One of the key tasks in a divorce is identifying the marital versus the non-marital assets of the divorcing couple.
To obtain a better understanding of the key issues involved regarding marital versus non-marital assets, David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides marital dissolution and business valuation services in Philadelphia and the Delaware Valley, interviewed Kathy Bloom, Esquire. Ms. Bloom is an attorney-mediator who is the Managing Partner of the family law firm of Bloom Peters, LLC; the firm has offices in Horsham, PA and Mount Laurel, NJ.
What Does Equitable Distribution Mean in the Divorce Process?
Pennsylvania, New Jersey, and Delaware are “equitable distribution” states (as opposed to states like California which are community property states). This means that during the divorce process, the courts decide what they consider to be an equitable or fair distribution of the marital assets between the divorcing spouses. In a community property state, the parties are generally entitled to a 50/50 distribution of marital assets.
What is Considered a Marital Asset vs a Non-Marital Asset?
When going through a divorce in an “equitable distribution” state, it is very important to distinguish between marital and non-marital assets.
- Residential homes and other real estates
- Vehicles (including cars, trucks, boats, and planes)
- Personal property (including art, collectibles, antiques, jewelry, furnishings, clothing, etc.), Investment accounts
- Bank accounts
- Investments in businesses.
- 529 education accounts not held in trust regardless of the source of the contributions. (Pennsylvania)
How do Courts Divide Property you Acquired During Your Marriage vs Pre- or Post-Separation?
The delineation between marital and non-marital assets is not based upon the name in which the assets are held, but rather when the assets were acquired. If the assets were acquired prior to the marriage or after the date of separation (or date of filing for divorce, depending upon the state of residence), they are generally considered non-marital assets. Assets acquired during the marriage as well as the increase in the value of non-marital assets during the marriage are marital assets. Can You Keep Your Marital Property Disputes Out of Court?
When Does a Non-Marital Asset Become a Marital Asset?
If non-marital assets are “commingled” with marital assets, then non-marital assets can become marital assets when one or both spouses put non-marital assets into a common marital asset. For example, if both spouses contribute non-marital assets to a common joint account (such as a checking account or investment account) or to a commonly owned asset (such as a home, car, or real estate), over time the non-marital asset may become indistinguishable from the marital asset.
How is “Vanishing or Diminishing Credit” Calculated in Pennsylvania?
Some Pennsylvania Counties, including Bucks County, employ the concept of “vanishing or diminishing credit”. This credit is applied ratably over a twenty-year period. For example, if a spouse contributed $20,000 of non-marital funds towards the purchase of a jointly owned home, and the couple divorces fifteen years later, the contributing spouse may claim a diminishing credit and be considered to still retain a 25% non-marital interest in the original $20,000 contribution. While Bucks County commonly applies for a diminishing credit, in other Pennsylvania counties, it is generally up to the judge to determine whether any credit remains in similar circumstances.
Issues can also arise if one or both spouses withdraw funds, marital or separate, before the final distribution. If any of those funds are invested (such as in a house, real estate, or investment account), the increase in the value of such investment may or may not be considered a marital asset. As a result, Ms. Bloom recommended that any such distribution prior to the final divorce decree be subject to an agreement between the parties regarding any increase in value.
Does a Prenuptial Agreement Protect Assets?
If there is a prenuptial agreement providing for segregation of certain non-marital assets and their subsequent earnings or increase in value, then certain items may remain non-marital assets.
Another exception can occur for non-marital assets acquired by inheritance or gift during the marriage. If those assets are segregated from marital assets, they can retain their non-marital status (although any earnings or increase in value during the marriage will still be considered as marital assets). Can Collaborative Law Help With Marriage Settlements & Prenuptials?
Who Can Help You Understand Your Marital Assets?
Oftentimes the divorcing parties need to engage a forensic accountant to trace both marital and non-marital assets throughout a marriage, particularly if some of the non-marital assets have been commingled with marital assets. There are many key issues involved in determining marital versus non-marital property, connect with a member of the Collaborative Law Professionals of Southeastern Pennsylvania to resolve marital property disputes without traditional litigation in a courtroom.
About the Author
David Anderson, CPA, CFE, CVA is a forensic accountant and collaborative business valuation expert serving divorce lawyers and their clients in Bucks County, Chester County, Delaware County, Montgomery County, and Philadelphia County, PA. He provides a full range of divorce-related business valuation and forensic accounting services including forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support services, economic damage analysis, business consulting, and outsourced CFO services. Click here to learn more about David Anderson, PA, CFE, CVA.