Removing Marital Property Before Divorce
Division of Marital Property
An important part of the divorce process in Colorado is figuring out how to divide the marital property. The procedure generally involves two steps. First, it must be determined what the marital property is. Second, the marital property must be divided equitably. Let’s look at each of those steps more closely:
What is ‘Marital Property?
State law, specifically Colo. Rev. Stat. § 14-10-113(2), defines “marital property” as “all property acquired by either spouse subsequent to the marriage.” Anything that isn’t marital property is considered “separate property,” and will not be divided for property division in a divorce case.
Separate property is generally defined as being anything acquired by either spouse prior to getting married. It also includes certain types of property acquired during the marriage that is statutorily excluded from the marital property definition, such as property:
- Acquired by gift, bequest, devise, or descent
- Acquired in exchange for property acquired before the marriage or in exchange for property acquired by gift, bequest, devise, or descent
- Acquired by a spouse after a decree of legal separation
- Excluded by valid agreement of the parties (e.g., by a prenuptial agreement)
The division of assets in a divorce case is almost always harder and more emotionally taxing than it initially might seem. This is especially true for high net worth couples and couples who either jointly own a business or have complex business interests that are difficult to quantify monetarily. Unfortunately, it is also not uncommon for a spouse in a contentious divorce to either hide or undervalue assets, which can necessitate drawn-out litigation.
Once the marital property has been identified and valued, it is then subject to equitable division by the courts – that is, if the couple hasn’t already divided it between themselves through mutual agreement via mediation. The word “equitably” in the context of divorce property division means that marital property must be divided fairly, but not necessarily 50-50.
Removing marital property before divorce is prohibited. By statute, a judge that is presiding over the dissolution of a marriage case in Colorado is required to consider a variety of factors in making sure that the marital property is divided in this way. Those factors – also from Colo. Rev. Stat. § 14-10-113 – are the contribution of each spouse during the marriage; the value of the property set apart to each spouse; the economic circumstances of each spouse at the time the marriage terminates; and any increases or decreases in the value of the separate property of either spouse during the marriage.
It warrants mentioning here that any debt that was acquired during a marriage in Colorado becomes part of the equitable division equation during a divorce. In other words, a divorce court is empowered to allocate debt in a way that’s fair under the circumstances. A common misconception is that debt that’s been acquired in only one spouse’s name during the marriage is automatically classified as separate property and thus not subject to division. That isn’t necessarily true, and in fact, most debts acquired by either spouse during a marriage will be deemed marital property and divided accordingly.
Not All Marital Property Is Created Equal
Complicating the process is the fact that all assets are not worth what they appear to be worth.
What if the marital property of a couple equals $800,000 and consists of:
- Family home with $200,000 in equity,
- Ski-condo with $200,000 in equity,
- 401K with a current market value of $200,000, and
- Savings account with $200,000.
Which would you take and why? The answer to that question depends on a number of factors.
- Do you have a steady income to pay your bills?
- Do you need the money to live on immediately?
- Can you afford to maintain the family home? If so, what if there are unexpected costs associated with maintaining the family home?
- If you sell the family home, will there be any capital gain taxes to pay? If so, what will they be?
- Can you sell the family home?
- If you sell the home, can you qualify for a mortgage on your own?
- What if you try to sell the home and find out it needs a new roof and $30,000 in repairs?
- If you sell the ski condo, will there be any capital gains to pay, and if so, how much? If you do not sell the ski condo, will you be able to rent it out and cover the costs to maintain it?
- If you take the 401K and need the money to live on, will there be an early withdrawal penalty? Will you have to pay income tax on the amount withdrawn? If so, how much is the penalty, and what is the tax bill? Many people fail to realize until it is too late, that if they cash out their 401K, it might only be worth ½ of its market value after penalties and taxes are paid.
Personal Business Interests
If either you or your spouse owns a business, it can get even more complicated. When a business is involved, the parties usually need to hire an expert to determine the value of the business. Then, once the value of the business is determined, it can get even more difficult in determining how to divide the business.
Determine what Each Asset is Worth based on Your Circumstances
The division of marital property can be complex and it usually takes an experienced lawyer to help you obtain a fair result. Therefore, before agreeing to any type of property settlement, make sure you have considered all factors that determine the value of each asset.
Determining what is separate property can be somewhat complicated, but most commonly it is any property owned before the marriage. It can also include certain types of property acquired during the marriage such as gifts and inheritance. For instance, a house you owned before the marriage is your separate property, but so is that money you inherited after you were married. This is because both inheritance and gifts to you are separate property. However, separate property can be converted to marital property, and in addition to that, it is your responsibility to prove that money or assets that you own are separate property. You will need to provide documentation of how you acquired the asset or money, and if you cannot the Court will consider it marital. Furthermore, if you commingle the separate property with marital property it can be construed as a gift to the marriage. This is a common debate amongst parties when someone asserts that an asset is separate property.
There are also scenarios in which an asset is comprised of both separate and marital interests. A common example of this is when a party sells a pre-marital home and uses the money to purchase a marital home. Unless intended as a gift (which as mentioned above may become an item of debate) then the money put into the marital home is separate property from the remainder of the asset. Another common scenario is that one party keeps their pre-marital home and rents it out. Although the asset’s value the day before the marriage is separate property, any increase in value over the course of the marriage is marital property. In the case of a home, this is most easily calculated by measuring the equity prior to and after the marriage. This means that an asset you owned before the marriage could be subject to sale because the court can divide any marital property.
What Are Your Options with Property Before and After A Petition For Dissolution Is Filed?
Once someone files for divorce and serves the other party, a temporary injunction is put in place, and both parties have an obligation to preserve the marital estate, among other obligations. This means removing marital property before divorce is prohibited and you cannot start recklessly spending money in a manner different from the way you did before filing. You also cannot dispose of marital assets without the approval of the judge. Essentially, you should continue living as you did before, and any large or unusual purchases should be put on hold until you’re officially divorced. If there is an immediate need for something out of the ordinary, your attorney can guide you on the best course of action and perhaps negotiate a course of action with the opposing party.
What is not so obvious is what you can do before the divorce papers are served. Although it might seem like everything is fair game before someone is served with paperwork, that is not the case. In reality, if someone takes an action that only benefits them because they know or suspect that a divorce is coming the judge can account for that when dividing up the property. It is never advisable to dissipate marital assets in anticipation of a divorce.
Contact Divorce Matters® Today
The team at Divorce Matters® has helped thousands of clients and counting navigate the Colorado divorce process and get a fresh start in life. We are compassionate and experienced advocates who focus exclusively on family legal matters, including but not limited to equitable divorce property division, spousal maintenance (alimony), child custody and support, prenuptial agreements, collaborative divorce, appeals, and more.
Gifts & Inheritance
If I get divorced, what are my rights regarding gifts I received prior to the marriage? What about during the marriage? What about an inheritance I received from my parents? What about the engagement ring? What about gifts my spouse and I both received? All of these are common questions when it comes to a dissolution of marriage. In a dissolution of marriage proceeding, there are many different aspects, and the issue of “gifts” come into play for many, including division of property and child support.
Gifts & Inheritance
In a dissolution of marriage, there are two different categories of property: marital and nonmarital (also referred to as separate property). In general, property that one spouse acquires by gift (or bequest, devise, or descent), is considered nonmarital property, regardless of whether it was acquired prior to or during the marriage. This means that gifts, ordinarily, are not taken into consideration for purposes of an equitable division of property, as the court can only divide marital property. Colorado law views inheritances as gifts.
However, gifts can lose their nonmarital status and become marital property. This may occur through commingling, change of title, or a subsequent gifting. Commingling occurs when separate property becomes mixed with marital property, such that the separate property is so intertwined with the marital property that one can no longer discern its separate character. For example, if you receive a $25,000 cash gift from your parents (either before or during the marriage), but you then deposit or transfer that $25,000 into your joint bank account titled in both you and your spouse’s name that currently has $5,000. Then, through the years of marriage, both you and your spouse continuously deposit and withdraw money from the joint account. Eventually, unless you have kept an extremely detailed accounting, it will be impossible to tell what money was from your nonmarital gift. When commingling occurs, the other spouse has the ability to assert that all of the funds within this joint account, even though initially comprised mostly of nonmarital funds, are marital and subject to equitable distribution at divorce.
Conversely, when it comes to gifts from one spouse to the other, there exists a presumption that such gifts are marital property. The presumption does not apply, however, to “gifts of nonbusiness tangible personal property.” § 14-10-113(7)(a), C.R.S. Types of these gifts include furs, rings (including the engagement ring), artwork, and other tangible personal property gifts. For gifts under this category, the property is considered the nonmarital property of the recipient spouse (the spouse that received the gift from the other spouse). Additionally, when the presumption applies, i.e., when the property at issue is not a gift of “nonbusiness tangible personal property,” the presumption can only be overcome by “clear and convincing evidence;” otherwise, it is marital property.
What about joint gifts? If your spouse and you received joint gifts during the marriage, such as wedding presents, there is no assumption that gifts from the wife’s family and friends belong to the wife or that gifts from the husband’s family and friends belong to the husband. This very well may be the most equitable way to divide these types of gifts; however, there is no hard and fast rule.
Child Support and Gifts
While Colorado law regarding gifts and inheritances for division of property can be relatively straightforward, it can be much more complex for determining a spouse’s income for purposes of child support. In fact, the court is not required to consider gifts for purposes of determining a spouse’s income for child support purposes, unless the gift is regularly received from a dependable source. In re Marriage of Nimmo, 891 P.2d 1002 (Colo. 1995). Future gifts, in order to be considered as income, cannot be speculative whatsoever.
If, however, you or your spouse is to receive a one-time gift in the future, such as an inheritance or winning the lottery, the court may include the gift in the calculation of income for the year in which the gift will be received. In re A.M.D. (Casteel v. Davidson), 78 P.3d 741 (Colo. 2003). The court also has a few options in deciding how to apply this type of gift, particularly regarding interest accrued from the gift, in years subsequent to the one-time payment. See In re Marriage of Bohn, 8 P.3d 539 (Colo. App. 2000) (holding that the imputation of investment income is not automatic and only applies if a spouse invests a portion of the funds, in which case income from interest could be used as the spouse’s income); In re Marriage of Laughlin, 932 P.2d 858 (Colo. App. 1997) (holding that gross income for child support purposes can include the amount of income an asset could “reasonably” be expected to generate, even if that asset had been consumed prior to the determination of child support); In re Marriage of Bregar, 952 P.2d 783 (Colo. App. 1997) (holding that if income is imputed as a result of a large, one-time payment, the net amount received, after payment of taxes, should be used).
While perhaps not the most common example (even though we all may wish it were), lottery winnings are helpful in explaining the complexity further. “Monetary gifts,” in general, are included within the definition of “gross income” for purposes of child support. There is a narrow exclusion for lottery winnings, but the vast majority of the lottery winnings will be considered in calculating a spouse’s income. Where lottery winnings are paid out in equal periodic installments (such as monthly), the appropriate manner for including them as income will typically be the same, i.e., monthly. In re Marriage of McCord, 910 P.2d 85 (Colo. App. 1995). But, when lottery winnings are to be paid in a lump sum, a Colorado court has indicated that child support may be calculated by including the entire winnings in the spouse’s income for the year in which the lump sum was received, without deduction for tax withholding. In re Marriage of Bohn, 8 P.3d 539 (Colo. App. 2000). A court then has the aforementioned variety of options in how to assess the spouse’s future income.
Dealing with inheritances can be a bit trickier. The definition of income in section 14-10-115(5)(a)(1), C.R.S., does not include “inheritance,” but the statute specifically includes “monetary gifts” as income, and the Colorado Supreme Court has concluded that monetary inheritances fall within this definition. In re A.M.D. (Casteel v. Davidson), 78 P.3d 741 (Colo. 2003). “Monetary” inheritances include cash or “[a]ssets that can be easily converted to cash,” such as money markets, mutual funds, stocks, and bonds. If an inheritance is “monetary,” then, before the court can include the inheritance as income, it must examine the recipient spouse’s use of the money. If the recipient spouse uses the principal as a source of income to meet existing living expenses or to increase their standard of living, the expended principal should be included as gross income. On the other hand, if the spouse saves or invests the monetary inheritance, such reserved principal is not included in gross income, but the interest generated by the principal is considered income.
While gifts can be relatively straightforward for purposes of division of property, it is not overly difficult to convert something from what was once nonmarital property to marital property. More importantly, gifts can be quite complicated when it comes to determining a spouse’s income.
Colorado Is an “equitable distribution” state. The court defines “equitable” as “that which is fair, but not necessarily equal.” Thus, marital assets in Colorado are not necessarily divided evenly in a 50/50 ratio. Additionally, only marital assets will be divided, separate assets will be kept separate.
You and your spouse are both responsible for any debt incurred during the course of your marriage, regardless of whose name the debt is in. However, it is possible to negotiate how debt is handled during the divorce process. Contact our law firm for more information.
Divorce can affect the amount of Social Security benefits you receive during retirement. Generally, if the marriage lasted for more than 10 years, spouses may be entitled to receive their ex-spouse’s Social Security benefits. This is a complex area of the law, so contact our law firm to set up a review of your unique situation.
A Qualified Domestic Relations Order (QDRO) is a detailed order used for dividing up a retirement plan during a divorce. Retirement plans that were either obtained during the marriage, or have increased in value during the marriage, are generally considered marital property and can be subject to a QDRO. QDRO’s are specifically needed when splitting up a 401K plan or most pensions (defined benefit plan). However, they are not generally needed for dividing up IRA’s or Roth IRA’s.