Chapter 12 Property and Expenses: Who Owns and Who Owes What?

• Library: Divorce & Money (Nolo) (2020 Ed.)

CHAPTER 12: Property and Expenses: Who Owns and Who Owes What?

Who Owns What—Marital Property and the Laws of Your State

Jointly Owned Property

Separately Owned Property

Debts

Who Knows What—Using Legal Discovery

Net Worth—What Do You Own and What Do You Owe?

The Difference Between Assets and Income

Cash Flow—Where Does the Money Go?

Questions to Ask an Attorney

What—exactly—is at stake in your divorce? To answer that question, you must get a handle on your property and living expenses.

In this chapter, you define which property is legally yours and which assets you may have to struggle for in the tug-of-war of divorce. You will also develop a much-needed picture of your cash flow. And you will learn about how to use legal discovery procedures if you have any trouble getting the information you need. The financial fact-finding you did in Chapter 8 (you did do it, didn't you?) will be immensely helpful here.

By completing the tasks that follow, you will lay the foundation for the analysis and decision making that must be done to reach your final settlement. Think of this stage as developing your database or stocking your pantry with the items you will need throughout the divorce process.

The four basic issues you must address at this point are covered in the following sections:

• Who Owns What—Marital Property and the Laws of Your State
• Who Knows What—Using Legal Discovery
• Net Worth—What Do You Own and What Do You Owe?
• Cash Flow—Where Does the Money Go?

Who Owns What—Marital Property and the Laws of Your State

Before you begin to negotiate your divorce settlement, you must know what property you own alone—as opposed to what property is owned solely by your spouse or by the two of you together. Keep in mind that the rules that follow are general. To get the specifics on the property laws of your state, you will have to consult a lawyer or do some legal research.

Read this section for an overview of ownership, and then do whatever additional research is needed. Once you have determined which of your property is separate and which is marital, you will list this information in the "Net Worth Statement" in "Net Worth—What Do You Own and What Do You Owe?" below.

Jointly Owned Property

The property that couples accumulate during marriage is called, straightforwardly enough, marital property. Depending on which state you live in, however, marital property will take different forms.

Community Property: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. (Alaska allows married couples to opt into a community property system. In South Dakota and Tennessee, spouses have the the option of identifying property held in trust as community property.) In community property states, all earnings during marriage and all property acquired with those earnings are considered community property owned jointly by the couple. Even if one spouse earned a salary during the marriage while the other one kept house, the salaried spouse's earnings are shared equally. Separate property in these states—that is, property that is not "community"—consists for the most part of money and property that the individual spouses owned before marriage, and gifts and inheritances that either spouse receives at any time, including during marriage.

At divorce, community property is divided equally (in half) between the spouses. A spouse who contributed separate money to an item bought with community funds—for instance, a wife who contributed her $5,000 inheritance toward a $20,000 down payment for the family home—may be entitled to reimbursement for that contribution. Conversely, a spouse who added community property money to a separate property item belonging to the other may be reimbursed.

In most community property states, a court has the discretion to divide the property equitably (fairly), if dividing the property in half would result in unfairness to one party. Additionally, in some community property states, a spouse whom the court considers at fault in ending the marriage may be awarded less than 50% of the community property. (These exceptions do not apply in California.)

Equitable Distribution of Property: All Other States. In the District of Columbia and the 41 states that follow equitable distribution principles, assets and earnings accumulated during marriage are divided equitably (fairly) at divorce. In theory, equitable means equal, or nearly so. In practice, however, equitable often means that as much as two-thirds of the property goes to the higher wage earner and as little as one-third goes to the lower (or non) wage earner—unless the court believes it is fairer to award one or the other spouse more. In some equitable distribution states, if a spouse obtains a fault divorce, the "guilty" spouse may receive less than a full share of the marital property upon divorce.

Separately Owned Property

In all states, a married person can treat certain types of earnings and assets as separate property. At divorce, this separate property is not divided under the state's property distribution laws, but rather is kept by the spouse who owns it.

In community property states, the following is considered separate property:

• property accumulated before marriage
• property accumulated during marriage with premarital earnings (such as income from a pension that vested before marriage) or with the proceeds of the sale of separately owned premarital property
• gifts given to only one spouse
• inheritances, and
• property acquired after permanent separation.

In the equitable distribution states, separate property includes:

• property accumulated before marriage
• gifts given to only one spouse, and
• inheritances.

In addition, some equitable distribution states consider wages kept separate from other marital property to be separate property.

Separate Is Separate Unless It's Mixed

In both community property and equitable distribution states, the separate property of a spouse generally remains separate property. However, if it's mixed with marital property or the other spouse's separate property, you may not be able to keep your separate property separate, unless you can trace the origin of your separate property and show how it was commingled.

Debts

Debts incurred during a marriage are usually considered joint debts—that is, during the marriage, both spouses are legally responsible for them. When a couple divorces, however, responsibility for marital debts is allocated in accordance with the property division laws of the state.

This usually means that the debts are divided equally or equitably (fairly, though not necessarily in half), especially when they were incurred for food, shelter, clothing, and medical care (called necessities). The court also considers who is better able to pay the debts (the spouse with the higher income or lower living expenses). If a couple has many debts but also has a great deal of property, the spouse better able to pay the debts may be ordered to assume the payments and also receive a larger share of the property.

Who Knows What—Using Legal Discovery

As described in Chapter 8, there are several ways to gather financial information during a divorce. Doing it yourself not only keeps down your lawyer's bill but also educates you about your family's finances and prepares you to negotiate from a position of strength.

If you can't find the information yourself, however, and all efforts to collect it informally fail, you can have your lawyer conduct "discovery." Discovery is the term for formal procedures used to obtain information during a lawsuit. As with all matters in your divorce, remember that the attorney works for you. You should be the one making the decisions about how extensive discovery procedures should be.

If you've never seen the checkbook and have signed tax returns for years without reviewing them, then your lawyer may have to do a lot of digging to create a picture of your financial life. Likewise, if you have participated in budgeting and bookkeeping, but your spouse owns a cash-and-carry business that you suspect is being used to hide assets, discovery may be worth every penny you spend.

On the other hand, if you and your spouse have few assets and you have a pretty good idea of what you're both worth, then using discovery to ferret out more information may simply be a waste of money.

Apply the maxim: Think financially and act legally. If you do, you should be fine.

In a divorce, the common discovery devices include the following:

Deposition (or examination before trial). A deposition is a proceeding in which a witness or party must answer questions orally under oath before a court reporter. In divorces, many lawyers want to take the deposition of the other spouse in order to ask about potentially hidden assets.

Interrogatories. Interrogatories are written questions sent by one party to the other to be answered in writing under oath. Interrogatories are often used to ask a spouse to list all bank accounts, investment accounts, and other assets ever held by that spouse.

Request (or notice) for production of documents. This is a request to a party to hand over certain defined documents. In divorce cases, spouses often request financial documents from each other, including bank statements, profit and loss statements, tax returns, pay stubs, and other documents showing earnings, assets, and debts.

Request (or notice) for inspection. This is a request by a spouse to look at items and documents in the possession or control of the other spouse. Items commonly inspected are original financial documents, houses, and cars. In divorces, the request often comes up regarding house appraisals. For example, Bill and Bernice are divorcing. The court orders Bill out of the family home to allow Bernice to stay with the children. They cannot agree on the value of the house, and Bernice won't give Bill's appraiser access in order to evaluate it. Bill must request an inspection.

Subpoena and...