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Assets Exempt from Equitable Distribution

There is a common misconception that all assets owned by individuals in a marriage are part of a marital estate and thus subject to equitable distribution, the process used by the courts in divorce matters to divide marital assets. In reality, assets in a marriage can be exempt from the marital estate and equitable distribution for a variety of reasons. For instance, if an asset is acquired by the party before the marriage, through an inheritance, or via a gift from a third party, the asset should be exempt from equitable distribution. This article will discuss the three general areas of exempt assets and will discuss the dangers of selling or commingling such assets.

  • Pre-marital Assets - Statistics show that people are waiting longer to get married than they did in previous generations. There is more of a focus in today's society on achieving personal goals (e.g., graduating college, establishing career, etc.) before seeking marriage. Therefore, it is not a surprise that many people will enter a marriage having acquired already a fair amount of property or belongings. Many people entering marriage own a car, pet, household furnishings such as a television or a computer, and even a house.1 All of these pre-marital items should be exempt from equitable distribution. Typically, these items are easy to identify, especially in shorter marriages, and will be retained by the party who acquired them before the marriage.
  • Premarital retirement accounts present a more complicated scenario. They are more complicated because a party will have contributed to the account before marriage and will probably continue to do so during the marriage. Thus the accounts will have a pre-marital portion (i.e., the amount of funds deposited before marriage) as well as a marital portion (i.e., the amount of funds deposited after marriage). In dividing such a retirement account, the pre-marital portion of the account (which may require the services of an actuary to determine) will be retained by the owner spouse, while the marital portion of the account will be equitably divided. In some instances, a Qualified Domestic Relations Order will have to be prepared to divide the retirement account equitably.
  • Inheritances - Any inherited property, whether it be money, family heirlooms or a stamp collection, should be exempt from equitable distribution. It is not uncommon for a spouse to inherit property during a marriage, especially if the marriage is a long one. Since inheritances are left to one spouse in particular, these items are considered separate property by the court.
  • Gifts from Third Parties - Any property received from a third party, such as a parent or friend, will be considered exempt from the marital estate. For example, if your grandparent gifted you stock in a company, that stock will be exempt from the marital estate. Please be aware that this only applies to gifts from third parties; gifts from one spouse to another are not exempt from the marital estate.

Even if property is exempt through one of the three methods, it can lose its exempt status. Commingling exempt assets with joint assets is the most common way for property to lose its exempt status. Likewise if you sell a pre-marital asset or an asset received via inheritance or gift, you must keep from commingling those sale proceeds with joint property. For instance, if your uncle leaves you $5,000 (or a baseball card collection which you sell for $5,000) in his will and you deposit the funds into a checking account owned jointly with your spouse, a court may very well determine that you meant for that money to be become joint marital property, to be used for joint marital expenses and the money very well may lose its exempt status.

Similarly, using the exempt property to pay marital expenses will prevent a party from claiming a credit for that amount in an equitable distribution. For example, if you took the $5,000 from the above example and used it on a marital expense, such as to pay for a family vacation or a credit card balance, you will have no ability to claim that the $5,000 is exempt from equitable distribution and recover the sum during your divorce. Therefore, if you have pre-marital, inherited, or gifted money, or if you have proceeds from the sale of an exempt asset, it is wise to deposit the proceeds in a non-joint bank account so the money can remain separate and intact.

1 Premarital houses which end up becoming a "marital home" wherein the parties reside as husband and wife can become subject to equitable distribution.