Here’s an explanation of how the courts typically define separate property and marital property in divorce.

In a divorce, all assets are designated as either separate or marital (known as “community” in some states) property in accordance to the state or provincial laws and prenuptial or marital agreements (if any). All marital property will go into the marital pot to be divided between the spouses, and each spouse gets to keep his/her own separate property (assuming it has been kept separate for the entire marriage). Exactly what constitutes separate vs. marital property can be a gray area, which you should discuss with your divorce lawyer. However, here’s an explanation of how the courts typically define the two types of property.

Separate property consists of items such as:

  • Property owned by either spouse prior to marriage, and kept in that spouse’s separate name.
  • Inheritance received by either spouse before or during the marriage, and kept in that spouse’s separate name.
  • Gifts received by either spouse before or during the marriage by a third party.
  • Payment received for pain and suffering in a personal injury judgment.

Let’s look at some examples. John and Jane have been married for 20 years. On their wedding day, she made a grand romantic gesture and changed the title on the lakeside cottage she had inherited from her grandparents from her name alone to both of their names. So although she inherited the cottage (which would make it separate property), she changed the title, which made it marital.

During her marriage, Jane inherited $20,000 when her Uncle Pete passed away. She deposited it into a bank account in her own name, and didn’t touch a penny of the funds. The $20,000 would be her separate property – but in some states, the interest on the original sum might be considered marital property. (Ask your divorce lawyer whether this is the case in your area.)

Some states make a distinction between “active appreciation” and “passive appreciation” when it comes time to deciding whether money is separate or marital. Active appreciation is when one spouse contributes or puts in effort directly or indirectly to increase the value of his/her separate property, such as a business or other investment. Passive appreciation is when property increases in value due to inflation or other reasons (sometimes, simple bank-account interest).

Let’s go back to Jane’s inheritance. In this example, she withdrew $15,000 from the $20,000 inheritance to renovate the marital home. In some states, if she can trace the $15,000 back to the original inheritance, it might still be counted in separate property; in others, she changed the designation to marital by spending the money on marital property. The same would be true if she deposited the $15,000 in a joint account, co-mingling her separate property with the marital property. (Again, ask your lawyer whether this is the case in your area.)

Do you get a sense for why this can be such a gray area?!

Generally speaking, all assets acquired or earned during the marriage are considered marital (or community) property – regardless of whose name it is in. Marital property consists of items such as:

  • Employment income
  • All bank accounts (except for those that pre-dated the marriage and did not have any marital funds – e.g., a paycheck – deposited into them during the marriage)
  • Businesses
  • Professional practices and licenses
  • Limited partnerships
  • Real estate
  • Vehicles and boats
  • Art and antiques
  • Pension and retirement plans
  • Brokerage accounts, mutual funds, stocks, and bonds
  • Bonuses and commissions
  • Memberships
  • Annuities
  • Life insurance
  • Tax refunds

Again, the distinction between marital property and separate property is a legal one, and it varies from place to place, so you must speak to your divorce lawyer about how the local laws might affect your property division.

Property Division in Canada

Generally speaking, property division in Canada works much the same way as described above. In all provinces, the goal of property division is fairness – but each province uses different rules to achieve a fair division. For example, some provinces don’t make a distinction between marital and separate property, but how the property was acquired (i.e., it was a gift or inheritance, or it was owned by one spouse prior to the marriage, etc.) may play an important role in how the property will be divided on divorce. Other provinces exclude separate property from division on divorce. Depending on the province, separate property that has been co-mingled with marital property could be treated as either separate or marital. However, as long as the assets or earnings were acquired during the marriage, the property is marital and will be be divided – no matter whose name it’s in.

For more information about marital property and separate property, please go to www.divorcemag.com/property-division.