What's Mine Is Yours . . . Sometimes: Solving the Puzzle of Nebraska's Approach to Allocation of Income and Appreciation from Separate Nonmarital Property

• Jurisdiction: Nebraska,United States
• Citation: Vol. 47
• Publication year: 2012

47 Creighton L. Rev. 37. WHAT'S MINE IS YOURS . . . SOMETIMES: SOLVING THE PUZZLE OF NEBRASKA'S APPROACH TO ALLOCATION OF INCOME AND APPRECIATION FROM SEPARATE NONMARITAL PROPERTY

WHAT'S MINE IS YOURS . . . SOMETIMES: SOLVING THE PUZZLE OF NEBRASKA'S APPROACH TO ALLOCATION OF INCOME AND APPRECIATION FROM SEPARATE NONMARITAL PROPERTY

SHEILA A. BENTZEN(fn)*

This Article explores Nebraska's current approach to allocation of income and appreciation deriving from separate property. Though Nebraska law clearly distinguishes between separate property and marital property, the law's current treatment of income and appreciation from that separate property is much more muddled. The Nebraska Supreme Court has devised standards to allocate income and appreciation of nonmarital property, but those standards lack consistency and predictability. This Article provides an in-depth analysis of Nebraska's current approach and provides concrete steps for reform.

The Article begins by surveying the various, and at times conflict-ing, approaches to allocation of income and appreciation of separate property among the many states. Next, the Article takes a close look at Nebraska's approach to allocation of these assets. By tracing pivotal cases, the Article reveals holes and inconsistencies in the law. Finally, the Article synthesizes both Nebraska's current approach and the com-peting approaches of other jurisdictions to propose a more concrete and predictable method for allocating income and appreciation of separate property.

I. INTRODUCTION

In the United States, approximately two million people get mar-ried every year.(fn1) By some estimates, the average wedding costs over $25,000.(fn2) Undoubtedly, the wedding industry is a booming business and represents its own unique subset of the American economy. Per-haps appropriately so, given that marriage, in many ways, reflects a business partnership just as much as it does the joining of two souls in love. For many, marriage means the merger of two homes, two bank accounts, two retirement plans, two incomes, and so much more.

And just as even the most well-thought-out business mergers sometimes fall apart, so too do marriages. In 2011, 877,000 people got divorced and in 2010, 872,000.(fn3) When a marriage, just like a business partnership, comes to an end it is often fraught with financial compli-cations. What happens to all of those merged assets? Rarely is it as simple as wife keeps half and husband keeps half, nor is it as easy as husband keeps what he brought to the marriage and wife keeps what she brought.

Adding to the complexity, the law across the fifty states is hardly uniform. Some states throw all property into the marital pot, opening it up for distribution upon divorce, while others draw bright lines be-tween what is considered each spouse's separate property and, there-fore, not to be divided by a divorce decree.

Nebraska, in particular, incorporates chaos into this system. Though Nebraska draws a relatively bright line between separate property and marital property, the courts' treatment of income and appreciation from that separate property is much less clear. Like a riddle with no solution, Nebraska's classification of appreciation and income from nonmarital property reaches no logical conclusion. On the one hand, the court classifies nearly all income from separate property as marital, and on the other hand, the court classifies appre-ciation from separate property as nonmarital . . . but only sometimes.

This Article sets out to solve the puzzle of Nebraska's approach to classification and allocation of income and appreciation from separate nonmarital property. Part II begins with an overview of the varying state approaches to division of income and appreciation from nonmarital property, focusing on common trends among the many states. Then, Part III explores, in depth, Nebraska's specific and unique approach to the division of these assets. By walking through the chronology of Nebraska case law, this Part reveals the chaos un-derlying Nebraska's current common law. Finally, Part IV synthe-sizes the varying approaches of the states by contrasting these approaches with current Nebraska law; it ultimately concludes with concrete suggestions to reform Nebraska's law.

II. OVERVIEW OF STATE APPROACHES TO DIVISION OF INCOME AND APPRECIATION FROM NONMARITAL PROPERTY

Although the general rules for division of marital property upon divorce vary widely among the states, the state approaches can, in large part, be separated into two primary categories-common-law property states and community property states.(fn4) Within common-law property states, a majority of state statutes direct the court to first classify the property as either marital or separate property, and next to divide only the marital property.(fn5) About fourteen of these common-law states "authorize the courts to divide all of the property held by the spouses at the time of the divorce, without regard to when, how or by whom the property was acquired or how the title is held."(fn6) In con-trast, ten states currently follow some type of community property law.(fn7) In community property states, "both spouses have interests in the community property during the marriage.(fn8) During a dissolution proceeding, then, each spouse has a claim to the community property.(fn9)

Whether considered a community property or a common-law property state, each state has a mechanism for the designation of nonmarital property. In a majority of states, nonmarital property in-cludes property owned prior to the marriage and property received by gift or inheritance during the marriage.(fn10) These general rules regard-ing the designation of nonmarital property carry over to specific rules regarding the allocation of income or appreciation of that separateproperty. Just as states vary in their approach to the initial classifica-tion of marital versus nonmarital property, states differ in their classi-fication of income and appreciation from separate property.(fn11)

Despite this variety, some general principles and patterns can be gleaned. For instance, "[c]ommunity property states treat active in-creases in the value of separate property-those that result from the spouses' efforts-as belonging to the community, while passive in-creases remain part of the separate estate."(fn12) As reflected in the dis-cussion below, the common-law states are more varied in their approaches.(fn13)

Some states treat all increases in the value of separate property as marital property. For instance, a Colorado statute directs courts to consider "[a]ny increases . . . in the value of the separate property of the spouse during the marriage" as one factor in the equitable distri-bution of marital property.(fn14) In application, then, Colorado courts may include all increases in the value of separate property in the mar-ital estate.(fn15) Similarly, in Pennsylvania, marital property broadly in-cludes "the increase in value of any nonmarital property."(fn16)

Conversely, in other states, whether an increase in value of sepa-rate property can be included in the marital estate turns on the dis-tinction between active and passive appreciation.(fn17) In Virginia, both income from separate property and appreciation of separate property is marital if the personal efforts of either party caused the increase in value.(fn18) Where appreciation is concerned, "[t]he personal efforts of either party must be significant and result in substantial appreciation of the separate property" for the increase to qualify as marital prop-erty.(fn19) Similarly, in Missouri, increases in value or appreciation of nonmarital property during the marriage become marital if "marital assets including labor, have contributed to such increases and then only to the extent of such contributions."(fn20) However, all income from separate property, such as dividends and interest, earned during the marriage is marital property.(fn21) In Maine, active appreciation of sepa-rate property is included in the marital estate, but passive increases are excluded.(fn22) As in Missouri, income from separate property earned during the marriage is marital property.(fn23)

For instance, courts in New York, North Carolina, Oklahoma, and Ohio also make an active-versus-passive distinction. The New York statute defines separate property to include "the increase in value of separate property, except to the extent that such appreciation is due in part to the contributions or efforts of the other spouse."(fn24) In Oklahoma, appreciation of separate property can be included in the marital estate if the increase is the result of either spouse's "efforts, skills or funds."(fn25) In Ohio, marital property includes "all income and appreciation on separate property, due to the labor, monetary, or in-kind contribution of either or both spouses that occurred during the marriage."(fn26) Finally, in North Carolina, the relevant statute broadly defines income and appreciation of separate property as nonmarital.(fn27) However, North Carolina case law limits the definition of separate property to include only passive increases in value.(fn28) Thus, active in-creases in value become a part of the marital estate.

On the opposite end of the spectrum, some states classify all in-come and appreciation from separate property as nonmarital. For in-stance, Illinois law defines all increases in the value of separate property and all income from separate...