Understanding Property Classification in Divorce
Property classification forms the cornerstone of equitable distribution in divorce. Property encompasses a spectrum of assets and debts—from homes and cars to retirement accounts and wine collections. It’s the financial tapestry scrutinized during the divorce process.
Understanding what is marital property, what is separate property, and what is hybrid property, can make a significant impact on your divorce and on your financial future.
Marital Property: The Shared Canvas:
Marital property includes assets and debts acquired during the marriage. It is critical to note that marital property is subject to division in divorce.
Separate Property: A Personal Tapestry:
Separate property comprises assets or debts owned before the marriage or obtained through gifts or inheritances during the marriage (and kept separate). Importantly, separate property can remain separate, untouched by the divorce division process. However it is critical to note that the burden is on the person claiming separate property to prove that the property is in fact separate. A divorce financial planner can conduct separate property tracing to support separate property claims.
Hybrid Property: Where Complexity Unfolds:
A challenge arises when assets fall into the gray area—what we term hybrid property. Hybrid property is part marital and part separate, and generally only the marital portion of hybrid property is subject to division in divorce.
A good example of a hybrid asset is a 401(k) retirement account with contributions spanning pre-marriage and marital periods. The pre-marital contributions are considered separate and the marital contributions are considered marital. The market gains and/or losses on each portion can either be considered separate or marital, depending on the state you are divorcing in. A divorce financial planner can conduct tracing to value the marital and separate portions of the account.
Commingling: Navigating Murky Waters:
Commingling, the intermingling of separate and marital property, adds another layer of complexity. This process can transform once-separate assets into marital or hybrid ones. Hiring a divorce financial professional becomes essential to document and trace funds, creating a clear delineation of marital, separate, and hybrid components.
Preserving Clarity Through Record-Keeping:
Detailed record-keeping emerges as a key ally in the property classification journey, especially when faced with commingling challenges. Financial institutions retain records for a finite period. Save electronic or physical documents for scrutiny and review by financial and legal professionals.
CONCLUSION: Empowered Decision-Making:
Reach out if you have questions or need property classification support. Remember, you have the right to get informed and you have the power to make good empowered decisions in your divorce. We are here to support you.
By: Elina Cannon, CDFA®, CFA®