When you are facing divorce, the subject of marital versus separate property will come up during the property division phase.
Distinguishing between the two types sounds simple, but if your separate property has appreciated during the marriage, a portion of that increase may go to your soon-to-be ex.
Separate and not-so-separate property
By way of example, when you were single, you may have owned a vacation home in which you had $50,000 in equity. You kept the home when you married, and the value had increased by $30,000 at the time you decided to divorce. During property division, the court may allow you the $50,000 as your separate property. However, the judge may divide the $30,000 of appreciation between you and your spouse because that amount will appear as marital property.
Passive versus active
If your separate property increased in value during your marriage, how did that happen? If you had an active role in the increase because of your skillful management of an investment portfolio, you are now looking at a marital asset and the court will lean toward distribution between you and your spouse. Appreciation is “passive’ when the appreciation that occurs is due to third-party management or to market forces beyond your control.
Signing a pre- or postnuptial agreement
One way to avoid having to share an increase in the value of separate property is to create either a prenuptial or postnuptial agreement. If you and your spouse have such an agreement, your vacation home will appear as your separate property; in fact, keeping property separate and outside of the marital estate is the purpose behind the signing of a prenup before the wedding or a postnup after.
Keep good records
Be sure to keep accurate records about separate property items. If you own stock, you should have the formation documents or corporate records. You should keep your separate bank account statements from the date of your marriage forward. You should not commingle the funds and use them for paying household expenses, for instance. Keep in mind that the matter of separate versus marital property will be in the spotlight during your divorce.