In a divorce, property division is one of the most important issues. In this regard, the courts in New York State follow what is called “equitable distribution.” Equitable distribution does not mean dividing properties 50-50 between the parties. Equitable distribution means fair distribution.
In the following article, I will talk generally about the subject of equitable distribution.
In deciding whether and how a certain asset should be divided up in a divorce, the first question to ask is: is this asset a separate asset or a marital asset. Generally, income earned during a marriage is considered “marital assets” and is subject to distribution during a divorce. Assets that a party already owns before getting married may be considered “separate asset” during a divorce, and that party may be able to keep it. But there are exceptions.
I will use the example of a bank account. Suppose the wife owns a bank account with $10,000 in it before the marriage. During the marriage, she keeps the bank account under only her own name, and she has not put any money into it. If the couple gets a divorce later, this bank account will most likely be considered a “separate asset,” and the wife will most likely be able to keep all the money in that bank account.
However, if the during the marriage the wife deposited $20,000 into that bank account, and the money came from her salary, then the $20,000 portion is considered “marital asset.” That portion will likely be divided 50-50 between her and the husband. And the remaining $10,000 that was in the account from before the marriage will be given to the wife alone.
Let’s change the example a little more and say that the wife not only deposited $20,000 into that bank account from her salary, but she also withdrew money from that account on many occasions to pay for living expenses totaling also $20,000. At the time of the divorce, there is $10,000 left in the account. Does that mean the wife can keep that $10,000 because the account already had $10,000 in it when the couple got married?
The answer is: the wife most likely cannot keep the $10,000 to herself in the divorce. The reason is that when the wife withdrew money from the bank account to pay for living expenses, we cannot say for sure that those money came solely from her salary during marriage. It is equally reasonable to say that she withdrew the portion that was already in the account at the time of the marriage, in which case that “separate asset” is considered withdrawn and spent. What remains in the bank account is considered martial asset; that is, money earned during the marriage. This example is what the courts call “co-mingling of assets.” Co-mingling happens when a spouse's separate asset is mixed with the other spouse's separate asset or with marital asset.
Let’s look at an investment account.
Suppose that prior to the marriage, the husband owned an investment account with a value of $50,000 that held stocks in a number of companies such as Apple and Facebook. During the marriage, the husband kept the investment account under his own name only, and he did not deposit additional money into the account. Suppose further that the investment appreciated in value during the marriage, and at the time of divorce, the investment is worth $150,000.
The question is: will the wife be entitled to a share of the $100,000 in appreciation?
The answer depends on whether the husband actively managed the investment account during the marriage.
Scenario 1: During the marriage, the husband did not touch the investment in any way. He did not buy or sell any stocks in the account. He did not do any research regarding his stock holdings which made him decide to not make any changes to his holdings. In this scenario, the investment account will likely remain a separate asset, and the wife will not be entitled to a share.
Scenario 2: During the marriage, the husband did research regarding his investment holdings and made tradings using the investment account. If the court determines that the husband has to some degree actively managed the investment account, then the wife may be entitled to share in the appreciated value of the account. The reasoning behind this can be said to be that the effort the husband put into managing the investment during the marriage is analogous to him working and earning an income. And since income earned during marriage is marital property, the appreciation of an actively managed investment should also be considered marital property.
Like marital property, marital debts can also be distributed between the spouses in a divorce court.
Regardless of whose name the debt is under, the court may order that both spouses be responsible for paying that debt.
For example, a husband incurred $10,000 in credit card debts to pay for the couple’s living expenses. The credit card is in the husband’s name only. In a divorce, the court may say that this is a “marital debt” and order the wife to pay for part of that debt, even though her name is not on the credit card. The reason is that the debt was incurred for the benefit of both spouses. Now suppose that the $10,000 credit card debt was not used to pay the couple’s living expenses. Rather, the husband used the money to pay for a series of expensive luxury spa treatments. In this case, the court may likely rule that the wife should not be responsible for the debt.
Tax liability incurred during the marriage may in many cases be considered as marital debt as well.
For example, a husband failed to file tax returns for a number years. At the time of the divorce, he owes $50,000 in back taxes to the IRS. Suppose also that the couple’s finances have for the most part been handled together, and that they kept joint bank accounts from which living expenses were paid. In such a case, the court will likely rule that the wife is also responsible for paying the back taxes that the husband owed. The reason for this is that the wife has also benefited from the back taxes that the husband has not yet paid.
However, there has been a case (Frey v. Frey, 68 A.D.3d 1052 (N.Y. App. Div. 2009)) where the court ruled that the wife was not responsible for back taxes that the husband owed. In that case, the couples maintained mostly separate finances, and decided from the beginning of the marriage to file separate tax returns. The husband failed to file tax returns throughout the marriage. The court ruled that the husband was solely responsible for paying income taxes, interest, and penalties he owed.
It is important to note that in a divorce, a spouse will often be held responsible for back taxes owed by other spouse. But there are exceptions. Each case must be analyzed based on its own unique facts.
Disclaimer: this article should not be construed as legal advice. Each legal case should be analyzed based on its own facts and circumstances.<- Previous Next ->