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Property Distribution in Divorce

Property distribution in Divorce

Upon marriage property acquired by a married couple generally becomes community property. What this means is that the parties generally are each entitled to ½ of such property. In legal jargon we might say that each party has a ½ community interest in such property. As a result, upon divorce the property can be divided equally. Nevada is an equal distribution state which means that absent compelling circumstances all community property, property acquired post marriage, will be split equally upon divorce.

Now there are some exceptions to the rule that property acquired post marriage becomes community property. For instance if one spouse receives property by way of an inheritance or gift this property is separate property. Meaning that the other spouse has no interest in this property post-divorce. Now additionally a party may receive monies by way of a personal injury law suit. The money stemming from such law suit can typically be divided into separate categories. The portion of the settlement or verdict for pain and suffering will be the separate property of the injured spouse. The non-injured spouse may have her or his own claim for loss of consortium. This loss of consortium claim is the separate property of the spouse who suffers such loss. The parties will share a community interest in any award providing for medical expenses related to the injury. Be advised that this exception for gifts being separate property does not apply to inter-spousal gifts. So that a gift from one spouse to the other doesn't make the gifted property separate property, at least unless there is a written agreement stating as such.

Aside from these separate property distributions the parties to a marriage are free to contract among themselves as to the characterization of property. Parties may enter into agreements establishing the character of property already acquired of may establish the characterization of property yet to be acquired. Be advised that agreements characterizing future earnings or assets as separate property simultaneous establish that any profits or interests realized from such separate property assets will also be separate property. These agreements may not be enforceable unless there is a written agreement supporting the agreement.

Property owned by a spouse prior to marriage is generally remains separate property of that spouse. However if a party intends to keep such property as separate he or she will be well served by keeping it separate from community funds. When it is no longer possible to determine if monies or assets were derived from separate or community funds the separate nature of such property will be deemed community and thus the entire asset is community property. Keep in mind that the profits from separate property assets typically remain separate property. This separate property presumption also applies to assets purchased with separate credit, even when such property is purchased during the marriage.

Although generally speaking a writing is required to transmute community property into separate property there are times when estopel and part performance may be sufficient to overcome the writing requirement. For instance, case law has held that where a married couple split their money into two accounts, one for each spouse, the husband was estopped from arguing a writing requirement as he had misled his wife into believing they had made a final property distribution.

There are times when a court may set aside one parties separate property for the benefit of the other spouse. The court can do this in order to satisfy an alimony obligation. For instance there are times when a spouse who would otherwise be required to pay alimony may be of such an age that the recipient's likelihood of receiving alimony for a significant period of time is unrealistic. Such as when the alimony obligor is elderly. The court would be wise to set aside the obligor's separate property for the recipient spouse so as to satisfy what would otherwise be an alimony obligation.

Nevada law mandates and restricts a spouse's control of community property. Parties may not devise or bequeath more than ½ of the community property. Spouses may not make a gift of community property without mutual consent of the parties. Parties may not sell or encumber community property unless both parties join in the effort. Neither spouse may purchase community real property unless both parties participate in this effort. However be advised that if real property is held in joint tenancy these rules do not apply.

Look out for the a situation where one of the parties uses community funds to purchase a life insurance policy naming a 3rd party as a beneficiary. Nevada courts will likely hold that in such a situation a ½ interest of the proceeds proportionate to the contribution be the separate property of the non-contributing spouse.

There will be times when you may find that one of the party will use separate property to contribute to t a community asset. For instance one spouse may use separate funds towards the purchase of the marital residence. The court may reimburse the spouse for his or her separate property contribution as long as such contribution can be traced back to separate property funds. Be advised that any profits or appreciation on the community asset will be awarded to the community and no part of such will be awarded to the separate property contributing spouse. Keep in mind that this rule only allows for reimbursement of principle paid down with respect to real property. So that any interest paid down with separate funds will not be reimbursed to the payor spouse.

Nevada is an equal distribution state. This means that absent compelling reasons the court will split all community property equally. Compelling reasons per Nevada case law include financial misconduct on the part of one of the parties. Financial misconduct may include concealment of property or earnings. In such a situation the court may award an unequal division of community property. The court may even set aside the entire undisclosed asset for the benefit of the other spouse.

An issue frequently encountered in divorce cases is that which arises when a party uses separate property to acquire property held in joint tenancy. Property held in joint tenancy would include real property where both parties' names are included on the Deed. In the situation where this separate property is used to purchase property held in joint tenancy it is presumed that the separate property was a gift to the other party in the amount of ½ the value of the separate property. This presumption can only be overcome by clear and convincing evidence. However, notwithstanding the presumption NRS 125.150(2) allows the court to provide reimbursement to a party for his separate property contribution to property held in joint tenancy at least up to the value of the contribution.

There are times when there may be a community interest in separate property assets. Interest and profits from separate property generally remain the separate property of that spouse. There are times when the profits of this separate property may become a community asset. Take for example the separate property business which comes into the marriage. Pursuant to the general rule any profits from this business would remain the separate property of business owner spouse. However there is the competing rule that income derived from the labor of a spouse during a marriage is presumed to be community income. As a result the rule stands that ordinary profits and gains not attributable to the owner spouse's devotion of more than minimal time and effort remain separate property. However the income which results from the spouse's labor and skill belong to the community. What this means is that there will likely be an apportionment of the income from what was just an ordinary expected growth and the growth which was due to the spouses labor and skills.

There are two approaches used in apportioning community and separate income from a separate property asset. The most widely used approach is the Pereira approach. Under this approach the community income portion is defined as that portion of the income which exceeds what the separate property could have been expected to return without the spouse's personal management. The other lesser commonly used approach is the Van Camp test. Per this approach a reasonable value is placed on the spouse's separate services. Under either approach after the community income is determined under either test you will deduct the community living expenses to determine the balance of the community property.

There will be times when separate property purchased on credit is brought into the marriage. After the property is brought into the marriage the community may then contrite to this otherwise separate asset. The court will need to determine what value of the community property contribution can be taken back out and distributed as community property. For instance, there will be times when market forces will drive up the value of the property, and thus equity, beyond ordinary gain derived from pay down of principle. To derive this community property figure one of two approaches may be used. Under the Moore approach the amount realized by the community will be directly proportionate to the amount of principle pay down by the community. Thus a 20% pay down of principle will result in a 20% community return on the overall equity realized in the property. The entirety of the remaining principle will remain separate property along with any principle pay down by separate property. To determine what amount of appreciation should be credited to separate property one only needs look at what fraction of the original purchase price was paid with separate property. This resulting fraction is then applied to the total amount of appreciation to determine the separate property value of appreciation.

The second approach used in valuing a community interest in separate property comes from the Moldave approach. Under this approach the court attempted solve the inequity which might otherwise result from the Moore approach. Recognizing that payments on a mortgage will pay down a higher rate of interest in the early years and a higher rate of principle in the later years there would thus be a resulting inequity in distribution after applying the Moore approach. As a result the Moore approach was modified and the Moldave approach evolved. Per the Moldave approach you can look at the number of separate property payments made vs the total number of community property payments made.

Typically property purchased on credit during the marriage will be construed as community property. However, if a spouse can prove by clear and convincing evidence that the lender relied primarily on one parties separate credit in issuing the loan then the resulting property purchased on such separate credit may be classified as separate property. This is called "the intent of the lender" test.

Often times the largest community asset come divorce is one or more retirements. In Nevada, state employees receive PERS (Public Employee Retirement System) benefits upon retirement. NRS establishes rules which apply to the courts specifically with respect to division of PERS. NRS 125.155 makes it clear that division of PERS must be based only on the time rule and thus no consideration of post-marital service efforts. The statute also requires that benefits not be paid until the participant actually retires if a court so orders. The court, upon doing so, may protect the non-employee spouse by way of bond or life insurance policy pending actual retirement. The statue also provides that PERS will cease upon death of either party absent a survivorship benefit clause protecting the prior spouse.

As a counterpart to PERS, federal employees who began service post 1984 participate in the Federal Employee Retirement Plan. Those participants who began federal service prior to 1984 are participants of the Civil Service Retirement System. The significant difference between CSRS and FERS is that CSRS members don't participate in the social security program. Under the FERS statue another plan called the Thrift Savings Plain was created for federal employees. The TSP plan is a defined contribution plan meaning that the amount of such retirement can be easily quantified and thus distributed at divorce if necessary. Military member's post 2001 have been able to participate in the thrift savings plan. Thus military members can participate in both a defined benefit plan as well as a defined contribution plan.

Upon divorce the community interest in a pension ceases. That being said the value of such community interest usually is not determined until a later date. The rule that requires us to wait and see what value actually becomes of such retirement is the time rule. The rule is used because frequently in these situations a retirements ultimate worth is valued by looking at the most recent three or most recent five years of service or some similar factor. Thus at time of divorce the ultimate value of the pension is unknown. By using the wait and see or time rule the parties must wait until vesting to find the non-employee spouses community interest in such retirement. However per Nevada case law there are times when this time rule will not suffice. Such times arise when the employee spouse, through extraordinary efforts, increases the value of the retirement beyond that which would have normally accrued in the ordinary course. However, the burden is on the employee spouse to prove that his extraordinary efforts lead to an increased value of the retirement.

Categories: Family Law