One of the first financial questions people ask me about divorce is: "Do we just divide everything 50/50?"
Not necessarily. New Jersey is an equitable distribution state. That means marital property is divided equitably, or fairly, based upon the circumstances of the marriage.
Sometimes that may result in an equal division of an asset. Sometimes it may not. The important point is that New Jersey law doesn't automatically require every marital asset to be divided exactly in half.
Equitable distribution is the process New Jersey uses to divide marital property when people divorce.
There are basically three questions we need to answer:
Those questions sound simple. They aren't always. The first disagreement may be whether something is even marital property. The next may be what it's worth.
And after we answer both of those questions, we still have to determine how the marital estate should actually be divided.
Generally, property legally and beneficially acquired by either spouse during the marriage may be subject to equitable distribution. And it doesn't necessarily matter whose name appears on the account, deed, or other document.
Depending upon your circumstances, marital property can include things such as:
Debts also have to be considered. The important question isn't simply: "Whose name is on it?" We need to know when and how the asset or debt was acquired.
Not everything owned by a married person automatically becomes marital property. Property owned before the marriage may be excluded from equitable distribution.
New Jersey law also generally excludes property acquired during the marriage by gift from someone other than your spouse, inheritance, or through a will or intestate succession.
But separate-property questions can become complicated. Suppose you inherit money and keep it in an account in your name for 20 years. That's one situation.
Suppose you inherit money, deposit it into a joint marital account, use some of it to renovate the marital home, move some into another account, and can no longer clearly trace where the money went. That's a very different situation.
If you claim that a particular asset should be excluded from equitable distribution, documentation can become extremely important.
No. There is no automatic presumption that every marital asset must be divided equally. But don't take that to mean that a 50/50 division is unusual. An equal division may be entirely appropriate depending upon the facts.
The better way to understand New Jersey law is this: The goal is a fair distribution, not a mathematical rule that automatically applies to every marriage.
New Jersey law recognizes marriage as a shared economic enterprise. One spouse may have earned most of the income while the other spent more time raising children, managing the household, or supporting the first spouse's career. Those nonfinancial contributions matter.
New Jersey law currently identifies 16 factors that courts consider when making an equitable distribution.
Those factors include things such as:
No single factor automatically determines the result. The court looks at the overall financial picture.
This is something people frequently misunderstand. Suppose one spouse earned $300,000 a year while the other stayed home, raised the children, managed the household, and supported the working spouse's career.
The working spouse may say: "But I earned the money." That isn't the end of the analysis.
New Jersey law creates a rebuttable presumption that each spouse made a substantial financial or nonfinancial contribution to the acquisition of income and property during the marriage.
Taking care of children and maintaining a household can be significant contributions even though they don't generate a paycheck. Marriage isn't treated simply as two separate people keeping score of who deposited more money into the bank account.
After determining which property is subject to equitable distribution, we have to value it.
Some assets are easy. If a bank account contains $50,000, determining its value may be relatively straightforward.
Other assets aren't. What is your house worth? What is a privately owned business worth? What is a medical, dental, or law practice worth? What is the marital portion of a pension? What are unvested stock options or RSUs worth?
Those questions may require appraisers, accountants, business valuation professionals, pension experts, or other financial professionals. Valuation can become one of the most important parts of a higher-asset divorce.
You don't automatically have to sell your house because you're getting divorced. One spouse may be able to keep the home and buy out the other's interest. The house might be sold and the net proceeds divided. Or its value may be considered as part of a larger settlement in which each spouse retains different assets.
The right answer depends upon the value of the home, the mortgage, your other assets, your children's needs, and whether either spouse can realistically afford to keep it.
Retirement assets can also be subject to equitable distribution. If part of a retirement account or pension was earned during the marriage, the marital portion may need to be identified and divided.
That doesn't necessarily mean every retirement account is simply cut in half. If an account existed before the marriage, for example, there may be both marital and nonmarital components. And different types of retirement benefits require different methods of division.
A business can be one of the most complicated assets in a divorce. If one spouse owns a company, medical practice, dental practice, law practice, or another professional business, we may need to determine what portion is subject to equitable distribution and what that ownership interest is worth.
That can involve tangible assets, debts, accounts receivable, earnings, ownership agreements, and potentially business or professional goodwill.
Usually, the goal isn't to turn the non-owner spouse into a business partner. Instead, the business owner may retain the company while the other spouse's equitable-distribution interest is addressed through cash, other marital assets, payments, or another settlement structure.
Executive compensation creates another layer of complexity. Stock options and restricted stock units may be granted during the marriage but vest later.
Whether and to what extent they're subject to equitable distribution can depend upon why they were awarded and whether they compensate the employee for work performed during the marriage, future services, or some combination of both.
The vesting date alone doesn't necessarily answer the question.
Potentially. New Jersey law specifically identifies dissipation of marital property as something a court may consider. But don't confuse dissipation with simply believing your spouse spends too much money. The circumstances matter.
If one spouse suddenly drains marital accounts, transfers money, incurs unusual debts, or spends significant marital funds for purposes unrelated to the marriage as the relationship is breaking down, that may require closer examination. Financial records become particularly important when money appears to be disappearing.
Inheritance deserves special attention because it can be a significant asset while still potentially being excluded from equitable distribution.
Generally, an inheritance received by one spouse isn't subject to equitable distribution simply because it was received during the marriage. But what happened to the inherited property afterward can matter.
If you're claiming that an inheritance or another asset should remain separate, keep records showing where it came from and what happened to it. Tracing can become extremely important.
This is another common misconception. Suppose you have a house, retirement accounts, investments, and a business. Equitable distribution doesn't necessarily require selling everything and splitting every individual asset. A settlement can sometimes be structured so that one spouse retains certain assets while the other receives different assets of appropriate value.
For example, one spouse might want to keep the business while the other wants to keep the marital home. The values may not line up perfectly, so additional assets or an equalization payment may be necessary. That's why I prefer to look at the entire marital estate, rather than negotiating each asset in isolation.
When you're trying to understand how property will be divided in your New Jersey divorce, start with three questions:
Is the asset marital?
What is it worth?
How should it be divided?
The answers can be very different depending upon the asset and the history of your marriage.
And when significant real estate, retirement benefits, investments, businesses, executive compensation, or other complex assets are involved, getting those answers right can have a major effect on your financial future.
If you're preparing for divorce and want to understand property division and the other financial decisions ahead of you, my free Divorce Smarter Course will walk you through the major issues involved in a New Jersey divorce.
Until next time,
Steve