Property Settlements Explained: Equitable Division and Community Property
Jan L. Warner
Generally, there are two components to the financial settlement of matrimonial issues: support (both for children and spousal support) and property settlement.
Depending on where you live, property settlement may be categorized as either “community property” or “equitable division.” Despite the differences, there are many similarities. For example, while “marital property” is divisible, “separate property” is not. Marital property is property acquired during the marriage while “separate property” includes assets that were not acquired by marital efforts -- such as inheritance, gifts from family members, etc.
In both community property and equitable division states, the following must be done before a division can be made:
The property must first be identified; then valued; and then characterized as either community property (or marital property in equitable division states) or separate property. The marital indebtedness must also be identified so as to be part and parcel of the division.
Generally speaking, and subject to idiosyncrasies of the law of the state in which you live, “community property” (in community property states) and “the marital estate” (in equitable division states) includes all assets acquired and income earned by each spouse during a marital union while living with the other spouse.
“Separate property” means any asset or income acquired by either spouse either before the marriage or during the marriage by gift or inheritance in both community property and equitable division states.
In community property states, “community property” -- also known as “the community estate” -- is divided equally between the spouses assuming that the spouses have not signed a valid written agreement to the contrary. In other words, the total fair market value of the community assets less the joint debts become the “net community estate” to which each spouse is entitled to one-half-- again, unless there is a valid agreement to the contrary.
By “entitled to one-half”, we mean that each spouse must receive an equal share of the value of the community assets -- not that everything must be split down the middle. Therefore, one spouse may get the family home, part of a retirement, and cash while the other receives stock, bonds, and the business.
In equitable division states, on the other hand, the courts are not mandated to award each spouse 50% but, instead, award each spouse a share of the net marital estate based upon criteria which differs from state to state, but generally includes the length of the marriage, contributions, etc. Generally speaking, the longer the marriage, the more equal the shares.
Like community property states, equitable division jurisdictions also allow do not require that assets be divided, only that each spouse receive the value awarded by the court.
Sometimes, there are disputes between spouses over whether an asset is community or separate and whether the value of a community asset is appropriate. Since categorization and valuation of various assets can be problematical, if the spouses do not agree, the courts will listen to the evidence and make an independent determination.
Divison of pension and employment benefit rights can be tricky and are often the subject of disputes. Generally speaking, since a spouse acquires an interest a spouse’s pension, profit-sharing, retirement, or other employee benefit plans during the marriage, these assets become community property or, in equitable division states, marital property and, after valuation, are subject to division when the relationship terminates.
When it comes to pension plans, courts have the power to either (1) award the pension plan to the spouse based on its present value in a which is determined by an expert such as an actuary, cpa, or economist or (2) reserve jurisdiction so that, when the benefits are in “pay status,” each spouse will be awarded a proportionate share.
Generally, courts tend to reserve jurisdiction so that when the employee-spouse retires, the other spouse receives a fixed percentage of each pension check. This percentage is determined by dividing the number of years the spouses lived together as husband and wife by the total number of years the employed spouse participated in the plan.
An example : If the employed spouse contributed to the pension plan for 25 years and lived with the non-employed spouse for five of those years, the by dividing five years by 25 years, the portion that would be community or marital property would be 20%, or one fifth. In community property states, the non-employed spouse would receive one half of 20% or 10% of each check. In equitable division states, the non-employed spouse would receive the percentage of the 20% allocated by the court -- which could be more or less than 10%.
Where the court reserves jurisdiction, the non-employed spouse can elect to
either receive his/her share of the pension benefits at the earliest time that the employed spouse could retire. In other words, if the employed spouse decides not to retire, he/she is still obligated to pay the non-employed spouse the amount that spouse would have received had the employed spouse retired.
An example: If the employed spouse is eligible for early retirement at
age 57 but he chooses not to retire at that time, his former spouse can require immediate payment of the amount he/she would have received had the employed spouse retired. The drawback to the non-employed spouse is that if this election is made, there will be no cost of living increases paid after that date.
In order to distribute qualified funds from pension and profit sharing accounts, Congress established what are known as Qualified Domestic Relations Orders or QDRO’s under The Federal Retirement Equity Act of 1984. This federal act requires that in order to force the employer to comply with a court order that deals with an employed spouse’s retirement plan, there must be specific language in the court order.
If the court chooses to divide the pension plan on a present day value basis, there must be an economic evaluation of the plan by an actuary who is an expert in the area of statistics and financial evaluations in the annuity and insurance field. After reviewing the plan and the amount in the employed spouse’s account, the actuary determines the present day value of the portion of the pension plan that is to be divided.
If, for example, the employed spouse’s pension plan provides that a benefit of
$2,000 per month upon retirement at age 62, and the employed spouse is 50 years of age, the actuary determines how much money would have to be deposited in an interest-bearing account now to pay interest income 12 years of $2,000 per month. This complex calculation includes an estimate of the long-range interest rates that would be in effect over the same period of time. These evaluations are accomplished by private companies for a rather minimal fee.
If this method of division is used, the employed spouse keeps the pension plan while other community or marital assets of that value are placed on the non-employed spouse’s side of the ledger to accomplish either the equal division of community property or the equitable division that is ordered or agreed upon.
Sometimes a family business or a professional practice has been acquired during the marriage and, therefore, must be valued and considered in making the division of assets. Like dividing a pension, to the extent that the business or practice has been developed during the marriage, there is a property interest that must be dealt with when the marriage dissolves.
There are a number of ways in which to value the business or practice which, again, must be accomplished by an economist or cpa who has access to and reviews the books and records of the entity. While some assets such as accounts receivable, inventory, and work in process can be valued comparatively easily, an integral aspect of coming up with a value of a business or professional practice is the value of an intangible asset known as “goodwill" which is an estimate of future business based upon either the name or the reputation of the business.
Even if the business or practice could not be sold on the open market and even though one of the spouses operates the entity, goodwill still exists -- despite the protestations of the business spouse or professional who says that there is no good will if that person stops working. In practice, however, the courts have generally said that business or professional practice goodwill is valued as a going concern -- meaning that the court will presume that the business will continue to operate at least as it has in the past. Otherwise, the spouse would not receive an appropriate value and therefore division of the asset.
When it comes to a spouse earning a college degree or securing a professional license during the marriage, different courts take different views of how, if at all, to value and divide this asset. Some courts say that by securing a decree or professional license the employed spouse was able to produce more money and, therefore, the marital estate was larger and there was more money for support available.
Other states have adopted rules that the marital or community estate is entitled to reimbursement of the cost of securing the degree or license -- such as tuition, fees and books and nothing else. Still other states award the non-employed spouse a right to a percentage of the difference between what the licensed or degreed spouse earns now as opposed to what that spouse would have earned had he/she not acquired the degree or license.
When it comes to the marital residence, if there are minor children at home, it is not uncommon for the custodial parent to live in the residence with the children for a specified period of time after the divorce. In this event, the custodial parent is generally required to pay the monthly mortgage payment, taxes, and insurance.
Because it amounts to one of the largest assets, the house is generally sold if there are no children at home, when the youngest child reaches age 18, or when the parties agree of the court orders.
And last, but not least, the way in which property is titled is irrelevant when it comes to dividing the assets. Should there be a corporation, partnership, or other entity which hold assets that should be divided, then those separate legal entities may be joined as parties to the divorce suit to prevent multiplicity of suits and to assure that as many issues as possible are determined in the divorce suit.
Always check with a matrimonial lawyer where you live to find out the latest developments in your state before you act.
2002, Flying Solo
Need more advice or help with this topic? Click here to get information about taking the "Next Step".
Please feel free to contact us with any comments.
Planning Your Future with 20-20 Vision