WHAT IS COMMUNITY PROPERTY?

There are nine community property states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In addition, Puerto Rico is a community property jurisdiction.

These states generally regard as community property all property that has been acquired during the marriage, other than a gift or inheritance. Even if one spouse earns all the money to acquire the property, all the property acquired is considered to be community property. While there are a number of differences in each state, all states have special laws that operate on the theory that both spouses contribute equally to the marriage; thus all property acquired during the marriage is the result of the combined efforts of both spouses. In community property jurisdictions, spouses equally own all community property (fifty percent owned by the husband and fifty percent owned by the wife).

WHAT IS SEPARATE (NON-MARITAL) PROPERTY?

The property that each spouse brings into the marriage, that is, the property that s/he owned before the marriage, is considered to be “separate” or “non-marital” property. For the property to remain separate, the spouse must keep it apart from marital or community property; that is, s/he would keep it entirely in his/her name. Once the separate property has been commingled (mixed) with marital or community property, it becomes part of the marital property.

For example, consider a bank account with $10,000 in it owned by woman before her marriage. This woman then marries and both she and her husband regularly deposit their respective paychecks into the account and periodically withdraw money to pay for their living expenses. At the time of separation twenty years later, the bank account has $5,000 in it. Since marital property has gone into it (deposits of the paychecks and marital or community debts have been paid from it is impossible to trace the original separate property money from that of marital or community property. The result is that this bank account has changed from separate property to marital property.

Some states, such as California, have a separate property rule that says that all property brought into the marriage, (including gifts and inheritance), that is kept separate and apart from community property remains the separate property of the spouse that owns it.

WHAT IS THE MAJOR DIFFERENCE BETWEEN MARITAL (COMMUNITY) AND SEPARATE PROPERTY?

The important distinction is that separate property is owned by the spouse who acquired it. Upon divorce, separate property goes completely to the spouse who owns it. Conversely, marital (community) property is divided between the spouses in the event of a divorce.

WHAT IS “EQUITABLE DISTRIBUTION?”

Most states employ “equitable distribution” in dividing marital (community) property as a result of the dissolution of marriage (divorce). Instead of a strict fifty-fifty split (in which each spouse receives exactly one-half of the marital or separate property), equitable distribution looks at the financial situation that each spouse will be in after the termination of the marriage. While equitable distribution is more flexible, it is harder to predict the actual outcome, since the various factors are subjectively weighed. Factors considered in equitable distribution include:

1. Earning power of the spouses (one might be much greater than the other)

2. Separate property of the spouses (one might be greater in value than the other)

3. One spouse having done all the work to acquire the property

4. The value that one spouse contributed as the home-maker for the family

5. Economic fault of one spouse in wasting and dissipating marital property

6. Duration of the marriage

7. Age and relative health of the spouses

8. The responsibility for providing for children of the marriage

9. Spousal abuse or marital infidelity (to penalize the offending spouse).

HOW CAN I FIGURE EQUITY IN OUR HOME TO BUY MY HUSBAND OUT OF THE HOUSE? ARE SALES EXPENSES AND COMMISSION TAKEN INTO ACCOUNT?

The first step is to get the currently appraised value of the house by a qualified residential real estate appraiser less the mortgage and any other liens on it. That’s the equity in the house.

Now if you sold the house, both of you would share the commissions and sales expenses. You’d get 1/2 of the balance, after commissions. If you want to buy it from him, it probably is a negotiation issue. While you’d try buy it at 1/2 the equity less all of the sales commissions, likely fix up costs, and taxes that have to be paid until the sale, the other side would say if you want to buy it, there is no sales commission and no fix up expense involved, so why should you get a discount?

A reasonable compromise is 1/2 the equity less 1/2 of what the normal sales commissions would be and 1/2 of what the essential fix up would be.

You’d also want to get a low appraisal and he would want a high appraisal, and as all appraisals are really just estimates (only an actual sale would give the exact price), that may be the hardest part. Some folks agree on a single appraiser, others each select one and split the difference or have the 2 select a 3rd.

DO I GET A PORTION OF MY SPOUSE’S STOCK OPTIONS IN A DIVORCE?

Yes, if a spouse earned stock options during the marriage, most courts will award at least a portion of the options, or the value of the options, to the other spouse in the event of a divorce.

Stock options are frequently granted as a form of compensation — or in lieu of additional compensation — by many businesses. Particularly in highly entrepreneurial firms, the potential riches that stock options can sometimes provide are the most important part of an overall pay package. It is estimated that at least 10 million American employees held stock options in 2000, up 10 fold from the number holding options in 1992.

As courts are still playing “catch-up” and figuring out how to deal with stock options in a divorce, in many states there are no set laws or clear “rules of thumb” for judges and courts to apply, as options are in many ways different from other forms of property. For example, most stock options cannot be exercised immediately on issue. They typically “vest” over a period of 3 to 5 years, or longer, and continued employment with the same company is nearly always a condition for vesting. How does that play in a divorce?

Assume the wife was granted options for 1,000 shares of her employer’s stock, vesting over 5 years, on January 1st and while the value of the options went way up, the couple separated on December 31st of the same year. In order for the options to be exercised in full she would have to work at the same firm for 4 more years, and the firm, knowing that she held valuable options, might pay her below market rates. In that case would it be appropriate to award options for 500 shares to her husband (a full 50-50 split), or only options for 100 shares (50% of the 200 shares that vested during the marriage) something in between? These are issues courts have to grapple with.

HOW IS THE DEBT INCURRED DURING THE MARRIAGE DIVIDED?

In addition to the property acquired during the marriage, the debt incurred during the marriage is divided upon divorce. Dividing the debt upon divorce determines who is responsible to repay the debt.

If both spouses co-signed for a debt, both spouses will probably be held to “joint and several liability” for the debt. “Joint and several liability” means that each spouse is responsible for the entire debt, but also the spouses are jointly responsible for the debt. When a joint and several liability is divided, the debt is attributed to both spouses. Often, however, one spouse is made responsible for the entire amount of the debt. This is generally offset by an “equalization” payment; that is, the spouse who pays the debt receives more property in the settlement than the spouse who is left free from the debt.

In some states debts that were incurred for the benefit of the family are joint and several liabilities of both spouses. For example, housing, furniture, furnishings for the home, child care and children’s doctor expenses would be considered as being incurred for the benefit of the family. Since both spouses benefited from these family expenses, both spouses would be responsible for the repayment of these debts.

Expenses that were incurred solely for the benefit of one spouse, such as a vacation for one spouse, or a hobby of a spouse, may be left as the responsibility of the spouse who obtained the benefit. However, in most community property states, both spouses are equally responsible for the repayment of debt incurred during the marriage, even if only one spouse enjoyed the benefit.

Typically, the debts that one spouse brings into the marriage (separate or non-marital debt) remain the responsibility of that spouse. In special circumstances (in community property states), both spouses can be held responsible for separate (non-marital) debt.

When a joint tax return is filed, the Internal Revenue Service holds both spouses to joint and several liability for the tax.