Friday, January 15, 2010

Equitable Distribution vs. Community Property – The Line is Fading

Simply put, “equitable distribution” is meant to be and do what the name implies: distribution of property upon divorce into fair -- not necessarily equal -- shares. This is accomplished by taking a number of factors into consideration to determine the financial position of the parties after divorce. In Virginia, similar to other equitable distribution states, the factors are:

1. Each party’s contributions – financial and otherwise – to the well-being of the family and the acquisition, care and maintenance of marital property;

2. Length of the marriage;

3. Age, physical and mental condition of the parties;

4. Cause of dissolution of marriage, including fault grounds;

5. How and when marital property was acquired;

6. Debts and liabilities of the parties and whether debt is secured by marital property;

7. Liquidity – or lack thereof – of marital property;

8. Tax consequences of distribution to each party;

9. Use of marital funds for separate purposes, dissipation of marital funds done in anticipation of divorce after separation;

10. Other factors deemed necessary or appropriate to consider to arrive at a “fair and equitable monetary reward.”

If after reading the statutory language you are no closer to understanding what you are likely to receive in an equitable distribution proceeding, then you are halfway to reaching the proper mindset necessary for entering into divorce litigation. The lack of predictive quality to this and similar statutes around the country -- while not purposefully so -- is the best of many reasons to try and reach a settlement as to the distribution of your property rather than take the matter to trial. There is not always a financially feasible as well as legally sound reason to leave distribution to a Judge, to whom such statutes offer no more guidance as to what is “equitable” than they do to you or me.

However -- whether it is a product of the vagueness of the statutory factors or a testament to their validity -- many if not most equitable distribution divorce decrees ultimately divide the marital property 50/50! In other words, equitable distribution divorces tend to look a lot like “community property” divorces. Confused? What if I told you that five of the country’s community property states subject the spousal shares to equitable distribution? What does this all mean to the bottom line?

The best way to try and understand what you might be facing is to avoid the distribution consideration and focus on the classification of your property, because therein lies the similarity between the states as well as the true reason that we are finding 50/50 splits across the map. Regardless of where you live, the classification of property drives the distribution and if you understand what you have, you can understand how much you’ll keep.

For the most part, community property states have two classes of property: “community” and “separate.” These jurisdictions consider everything acquired during the marriage to be community property except that acquired by gift or inheritance. Everything acquired prior, or by gift or inheritance, is “separate.”

Equitable distribution states classify property as marital, separate, or part-marital/part-separate. “Marital property” is similar to “community property.” “Separate property” is property acquired prior to marriage; property received in exchange or as proceeds of separate property, regardless of when acquired; and gifts or inheritances, regardless of when acquired. “Part-marital/part-separate” occurs when marital is commingled with separate property or when the non-owning spouse adds value – either monetary or non-monetary – through personal efforts.

In the vast majority of cases – not the most notable, but the most common -- most property is not separate. You find more separate property in very short marriages or those governed by prenuptial agreements – ironically, two factors common in “Hollywood marriages.” These are the exceptions, not the rules. Because most property is classified as community, marital, or at least part-marital, you will find that most divorce decrees split most property 50/50.

So, where does all of this lead us? The moral of the story is that if your attorney suggests early settlement negotiations and begins with the notion of an equal division of property and works from there -- regardless of where you live -- you are likely getting better advice than if your attorney tells you he’ll help you “take him for all he’s worth,” because, in fact, he’s probably only worth about half of what you were worth together.