paid the expenses of the home and the mortgage while the husband was out of the house. But what if the husband paid the taxes, half the mortgage, and helped reseal the driveway during the separation and the divorce? In that case, the right valuation may be at the date of final judgment.
In any case, the goal should be a fair or equitable resolution. If the wife wants to value the home at the date of separation but the husband contributed substantially to the home’s bills during the divorce process, one option is to pay back the husband a “credit” for the money he invested in the home. Another option could be to “call it square”, especially if the wife had a claim for retroactive alimony.
The key takeaway is to recognize there is no correct way to analyze the situation, and look for win-win options during settlement negotiations.
What about the actual value to use for the marital home? Does the home need to be appraised? Can we just look it up on Zillow? Will a market comparative analysis work? Should we deduct reasonable repair costs? What about reducing the value of the home “for reasonable realtor fees” if the party taking the home might be selling it in the near future?
In this case, we are looking for substantial competent evidence to help us figure out the value. Often, the best solution is to agree upon the method of valuation, and the correct value will fall into place.
So for example, if the spouses cannot agree on a value, getting a market comparative analysis from a neutral real estate professional can solve the problem for a few hundred dollars. If the parties are more lax, they may stipulate to a Zillow evaluation. And of course in all cases, the value of the marital residence matters little if the parties agree to sell the home and split the proceeds.
So now after all that, it’s time to distribute marital assets and marital debts. So how is the court going to do it?
As mentioned at the beginning of this article, the court first must decide if they want to do an equal distribution or if fairness dictates that somebody should get more assets than the other person.
Next, the court needs to decide which assets they want each party to maintain. For example if there is a 401(k) that’s titled solely in the husband’s name, the court may want the husband to keep that asset. Similarly, if there is a credit card debt held solely in the husband’s name, the court may want the husband to keep that debt.
As it determines equitable distribution, once the Florida court has gone through and allocated the assets to each party that the court wants each party to keep, the court then has to see what the total distribution is. If the court wants the parties to have an equal distribution of assets and debts, but the court divvied things up so that the husband is getting 60% of the assets and the wife is getting 40%, then the court’s going to have to change things.
In that case the court can do one of two things: First, the court could order an equalizing payment where the husband pays a certain sum of money to the wife that equalizes the distribution. Second, the court could just reorganize how they want to distribute the assets. For example, the court could order that the husband take out a loan against his 401(k) for a certain amount of money and then give that to the wife in order to equalize things.
For most of our examples we are assuming that the Florida court is the one distributing assets and debts. And for the purposes of learning the law, that’s the right way to analyze it.
But the reality is in the vast majority of cases the court doesn’t decide who’s going to retain what assets and what debts. In the vast majority of the cases, the parties decide what is the correct equitable distribution.
A substantial majority of cases are settled either informally pre-suit, formally after filing the suit, formally at mediation, or even on the courthouse steps before trial.
The reality is that you will probably be the one to decide who gets what assets and what debts. But the problem is it takes two to tango in negotiation. And the best way to negotiate assets and debts is to have a strong understanding of all the facts.