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In any Minnesota divorce, the couple must agree to a division of marital property, or the court must decide how to divide that property. One thing many people are not clear on, however, is the distinction between marital property and non-marital property. What is non-marital property?
To understand what non-marital property is, you first have to understand what marital property is. Marital property is any property that is acquired by either spouse during the marriage (with very limited exceptions that we'll discuss in a moment). So if a husband buys a million-dollar winning lottery ticket on the way from the wedding to the reception, that's marital property. If a wife is working and brings home a paycheck during the marriage, that's marital property.
Property owned by either spouse before the marriage is non-marital property. So the beat-up couch the husband brought to the couple's first apartment, or the car the wife purchased just before they tied the knot, are considered non-marital or separate property, and would not be subject to division in a divorce.
Some property, even if it was acquired by a spouse during the marriage, is still considered non-marital. If an asset was a gift (from someone outside the marriage to one spouse) or an inheritance, it is considered separate property. Pretty straightforward, right? Not exactly.
There are ways that non-marital property can be converted into marital property. The most common of these is by "commingling." Let's say your Aunt Esther left you $25,000. If you open a new bank account for that money, or buy a car with it, no worries. It remains separate. If you put it in your joint bank account with your spouse, however, it's commingled with your other funds. There is no way to tell whether you paid last month's electric bill with the inherited money or the money from one of your paychecks. In a divorce, you cannot insist that you get $25,000 "off the top" of your joint bank account because of the inherited money you put in.
What if Aunt Esther left you a rental property that earned $3000 per month? Since the rental property is non-marital, are the rents from that property non-marital as well? It would seem logical, but the answer is no. That rental income that came to you during your marriage is considered marital property, just like your paycheck.
Let's say that rental property that dear Aunt Esther left you was worth $200,000 when you inherited it. By the time of your divorce, that property, located in a favorable area, is worth $350,000 due to appreciation. Is the increase in value, that extra $150,000, marital property?
Probably not. If the value went up just because land in the area was becoming more valuable, that is passive appreciation. An increase in value from passive appreciation is not considered marital property. If, however, your property value increased because your spouse worked to make repairs to the property, actively managed the property, or invested marital funds in improvements to the house, the story might be different. That is considered active appreciation, and Minnesota courts have ruled that active appreciation under those circumstances is marital property.
To further complicate matters, some property may be considered partly marital and partly non-marital. It often happens that one or both spouses have a retirement plan from an employer at the time they get married. Assets in a retirement plan at the time of marriage are considered non-marital, but those placed in the plan afterward are marital. That is one reason that division of pensions and retirement plans can be so complicated; spouses have to figure out what portion of the plan is subject to division, usually with the help of an accountant. To give each spouse their rightful share, the plan may need to be divided using a Qualified Domestic Relations Order, or QDRO.
Likewise, a house that one party purchased before the marriage, but that marital funds paid the mortgage on afterward, is partly non-marital and partly marital property.
Sometimes it's obvious whether a piece of property is marital or not. The car one spouse bought and paid off before the marriage is clearly non-marital. The dining room set bought after the marriage is clearly marital. But what about the piece of artwork the husband claims was a gift to him, and the wife says was a gift to them both? Or the ruby ring the wife says she inherited from her grandmother, but which the husband claims she bought for herself?
If there is a dispute about whether property is marital or non-marital, the burden of proof is on the person who claims it is non-marital. If one party stands up in court and says only, "this asset is marital," and the other says only, "this asset is non-marital," the court will treat the asset as marital. The lesson is that if you want a piece of property to be treated as your non-marital property, not subject to division, you had better come with receipts or other proof to back up your story.
Property division can be one of the most stressful and hotly-contested aspects of a divorce, particularly if you have significant assets. If you have further questions about what constitutes marital or non-marital property in Minnesota, we invite you to contact Mundahl Law to schedule a consultation.