Key Issues Regarding Marital vs. Non-Marital Assets in a Divorce
By David Anderson, CPA, CFE, CVA
One of the key tasks in a divorce is identifying the marital versus the non-marital assets of the divorcing couple.
To obtain a better understanding of the key issues involved regarding marital versus non-marital assets, David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides marital dissolution and business valuation services in Philadelphia and the Delaware Valley, interviewed Kathy Bloom, Esquire. Ms. Bloom is an attorney-mediator who is the Managing Partner of the family law firm of Bloom Peters, LLC; the firm has offices in Horsham, PA and Mount Laurel, NJ.
Ms. Bloom began by stating that Pennsylvania, New Jersey and Delaware are “equitable distribution” states (as opposed to states like California which are community property states). This means that the courts decide what they consider to be an equitable or fair distribution of the marital assets between the divorcing spouses (whereas in community property states the parties are generally entitled to a 50/50 distribution of marital assets).
As a result, it is very important to distinguish between marital and non-marital assets. Such assets include homes and other real estate, vehicles (including cars, trucks, boats and planes), personal property (including art, collectibles, antiques, jewelry, furnishings, clothing, etc.), investment accounts, bank accounts and investments in businesses. In Pennsylvania, 529 education accounts not held in trust are also considered marital assets regardless of the source of the contributions.
Ms. Bloom stated that the delineation between marital and non-marital assets is not based upon the name in which the assets are held, but rather when the assets were acquired. If the assets were acquired prior to the marriage or after the date of separation (or date of filing for divorce, depending upon the state of residence), they are generally considered non-marital assets. Assets acquired during the marriage as well as the increase in value of non-marital assets during the marriage are marital assets.
Of course, there are always exceptions to the above. If there is a pre-nuptial agreement providing for segregation of certain non-marital assets and their subsequent earnings or increase in value, these can remain non-marital assets. Another exception can occur for non-marital assets acquired by inheritance or gift during the marriage. If those assets are segregated from marital assets, they can retain their non-marital status (although any earnings or increase in value during the marriage will still be considered as marital assets).
If non-marital assets are “comingled” with marital assets, these non-marital assets can become marital assets. This can happen when one or both spouses put non-marital assets into a common marital asset. For example, if both spouses contribute non-marital assets to a common joint account (such as a checking account or investment account) or to a commonly owned asset (such as a home, car, or real estate), over time the non-marital asset may become indistinguishable from the marital asset.
There are even exceptions to some of these exceptions. Some Pennsylvania counties (such as Bucks County) employ the concept of “vanishing or diminishing credit”. This credit is applied ratably over a twenty-year period. For example, if a spouse contributed $20,000 of non-marital funds towards the purchase of a jointly owned home, and the couple divorces fifteen years later, the contributing spouse may claim a diminishing credit and be considered to still retain a 25% non-marital interest in the original $20,000 contribution. While Bucks County commonly applies a diminishing credit, in other Pennsylvania counties, it is generally up to the judge to determine whether any credit remains in similar circumstances.
Issues can also arise if one or both spouses withdraw funds, marital or separate, before final distribution. If any of those funds are invested (such as in a house, real estate or investment account), the increase in value of such investment may or may not be considered a marital asset. As a result, Ms. Bloom recommended that any such distribution prior to the final divorce decree be subject to an agreement between the parties regarding any increase in value.
As can be seen from the above, there are many key issues involved in determining marital versus non-marital property. Very often, the parties will need to engage a forensic accountant to trace both marital and non-marital assets throughout a marriage, particularly if some of the non-marital assets have been comingled with marital assets.
David Anderson is a forensic accounting expert in Philadelphia with more than 30 years of experience in financial and operational leadership positions. He is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst. Anderson also has served as a divorce accountant or marital dissolution accountant in Philadelphia and the Delaware Valley. He can be reached at 267-207-3597 or emailing him at firstname.lastname@example.org.