One of the more difficult issues courts have to deal with in a dissolution is how to differentiate marital property from non-marital property. Divorcing spouses often feel that they should be allowed to take out of the marriage everything they brought into the marriage. If the asset is clearly identifiable and separable from the marital estate (i.e. coins owned prior to the marriage) it is possible to maintain the asset as entirely nonmarital. However, when the asset is one in which both parties maintained possession and made contributions to during the marriage (i.e. a house) determining the nonmarital interest becomes more difficult.
As will be seen below, further complicating the issue is that according to Minnesota law the analysis of the nonmarital claim varies depending on the asset class involved. This article is meant to give an overview of some of the issues surrounding nonmarital claims in a dissolution. The analysis of any particular nonmarital claim requires an application of the law to the very specific facts of each case.
Basic Concepts and Law on marital and non-marital property.
As part of the dissolution of a marriage the court is required to make a “just and equitable division of the marital property of the parties.” Minn. Stat. §518.58. Marital property is generally defined as property acquired by either spouse during the marriage. If you think of it in terms of a balance sheet, the marital property is listed and equitably[1] awarded to each party. Nonmarital property is not part of the marital estate and is therefore not part of the equitable division of the marital estate.
Burden of Proof.
Pursuant to Minnesota statutes, any property acquired during the marriage is presumed to be marital property. The person asserting a nonmarital claim has the burden of proof to establish the claim by a preponderance of the evidence. Whether the non-marital claim has been established by a preponderance of the evidence is a somewhat subjective determination. However, generally speaking, if the evidence shows that the non-marital claim is more likely to be true than not to be true, the claimant will likely have met his or her burden.
Tracing.
A person making a non-marital claim will normally be required to provide documents which establish the source of the funds or asset and the disposition of those funds or assets during the marriage. In a real property situation, documents such as purchase agreements, appraisals, refinancing documentation, tax statements and mortgage statements are useful in tracing a non-marital claim. When tracing a non-marital investment or other monetary account, monthly or other periodic statements are helpful as well as anything which shows deposits, withdrawals, appreciation, changes in investments, transfers, etc. All of these sources of information along with verbal testimony help to trace the non-marital claim over time. There is no strict tracing requirement that requires a party to account for every penny of a non-marital claim, however, the more detailed the tracing and the more thorough the documentation, the stronger likelihood that the non-marital claim will be successful.
Commingling.
Commingling is the act of combining marital assets or funds with those claimed to be non-marital. A simple example is depositing a non-marital inheritance into a joint marital bank account. Assuming marital expenses are paid out of the joint bank account, it may become difficult or impossible for a court to determine whether the funds remaining in the account are marital or non-marital. That is not to say a party loses his or her non-marital claim simply by depositing funds into a marital bank account. It is simply that the tracing becomes more difficult. Consider a mortgage payment made from an account containing marital and non-marital funds. How would a court determine whether marital or non-marital funds were used to pay the mortgage?
Often the timing of the purchase can be used to support the claim. For example, when a large transfer of non-marital funds occurs immediately preceding a large purchase, it can reasonably be assumed the transferred funds were used to make the purchase. Thus, the “new” asset is non-marital or partially non-marital. Note that one way to establish that nonmarital funds were applied towards the purchase of an asset is to write the source of the funds (i.e. the account number) on the check.
Refinance and lost equity in real property.
Another potential erosion of a non-marital claim occurs when parties refinance the property and take out additional equity out of the home. If the new mortgage is more than the marital equity in the home, then the new mortgage will also recue the non-marital equity in the home. Put another way, when you refinance and pull equity out of the home it is likely you are pulling marital and non-marital equity out of the home. Also, with decreases in home values, many find themselves with a mortgage greater than the value of the house. In those situations, there is no non-marital or marital equity.
Invasion of the Non-Marital Estate.
Minnesota statutes allow courts to invade up to one-half of the non-marital property if the court finds that one spouse’s resources or property are so inadequate as to create an unfair hardship for that spouse. The most common example of an unfair hardship occurs when there is a significant disparity in the income of the parties and there is only a nominal marital estate. Where a spouse would be destitute following the divorce, the Court may invade the non-marital estate of the other spouse so as to avoid such an unfair hardship. Invasion of the non-marital estate happens in only very extraordinary circumstances, but its existence supports the court’s strong desire to effectuate an equitable division of the marital estate.
Non-marital issues unique to the underlying asset.
In Minnesota, analyzing the nonmarital claim differs depending on the type of the nonmarital asset in question. Specifically, courts have struggled with how to determine marital and nonmarital values of assets that increase in value during the marriage. In a housing example, it is relatively straightforward to calculate the nonmarital interest at the time of the sale of the home. Assume wife made a $50,000 down payment on the $200,000 marital home with funds she acquired prior to the marriage thereby creating a 25% nonmarital interest in the home. Further assume that as a result of the divorce the marital home is sold for $400,000 less the existing mortgage of $120,000.
Wife would receive $100,000 ($400,000 x 25%) of the net proceeds, and the remaining $180,000 would be considered marital net proceeds. Wife’s nonmarital interest in the home comes off the marital balance sheet first and is not considered as part of the court’s equitable division of the marital estate. In the above scenario if there were $100,000 of net proceeds or less, wife would be awarded her nonmarital interest and there would be no marital equity to divide between the parties.
However, what if the asset were an investment account or a retirement account and there were contributions made to the accounts during the marriage? Consider also an ownership interest in a business in which one spouse works during the marriage to make the business increase in value. It can be difficult to quantify how much of the increase in value resulted from marital labor.
[1] In Minnesota and in most other jurisdictions, equitable does not mean equal.