The first step in allocating assets and liabilities in a divorce is to create a comprehensive list of those assets and liabilities, making certain that all have been identified. Sometimes, this is a difficult and time-consuming process, since often a spouse does not have a complete understanding of the other spouse’s financial affairs. Through the discovery process – including subpoenas to third parties, depositions, written questions to be answered under oath, forensic investigations, and property inspections to inspect buildings, equipment, and assets – a complete list is developed.
It is critically important not only to create a complete inventory of all the assets and liabilities held by the parties but also to understand how those assets came to be in their present form.
To effectively allocate property in a divorce, the next step is to create a carefully-crafted statement of net worth which classifies and presents each asset and liability (property and debt) as either separate property of one spouse or marital property belonging to both spouses. How an asset is titled or own (by one spouse alone or jointly, for example) often does not determine whether an asset is separate property or marital property.
Separate property is any property owned by either party before to the marriage, as well as some property which is acquired during the marriage by gift or inheritance to one spouse, and then kept separate during the marriage. Passive growth of a separate asset usually is also separate property, unless that separate asset has been commingled with marital assets.
The following assets generally are considered separate property:
Whenever separate property actively appreciates during a marriage – i.e., the appreciation is caused by the efforts of either spouse – that appreciation should be classified as marital property. Turner, Brett R., Equitable Distribution of Property, §5.22 at 230-256 (2d ed. 1994). While property that a spouse owned before the marriage generally is considered to be separate property, when a spouse actively manages that separate property during the marriage, the appreciation in the value of that separate property is part of the marital estate. Reeves v. Reeves, 226 Mich App 490, 495‑496 (1997).
Marital property typically is any property (or debt) acquired during the marriage with active effort by either of the spouses during the marriage. Income earned during the marriage almost always is marital property, and separate assets can become marital property by the active efforts of either spouse during the marriage. Sometimes, the growth of a separate asset may be marital property, but the initial value of the asset may remain separate property.
Some assets may be partially separate and partially marital, depending on how the asset was acquired and what happened to the asset during the marriage. For example, where a party initially invests premarital, separate money into jointly-titled property, and the pre-marital equity then is treated as a joint asset, the premarital separate property can lose any separate character that it may have had. Cunningham v. Cunningham, 289 Mich.App. 195, 209 (2010). To keep its separate character, there must be “… evidence from which to conclude that [a spouse] considered the funds [that spouse’s own] separate property or that it retained its separate character.” Cunningham, 289 Mich.App. at 209.
Carefully analyzing and presenting the separate and marital components of each asset and of the spouses’ overall net worth can have a significant impact on how property is allocated in a divorce.
The next step is to understand the current value of the parties’ property and debt. How an asset is valued in a divorce makes a significant difference in the outcome, because when an over- or under-valued asset is awarded to one spouse, it creates a significant shift in the overall property allocation.
The equity in the marital home is sometimes the biggest asset the spouses will divide. The equity is the current market value of the home, less any debts associated with the property, such as mortgage, taxes, or home equity loans.
Where a spouse owns an interest in a closely-held business, valuing the parties’ assets also may require hiring a business valuation expert to assess the fair market value of the business and the income it produces. Business valuations can be highly subjective, and often, the results of a business valuation can have an enormous impact on not only property division, but also support in a divorce case.
Michigan courts follow the rule of equitable distribution, meaning both marital property and separate property are subject to being divided “fairly” among the parties. Although the presumption is that marital property will be divided roughly equally, and each party will retain his or her separate assets, there are reasons why the court would deviate from an even split, including fault.
Typically, separate property is awarded to the party who originally owned it; however, separate property can become subject to division between the parties, such as where it increased in value because of the active involvement of one of the spouses (as opposed to passive appreciation, where property increases or decreases in value through no effort of the spouse, such as with stock), or where it became commingled with marital property. In some circumstances, the court may award part of the separate estate to the other party if the property division is otherwise insufficient for the support and maintenance of that party.
In a trial, the court will weigh a number of factors in determining how to divide property, including:
There is no specific formula for the trial court use when evaluating these factors.
Even a favorable agreement is not worth the paper it is printed on if it cannot be enforced. Going back to court repeatedly to have your agreement enforced is no good either, because that approach generally is expensive, time-consuming, and often ineffective.
Divorce agreements and judgments need to be drafted very precisely and carefully, so that as much as possible, they are self-enforcing, and there are built-in remedies when a former spouse decides not to abide by the agreement.
There often are many different possible ways that assets and liabilities can be divided in a divorce. The terms under which the division occurs often are as important as what is divided and how it has been valued, and developing security to ensure that agreed-upon payments actually are made is critically important in most cases.
Developing the most constructive and creative solutions to difficult property division problems can help resolve complex situations and ensure stability and security for years to come after the divorce.