Property & Debt Allocation in Divorce
- by Eric C. Nelson, Attorney

I. Marital Property.
II. Non-Marital Property.
III. Property That Is Partially Marital and Partially Non-Marital.
IV. Income and Appreciation of Non-Marital Property.
V. Pension and Retirement Interests.
VI. Real Estate.
VII. Deadbeat Spouses.
VIII. Gifts Between Spouses.
IX. Debt Allocation.
X. Final Tip — Close Joint Accounts.


I. Marital Property.

In Minnesota, all property acquired during the marriage
by either party is presumed to be marital property. [1] This means that earnings and property acquired by either spouse are viewed as joint property. The philosophy underlying this is that marriage is a full partnership, and that the contributions of a homemaker are equal in value to those of the bread-winner. This marital property includes pensions and retirement investments acquired or earned during the marriage, as well as equity in property built up during the marriage.

The controlling legal principle which determines the Court’s division of marital property is the rather broad standard of what is “just and equitable.” [2] In practice, however, this typically results in each party receiving half the value of the marital estate. This does not mean that each and every item is split down the middle. It means that in the balance sheet listing all of the marital assets and debts, each party will normally receive a net equal apportionment, regardless of the configuration.

II. Non-Marital Property.

There are two main forms of non-marital property: [3]

  1. Property acquired before the marriage (or in exchange for property acquired before the marriage); and
  2. Property acquired as a gift or inheritance made by a third party to one spouse but not the other (or any property acquired in exchange for such property).
For example, if prior to the marriage I own a Corvette, and during the marriage I trade the Corvette in for a mini-van, then the mini-van is my non-marital property.

Likewise, if during the marriage I am given a Steinway piano from my aunt, that piano is my non-marital property. If I sell the piano and use the proceeds to buy a Savings Bond, then the Savings Bond is my non-marital property.

Similarly, if during the marriage I inherit $10,000, then that $10,000—or whatever I buy with it—is my non-marital property.

Why is this important? Because unlike marital property, non-marital property belongs wholly (100%) to the person who acquired it. Although the Court has some authority to award a spouse up to one half of the non-marital property of the other spouse, this is only in cases of unfair hardship, and is extremely rare. [4] In all my years of practice, I have yet to see it happen.

One very important caveat: the burden of proof is on the person claiming a non-marital interest in property to prove that the property is in fact non-marital. [5] Therefore, when you acquire property by gift, or want to protect pre-marital property from being awarded to your spouse, you must be very careful not to commingle the property with marital property—e.g., don’t deposit it into any joint accounts, or it becomes very difficult to trace. (If you have already commingled your non-marital money, don’t despair; just be prepared to start digging up a lot of old documents, and perhaps hiring an accountant).

III. Property That Is Partially Marital and Partially Non-Marital.

Some property may be both marital and non-marital. The most common example of this is with real estate or retirement accounts. For example, one spouse might have purchased a house prior to the marriage, but continued to pay down the mortgage during the marriage. In this case, the house is both marital and non-marital. Likewise, one spouse might have started contributing to a 401(k) or other retirement account prior to the marriage, and then continued making contributions to the same account during the marriage. The account will therefore be partly marital and partly non-marital.

The burden of proof remains on the party asserting the partial non-marital interest to prove both its existence and its amount. For a retirement account, this will ordinarily require you to obtain documentation of the account balance on the date of marriage, and every statement thereafter (or at least every year-end statement thereafter). From these documents, an accountant can determine the extent to which the current balance of the retirement account is composed of premarital contributions, and the gain thereon, versus marital contributions, and the gain thereon.

A common mistake is to simply use the balance of the retirement or other account on the date of marriage as the total premarital value. The problem with this approach is that it improperly excludes all of the gain on the premarital asset from the date of marriage to the present. For example, assume a party has an account worth $100,000 on the date of marriage. During the marriage, an additional $100 is added, thereby making it a partly marital account. Ten years later, the parties are divorcing, and the account is worth $200,000. Clearly, most of the gain is from the $100,000 premarital balance, and not the $100 marital contribution.

IV. Income and Appreciation of Non-Marital Property.

An increase in the value of non-marital property during the marriage is still non-marital. [6] For example, if you buy a painting prior to the marriage for $10,000, and during the marriage it increases in value to $100,000, the entire value of the painting remains non-marital.

However, income earned during the marriage from non-marital assets is marital. [7] For example, if you own rental property prior to the marriage, the rental income received during the marriage is deemed marital, because it was “earned” during the marriage. [8] Another example would be dividends earned during the marriage from premarital shares of stock. The dividends paid are treated as marital earnings. [9] Interest on a non-marital bank account during the marriage would likewise be marital. [10]

Caveat: the Court distinguishes between
active and passive appreciation. If the appreciation of an asset is due to efforts or expenditures made by either party during the marriage, then the appreciation is marital. [11] For example, if during the marriage, there is active management and improvement of the property — i.e., some investment of marital money, labor, or entrepreneurial decision-making — then the appreciation is marital. Id. Merely paying taxes on non-marital property during the marriage, however, does not create a marital interest in the otherwise non-marital property. [12]

V. Pension and Retirement Interests.

Frequently, one party or the other has acquired a pension or retirement interest of some kind during the marriage. The portion of such a retirement interest that was acquired during the marriage is marital property, and becomes part of the marital estate subject to a “just and equitable” (usually 50-50) apportionment. In cases where a retirement account is partly marital and partly non-marital, an accountant will normally need to be retained to determine the marital versus non-marital values.

If there are not enough other marital assets to compensate the other spouse for half of the marital value of the retirement interest, then the Court will order the distribution through what is known as a Qualified Domestic Relations Order, or QDRO (pronounced “quadro,” in legal jargon). This is a way of dividing a tax-sheltered retirement account between divorcing spouses without incurring any adverse tax consequences as a result of the division.

If there is a need for either party to immediately obtain distributions from a retirement account, a QDRO is a way to accomplish this in divorce proceedings without incurring the normal 10% early withdrawal penalty (although you’ll still be liable for income tax on the withdrawal). [13] Note that this only applies to qualified retirement accounts such as 401(k)s, 403(b)s, etc. [14] It does not apply to IRAs or pensions.

VI. Real Estate.

It often happens that one spouse or the other has a house prior to the marriage, but with an outstanding mortgage, which is in part paid off during the marriage. The Court has developed methods for apportioning the value of such real estate to give one spouse credit for his or her non-marital interest, while giving the other spouse credit for half of the value of the equity increase in the house during the marriage.

Note that it does not matter which party wrote the mortgage checks every month. Earnings by either party during the marriage are marital earnings, and to the extent that the parties acquire increased equity in a piece of real estate during the marriage as a result of paying down the mortgage with marital earnings, the increased equity is treated as marital property.

The formulas for calculating these interests are complicated, but basically, a party’s non-marital interest is calculated as follows: first, one calculates his or her non-marital interest at the time the property was acquired. This is calculated as a percentage. It is equal to the ratio of non-marital equity in the property at the time it was acquired to the fair market value at that time. For example, if you have a house worth $100,000 on the date of marriage, with a remaining mortgage balance of $60,000, then you have a 40% non-marital interest in the house. [15] This percentage non-marital interest remains constant, regardless of whether the property appreciates or depreciates in value during the course of the marriage.

Now, to determine your non-marital interest at the time of the dissolution as a dollar figure, you simply multiply the current fair market value by the same 40%.

So for example: if the fair market value of the same house at the time of the dissolution is $120,000 because of passive appreciation, and the remaining mortgage balance is only $40,000 because $20,000 was paid off during the marriage, then your non-marital interest would be $48,000 (40% of $120,000. The remaining equity of $72,000 would be the parties’ marital interest, and subject to apportionment as part of the total marital estate.

This formula applies even in cases where the original mortgage was refinanced during the marriage. [16]

VII. Deadbeat Spouses.

But, you say, my spouse is a lazy, good-for-nothing bum who refuses to work either at a job or around the house, and just watches TV and drinks beer all day long! Why should s/he get half?!

In theory, the deadbeat spouse does not automatically get half of the marital estate. The Court has discretion to apportion the marital estate in any manner that is “just and equitable.” [17] One of the factors which the Court is supposed to consider is “the contribution of each [spouse] in the acquisition, preservation, depreciation or appreciation in the amount or value” of the marital estate. [18]

That said, if you have two fingers you can count the number of times this sort of deadbeat spouse argument has ever prevailed in the history of civilization. (I’m being facetious, but only slightly. The attitude of the courts seems to be: “Yah, yah, that’s what everybody says. Just suck it up and stop making things difficult. If you thought your spouse was such a bum, you shouldn’t have stayed married, etc. etc.”).

VIII. Gifts Between Spouses.

In Minnesota, gifts between spouses during the marriage are marital property — not non-marital. [19]

As for the engagement ring, if it was given prior to the marriage, and a marriage subsequently took place, the engagement ring is the premarital property of the recipient. [20]

IX. Debt Allocation.

The Court has broad discretion to divide marital debt in any manner that has an acceptable basis in fact and principle. [21] Typically, the marital debts are included as part of the same balance sheet that includes the marital assets, with the total estate being apportioned in some configuration which results in an equal net division.

There is some precedent for holding a spouse solely responsible for debts incurred secretly, without the other party’s knowledge or consent. [22] In practice, the mere fact that the other spouse didn’t know about a debt is probably not going to be enough to keep it from being regarded as a marital debt. It is fairly common for one spouse or the other to be more in charge of household finances. A stronger argument is made when the reason the other spouse didn’t know about it is because the spouse incurring the debt deliberately kept it secret, but even in that case, if the purpose of the debt was to put food on the table, clothes on the children, or any other legitimate marital expense, it will likely be treated as a marital debt.
It is sometimes asked whether a debt may be assigned solely to the spouse who incurred it, based on what the debt was for. Again, all though there is some case law to support this, in practice, the expenditures need to be extremely unreasonable in order to avoid them being treated as marital debts, for example:
  1. Gambling.
  2. Illegal Drugs.
  3. Liaisons with Paramour.
Student loans are a special case. Sometimes one can be successful arguing for separate treatment of student loans, given that the party on whose behalf they were incurred is the one who is receiving the educational benefit. There is no definitive law on this, so it’s very much up to the discretion of the trial court.

X. Final Tip — Close Joint Accounts.

Unless you have a great deal of trust remaining in your relationship, it is wise at the time of separation or imminent dissolution to take your fair share of the funds in any marital accounts and put them in a separate account in your own name, to protect them from depletion. Likewise, cancel all credit cards which your spouse has authority to use, to prevent any running-up of debt. I see these things happen all the time.


Footnotes:
  1. Minnesota Statute section 518.003, Subdivision 3b.
  2. Minnesota Statute section 518.58, Subdivision 1.
  3. Minnesota Statute section 518.003, Subdivision 3b.
  4. Minnesota Statute section 518.58, Subdivision 2.
  5. Minnesota Statute section 518.003, Subdivision 3b.
  6. Minnesota Statute section 518.003, Subdivision 3b(c).
  7. Gottsacker v. Gottsacker, 664 N.W.2d 848, 854 (Minn. 2003).
  8. Campion v. Campion, 385 N.W.2d 1 (Minn.Ct.App. 1986).
  9. Nardini v. Nardini, 414 N.W.2d 184 (Minn. 1987).
  10. Swick v. Swick, 467 N.W.2d 328 (Minn.Ct.App. 1991).
  11. Swick v. Swick, 467 N.W.2d 328 (Minn.Ct.App. 1991).
  12. See Gottsacker v. Gottsacker, 664 N.W.2d 848, 854 (Minn. 2003) (use of marital funds to pay taxes on undistributed Subchapter S corporate income did not create a marital interest).
  13. 26 USCS section 72(t)(2)(C).
  14. 26 USCS section 72(t)(1).
  15. Schmitz v. Schmitz, 309 N.W.2d 748 (Minn. 1981).
  16. Antone v. Antone, 645 N.W.2d 96 (Minn. 2002).
  17. Minnesota Statute section 518.58, Subdivision 1.
  18. Id.
  19. Minnesota Statute section 518.003, Subdivision 3b(a).
  20. Linderman v. Linderman, 364 N.W.2d 872, 877 (Minn.Ct.App. 1985) [engagement ring and wedding band are recipients’ pre-marital property per 518.54, Subd. 5(b)(1984)(now 518.003, Subdivision 3b(b)].
  21. Servin v. Servin, 345 N.W.2d 754 (Minn. 1984).
  22. See Dahlberg v. Dahlberg, 358 N.W.2d 76 (Minn.Ct.App. 1984) (entire marital debt apportioned to husband because he incurred most of it without consulting Wife); and Bliss v. Bliss, 493 N.W.2d 583 (Minn.Ct.App. 1992) (certain debts apportioned solely to wife, where wife failed to disclose the purpose of the debts).