When couples divorce in New York, their marital property is subject to “equitable distribution” meaning it is divided fairly, not necessarily equally. What constitutes a fair division of assets is determined by evaluating a list of statutory factors that consider the type of property involved as well as the financial impact the divorce will have on either or both spouses and his or her ability to recover. When the asset was acquired is also relevant as only “marital property” is split in divorce. Separate property is retained by the owner-spouse as explained further below.
PART 1: RULES OF EQUITABLE DISTRIBUTION
Statutory Factors
New York Domestic Relations Law § 236B sets forth 16 factors to be considered in equitable distribution including:
- the income and property of each party at the time of marriage, and at the time of the commencement of the action;
- the duration of the marriage and the age and health of both parties;
- the need of a custodial parent to occupy or own the marital residence and to use or own its household effects;
- the loss of inheritance and pension rights upon dissolution of the marriage as of the date of dissolution;
- the loss of health insurance benefits upon dissolution of the marriage;
- any award of maintenance under subdivision six of this part;
- any equitable claim to, interest in, or direct or indirect contribution made to the acquisition of such marital property by the party not having title including joint efforts or expenditures and contributions and services as a spouse, parent, wage earner and homemaker, and to the career or career potential of the other party. The court shall not consider as marital property subject to distribution the value of a spouse’s enhanced earning capacity arising from a license, degree, celebrity goodwill, or career enhancement. However, in arriving at an equitable division of marital property, the court shall consider the direct or indirect contributions to the development during the marriage of the enhanced earning capacity of the other spouse;
- the liquid or non-liquid character of all marital property;
- the probable future financial circumstances of each party;
- the impossibility or difficulty of evaluating any component asset or any interest in a business, corporation or profession, and the economic desirability of retaining such asset or interest intact and free from any claim or interference by the other party;
- the tax consequences to each party;
- the wasteful dissipation of assets by either spouse;
- any transfer or encumbrance made in contemplation of a matrimonial action without fair consideration;
- whether either party has committed an act or acts of domestic violence, as described in subdivision one of section four hundred fifty-nine-a of the social services law, against the other party and the nature, extent, duration and impact of such act or acts;
- in awarding the possession of a companion animal, the court shall consider the best interest of such animal. “Companion animal”, as used in this subparagraph, shall have the same meaning as in subdivision five of section three hundred fifty of the agriculture and markets law; and
- any other factor which the court shall expressly find to be just and proper.
Income as a Factor
A common question in divorce is whether the lesser-earning spouse can get a larger share of the assets to compensate for having a lower income. The short answer is that simply earning less money by itself is not enough to get more than half of the marital property.
Each spouse’s finances, including present and future income, can be considered by the court. However, the court will weigh income along with other factors such as:
- The likelihood that the higher-earning spouse in a long-term marriage will continue to maintain that income.
- The employment prospects and the likelihood that the lower-earning spouse can maintain or increase his or her income.
- The age and health of the spouses especially if these are likely to impact a spouse’s earning potential.
- The lifestyle of the parties during the marriage.
- The amount of maintenance awarded to the lower-income spouse.
To justify a larger share of the assets, the lesser-earning spouse will have to make a case that under the circumstances, it is just and proper to award him or her more property largely because the higher-earning spouse will continue the earnings he or she had during the marriage and, thus, be in a position to replace the additional share of the assets given to the lesser-earning spouse as part of equitable distribution.
Adultery as a Factor
In New York, a spouse cannot get a larger share of the assets because the other spouse cheated. This is true regardless of the grounds for the divorce.
Adultery is not one of the listed factors discussed above. Further, while the court may take into account “any other factor” the court finds to be just and proper, adultery by itself will not result in more money. However, adultery can be an indirect factor if it results in wasteful dissipation of assets by the cheating spouse. For instance, the court would consider it relevant if the adulterous spouse took marital assets and used it to maintain the extra-marital relationship such as for dinners, travel and hotel rooms or to buy things for the paramour. The focus, however, would be on the dissipation of assets not the reason for it. In addition, the dissipation would need to be substantial as the amount of legal fees spent recovering the dissipated money, for example, may exceed the amount of money dissipated.
Domestic Violence as a Factor
In 2020, the New York State Legislature enacted factor 14 regarding domestic violence which should be considered in equitably distributing marital property. While many commentators have raised concerns as to whether adding this factor returns fault in what has otherwise become a no-fault divorce process ten years after the latter has been enacted, in the end, a court can consider domestic violence in equitably distributing marital assets. The domestic violence should be such that the spouse and/or children suffered in a manner that continues to cause emotional harm after the divorce action is filed. As this factor is relatively new, cases construing it are few and apply to either reduce the abuser’s interest in marital assets or increase the other spouse’s interest therein.
Division of Active vs Passive Assets
How property is divided also varies based on the type of property. For example, “passive assets” like stocks and bonds, retirement accounts and real estate are generally divided equally subject to the rule concerning separate property contributions discussed below. They are considered passive because they increase or decrease in value due to external market conditions rather than the actions of the parties.
“Active assets” are more complicated. They change in value because a party is actively working the asset on a regular basis, such as with a business or professional practice. The spouse who has title to an active asset typically gets 10% of the value automatically because of his or her name recognition and/or reputation in the community the business or professional practice is serving. Thereafter, the court will look at factors such as whether the business was started before or during the marriage and the degree of contributions made by the non-titled spouse to the business. These contributions may be directly to the asset (ex. working in the family business or making introductions that benefit the business) or indirectly (ex. working in the home, taking care of tasks the business/professional practice owner would otherwise have to focus on or making contributions through other work). Typically, the non-titled spouse is awarded less than half the business.
PART 2: AVOIDING EQUITABLE DISTRIBUTION
Separate vs Marital Property
Only marital property is subject to equitable distribution. Generally, marital property is property that is acquired after the parties’ wedding date up to the date a divorce action is filed. Separate property is property that is either acquired before the parties marry, a provable gift specifically to one party of the marriage, or through an inheritance during the marriage. Absent specific circumstances, separate property exclusively belongs to the spouse owning the property and will not be divided if the couple divorces.
Notwithstanding this rule, it is possible for a spouse to inadvertently convert separate property into marital property. Some common examples of this are a spouse who puts an inheritance into a joint bank account or keeps the funds in a separate account but periodically withdraws and deposits money into a joint account to pay marital expenses. The money put into a joint account is converted into marital property, although anything remaining in the separate account is still considered separate property.
Protecting Separate Property
One way to protect separate property is to ensure it is not accessible to the other spouse. However, this may not always be practical. The better way to preserve separate property is through the use of a prenuptial or post-nuptial agreement or a trust. A loan may also work.
Prenuptial and post-nuptial agreements are used to help couples address financial issues that may arise during their marriage and in the event of divorce, separation or death. A prenup is entered into before the vows are exchanged, while a post-nup is signed during the marriage. The agreement can state what property is separate and marital, and how the parties want to divide their assets in the event of divorce. These agreements provide an extra layer of protection to help ensure that the designated property remains separate.
With a trust, separate property is transferred into a trust. The trust then owns the property so it cannot become marital property even if those assets are used by both parties during the marriage. A prime example would be a separate property home that the parties want to live in as a married couple. Importantly, any income and principal paid from the trust to the beneficiary spouse must not be commingled with marital property or used to pay marital expenses or that income will become marital property although the trust itself will remain the separate property of the beneficiary.
Another option is a loan agreement. When one spouse transfers money that is separate property to the other spouse, those funds would ordinarily become marital property. A post-nuptial agreement can change that result but, in some instances, there may not be time to negotiate an agreement. A loan agreement can provide an immediate solution provided it is executed by the parties in the same manner a prenuptial or postnuptial agreement is signed. The loan should also be explicitly addressed in a final post-nuptial agreement.
Keep in mind that if separate property is used to purchase real property such as a marital home, the marital home will be deemed marital property as a matter of law regardless of how it is titled. However, the spouse contributing the separate property will recover the separate property at the time of divorce/sale of the marital home albeit without the appreciation which is deemed marital property as a matter of law. It is imperative that the spouse contributing the separate property keep the closing statements and any other documentation that proves the transfer of separate property for the purchase of the real property as without proof, the separate property shall be deemed marital property because it could not be proven to be otherwise.
PART 3: VALUING MARITAL PROPERTY
Equitable distribution cannot be fair if the assets haven’t been accurately valued. While valuation may be straightforward in some cases, such as where monthly or quarterly financial statements exist, in other ones, a valuation expert may be needed. Typically, experts are used for the valuation of a home or other real property, a pension or other retirement account, or a business.
Ideally, both parties agree on the valuation, but disputes can arise. Where the parties disagree, usually one side will hire an expert to challenge the first expert. Sometimes, parties may decide to hire two experts at the outset and split the difference if the valuations differ.
Importantly, it’s best for the parties to settle the matter without litigation in the case of a home, land, artwork and similar types of property because, if the parties cannot agree, the judge will order a judicial sale and divide the money between the spouses to resolve the valuation. Each spouse can bid on the property at auction as can outsiders. The risk is that a party will lose the property that he or she wanted, pay more for the asset at auction than if they simply bought the other spouse’s interest outright, or receive a lower amount of money. In addition, there could be tax consequences of a judicial sale.
PART 4: MAINTAINING MARITAL PROPERTY DURING DIVORCE
Generally, each spouse is responsible for his or her own expenses once a divorce action starts. However, there is an exception for marital property. Spouses have a joint obligation to maintain marital property during the divorce until a final decision is made regarding how it will be divided. This is because of the ‘automatic orders rule’ which applies to all divorces while they are pending. The rule states that the financial status quo must be maintained until there is a written agreement between the parties that is signed in accordance with the statute or a court order resolving all financial issue(s). The purpose of the rule is to ensure that divorcing spouses do not walk away from their financial obligations or dispose of or damage assets.
Therefore, as an example, both spouses are jointly responsible for expenses for a home, such as the mortgage, real estate taxes, homeowner’s insurance, utilities, HOA fees, necessary repairs, and the like. If spouses cannot agree on how to allocate expenses between them, they can go to court, and the judge will make a temporary determination until a final property distribution is made.
Dividing property can be complicated. If you are considering a divorce, it is important to get good legal and financial advice to ensure a fair result. Contact us for a consultation.
