Equitable Distribution (handout for clients)

Equitable Distribution

One of the most important parts of a divorce settlement is figuring out how you will divide property that you own together. This article explains the process for doing just that.

New York uses a system called equitable distribution. This means that marital property will be divided equitably, not necessarily equally. The basic concept is that marriage is an economic partnership, and non‐monetary contributions to the marriage have value. It also means that title does not control ownership.

If you were in court, a judge would be making these decisions, but in mediation or collaborative process, you and your spouse will be making these decisions yourselves.

Determining equitable distribution is a 5‐step process:

Determine the relevant time frame.
Identify all of the property owned by each person.
Determine which property is separate and which is marital (or joint);
Determine the value of marital property;
Decide how to divide the marital property.

1. What is “During the Marriage”?

For many people, the term “During the Marriage” begins on the date they were legally married. However, couples who lived together for a long time before marrying, or who had a ceremonial marriage that was different from the date of the legal marriage, might use a different date, such as the date they had a commitment ceremony, or the date they started sharing bank accounts, or the date they physically moved in together. Mediation and collaborative process give you the leeway to be creative.

The end‐date is the date when a couple officially ends their financial partnership and separates their finances. In a “traditional” divorce process, the end‐date is the date one person files an action for divorce in court. In mediation and collaborative process, it is negotiated. For instance, some couples use the date of physical separation, while others use the date they start mediation, or the date they sign their settlement agreement.

2. What is Property?

The first step is to identify the property to be considered. “Property” includes the things you would naturally think about, like checking, savings and brokerage accounts, tangible items like cars, artwork, collectables, precious metals, furniture and real estate. But it can also include things somewhat less obvious such as retirement plans, life insurance, annuities, royalties, deferred compensation, stock options, business and professional interests. It also includes things that may have more sentimental than financial value, including pets, photographs, and family memorabilia.

On your Assets and Liabilities worksheet, make sure to list all of the property you own, including property that is clearly separate, as well as property you own with your spouse, and property you might own with anyone else. And don’t forget to include debt such as mortgages, student loans, liens and personal obligations.

3. Separate vs. Marital Property

The next step is to determine which property is separate, and which is marital or jointly‐ owned. Separate property belongs entirely to that spouse, while marital property will usually be divided between spouses. Note that the title on an account or deed is not definitive.

Separate property usually includes:

Property you owned before the marriage and kept entirely separate during the
marriage;
Gifts given to one spouse only;
Inheritance;
Personal injury awards.
Marital property is that which is acquired by either party during the marriage, regardless of how the asset is titled. Marital property usually includes:
Funds earned by either party during the marriage;
Retirement plan contributions made (by the party or an employer) during the
marriage;
Property acquired during the marriage by both spouses together;
Property in joint name (i.e. joint bank accounts);
Formerly separate property that is mixed with joint funds (see below);
Gifts given to both spouses.
Mixed property. When separate and marital property are mixed together in the same bank account, the presumption is that it all becomes marital. This can happen in two ways:
Commingled property stays in the title of one person but contains a mix of separate and marital funds. For instance, Lucy has a Wells Fargo account in her name alone which had $10,000 when she and Ricky got married. This is separate property. Lucy works during the marriage and adds funds she earned (which is marital property) to the same account. There is now a presumption that all of the funds in her Wells Fargo account are marital, since they are mixed together.
Transmuted property is when one person puts separate property into a joint account. So in this case, let’s say Lucy put that same $10,000 of separate property into a joint account with Ricky. Again, all of the funds in the joint account are presumed to be marital.

The increase in value of separate property may also be considered to be marital if either partner is actively involved in the appreciation (rather than market forces) of value.

Real estate

Real estate (including houses, condominiums and cooperative apartments) are treated a little differently from other kinds of mixed property.

When a couple purchases real estate, one or both may contribute separate property to the down payment, but then the deed (or stock certificate, in the case of a cooperative apartment) and mortgage are often in joint name. The equity in the home is joint property, but each person receives a dollar for dollar credit back for their separate property contribution to the down payment (or improvements).

Let’s say that Lucy and Ricky own a house together that they sell for $500,000. They have a mortgage for $160,000, and the closing costs, taxes, etc. will be $40,000. Lucy contributed $50,000 and Ricky contributed $100,000 when they purchased it. Here is the math:

Sale Price = $500,000
Minus mortgage and closing costs ($200,000) = $300,000
Minus down payments ‐ $50,000 to Lucy, and $100,000 to Ricky = $150,000 Equity divided by 2 = $75,000 each
So Lucy ends up with $125,000 ($75,000 + $50,000) and
Ricky ends up with $175,000 ($75,000 + $100,000)

Retirement accounts

The increase in value of retirement accounts that accrues during the marriage is considered to be marital, even if the account was established before the marriage. Often, both spouses have retirement accounts, and the accounts will be equalized.

In this case, let’s say Lucy has $200,000 in her 401(k) account, and Ricky has $100,000. To equalize them, total them together ($300,000) and divide by 2 ‐ $150,000. Lucy will therefore transfer $50,000 to Ricky, so they each end up with $150,000.

There are certain rules about transferring funds from retirement accounts that are classed as “qualified plans,” which means they are qualified for special tax treatment. Contributions are tax‐deductible and they grow tax‐free. Taxes are paid when the funds are withdrawn and, with a few exceptions, the owner must be 591⁄2 before withdrawing funds to avoid a 10% penalty. This all means that the distribution of retirement funds must be thought of differently than other property.

The transfer of retirement funds pursuant to a divorce is exempt from penalties if the divorce judge signs a Qualified Domestic Relations Order (QDRO) authorizing the transfer. Although we do not prepare QDROs ourselves, we can facilitate the process of obtaining one.

4. What is the Value of the Marital Property?

This is easy for bank and brokerage accounts, since all you have to do is get a statement to see the value. However, it may be less clear for pensions, real property or for businesses or professional practices. Parties in mediation or collaborative process often use neutral appraisers to determine value.

5. How will Property be Divided?

With a few exceptions most marital property is divided equally between spouses. The main exception to this is a business interest, particularly a professional practice, where the non‐ involved spouse may be awarded a smaller interest.

The statute (DRL § 236B) lists a number of factors to be considered:

The income and assets of each spouse at the time they got married, and when they
separated;
The length of the marriage;
The age and health of the parties;
The need for one parent to stay in the marital home with the children;
The loss of rights to inherit from the other spouse;
The loss of health insurance benefits from the other spouse;
Spousal support payments;
The indirect contributions made by a spouse who does not have title as spouse,
parent, homemaker, and to the career of the titled spouse;
The liquidity of the assets;
The probable future financial positions of the spouses;
The difficulty in valuing a particular asset (e.g. a business);
The tax consequences to each party, if any;
Whether one spouse wastefully dissipated any assets;
A transfer of assets to a third person;
Any other factor the court may find useful to achieve equity between the parties.
Mediation and collaborative process are excellent methods to decide how property will be divided. They allow you to discuss the nuances of your particular situation and the needs of each person involved to come up with a plan that is viable and feels fair to you both.

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