The legal process of dividing marital property, assets and debts in non-community property states is known as “equitable distribution.” Equitable essentially means, “fair, based on the circumstances of the parties.” In comparison, in community property states, marital property is generally divided equally or 50-50.
The main factors that affect Equitable Distribution are the earning abilities of the parties, the ages of the parties, the contribution of each party towards the marital property, who has primary physical custody custody of the children, and any property and assets owned separately by the parties. To many peoples’ surprise, marital misconduct, such as adultery, is not a factor in equitable distribution.
Marital property is generally any property or assets that a married couple acquired during the marriage. It includes increases in value on separate property, such as property acquired before the marriage. For example, money contributed during the marriage to a pre-marital, separately titled retirement account, such as a 401(k), is considered marital property, as is any increase in value during the marriage of the money in the account as of the date of the marriage. In comparison, non-marital or separate property, is property that a person brings into the marriage, is acquired by gift or inheritance, or that is acquired post-separation.
All marital property is divided in equitable distribution. It can include bank and retirement accounts, pensions, stocks, paintings, college funds, the marital home, cars, even the living room sofa. Because separate property is not divided in ED, an important step in the ED process is to accurately identify what property is marital property and what property is separate property.
In a traditional litigated divorce, getting to court for equitable distribution usually a lengthy, complicated and expensive process. First, an Equitable Distribution claim must be raised in the divorce. Then, “discovery” must be completed, which is a detailed exchange of documents and information between the parties and their respective lawyers. Then, you must prepare and file all of the appropriate paperwork to get to court, which also involves mandatory waiting periods and other obstacles. Included in that paperwork is a detailed analysis of your assets and the case prepared by an attorney, which is time consuming and expensive to generate.
One of the reasons divorce mediation is better than traditional litigation is because a divorcing couple can avoid the duplicate and expensive work of attorneys and the delays and hassle of the court system.
In divorce mediation, the equitable distribution process is broken down into three steps. The first step is the identification all of the marital assets and non-marital assets that the parties own or in which they have an interest. The second step is valuing the assets identified. The third and final step involves actually dividing marital property – working to agree, through mediation, how the assets should be divided.
To establish which assets owned by the parties are marital property and which assets are separate property, a divorce mediator helps the couple determines, among other things, how the asset was acquired (e.g. by purchase, gift, inheritance, exchange, etc,), how the asset is titled, whether a separate asset has been commingled or combined with a marital asset (as in the case of separate money used for a down payment on a home jointly owned by the parties), and whether there have been both premarital and post-separation contributions to a separate asset (usually in the case of retirement accounts and pensions).
Once the parties’ marital and non-marital assets are identified, the current values of the assets and/or the marital portions of the assets are determined in a variety of ways. For real estate, a professional appraiser may be necessary or, in the case of a sale, the market will determine the value. For pensions, professional pension valuations are used. In the case of businesses, it is often necessary to hire a professional business evaluator. The value of assets such as bank accounts, brokerage accounts and non-pension retirement accounts can usually be determined from the account statements, but parties must be sure to establish value of each account as of the date of marriage, as of the date of separation and the current value, and to back out any pre- and post-marital contributions to the accounts.
Dissipation of marital assets must also be considered to properly value marital assets. An example of dissipation is if one party spends money from a marital account post-separation. Dissipation can also occur where a party in control of a marital asset, such as a home, fails to maintain the asset.
Finally, after the marital assets and non-marital assets are identified and valued, the process for the distribution of the assets is mediated. Each party does not necessarily receive their percentage of each individual asset. Rather, the goal is to have the overall distribution be fair and reasonable. Some assets may be divided between the parties (e.g. bank accounts) and some assets may be distributed in their entirety to one party or the other (e.g. real estate). The couple and mediator should take into consideration the nature and liquidity of each asset, the tax consequences associated with the asset, and each party’s desire to retain all or part of the asset at issue.
After the distribution is determined, the assets are divided accordingly. Some assets may simply be divided or distributed, such as bank accounts. Real estate often needs to be liquidated (sold) or title transferred. Retirement accounts are divided through qualified domestic relations orders (QDROs) or rollovers to avoid taxes and penalties.