Equitable Distribution

Dividing property in a Virginia divorce.

In Virginia, dividing property, assets, debts, and other liabilities in a divorce is referred to as “equitable distribution”. The statute governing equitable distribution is  Virginia Code § 20-107.3.

Equitable distribution is comprised of several steps:

1. Classification of property and debts as marital, separate, or hybrid.
2. Valuation of marital and hybrid property and debts.
3. Equitable division of marital (and hybrid) property and debts between the spouses.

Here is a simple chart to help you visualize the process:

Step 1: Classification of property as marital, separate or hybrid.

A circuit court is only authorized to divide “marital” property in a divorce. For this reason, all property owned by the parties must be classified before there any property is divided.

There are three classes of property in a divorce:

Marital property – Separate property – Hybrid property

So how are these classifications of property defined?

• What is marital property?

“Marital property” refers to all property titled in the names of both parties and all other property acquired by each party during the marriage which is not separate property.

Marital property is presumed to be jointly owned unless there is a deed, title or other clear evidence that is it is not jointly owned.

Acquired during the marriage” refers to property obtained after the marriage of the parties and before the last separation of the parties. Property acquired after the separation of the parties is presumed to be separate property.

Income earned by either spouse during the marriage is considered marital property. It follows that property purchased with income earned during the marriage is also marital property. Also, income generated from marital property as well as property that is purchased with income generated by marital property is also classified as marital.

In the past any co-mingling of marital and separate property could, and often did, result in all of the property being classified as marital property. The Virginia equitable distribution statute was revised to address this in 1990. Since 1990, property may also be classified as hybrid or part-marital or part-separate. This hybrid class of property will be discussed in a later section.

“Property” is not clearly defined in the Virginia divorce statutes. Decisions by Virginia courts regarding the definition of property in the context of a divorce have essentially broadened the definition to include all imaginable types of property from jewelry and bank accounts to investments and retirement accounts. There are some exceptions to this broad definition including military disability benefits, which are classified as separate property due to a federal court decision.

There still a few interesting issues left to be determined by the courts with regard to the classification of marital property. That discussion will be saved for another day.

• What is separate property?

“Separate property” is all property acquired by either party before the marriage, all property inherited or gifted to either party by someone other than his or her spouse during the marriage, and all property acquired in exchange for or from the proceeds of the sale of separate property.

Income from separate property generally remains separate property. However, any income generated from separate property as a result of active efforts of either party during the marriage may be classified as part marital. Separate property may be transmuted into marital property as a result of co-mingling if the separate property cannot be adequately retraced. As previously mentioned, property acquired after the separation of the parties is presumed to be separate property.

• What is hybrid property?

“Hybrid property” refers to property that is part-marital and part-separate.The concept of hybrid property is used to avoid the inequity of past practices that treated all co-mingled property as marital property regardless of any separate investment.

Hybrid property may be created when there is an increase in value of separate property during the marriage as a result of efforts by one or both of the spouses. This may include direct effort or the investment of marital income in the property.

For instance, hybrid property is created when a spouse pays the down payment on a home, with money he or she owned prior to the marriage, but then the mortgage is paid with income earned during the marriage.

Another example might be the restoration of a classic, collectible car during the marriage. If the car was a rusted junker owned by a spouse at the time of the marriage. The value of the car determined as of the date of the marriage would be separate property. The net increase in value of the car from the date of marriage to the date of separation may be marital property.

To make things even more complicated, parties frequently argue whether inflation in value is due to market influences outside their control and thus either should or should not be deducted from any increase in value during the marriage. Personal investment accounts often exist in the middle of these types of dilemmas.

The methods and strategies for classifying and valuing separate property will be dealt with in another article. The key to the analysis of hybrid property, and frequently the value of separate property, is to tease out the difference between active effort by the spouses and passive increases in value that would have occurred regardless of any effort by either of the spouses.

Contrary to popular belief, co-mingling of separate and marital property does not result in a presumption that the entire property is marital. In other words, jointly titling property does not give rise to the presumption that the separate property was gifted to the marriage. Despite joint titling, either party is permitted to trace separate property and ask for a hybrid classification by the court.

Step 2: Valuation of marital and hybrid property.

Once property has been classified, the burden is upon the parties to present sufficient evidence of the value of marital or hybrid property that the court is asked to distribute.

Valuation in a divorce is intended to determine the intrinsic worth of marital property to the spouses. This standard usually refers to the fair market value of the property. In a more detailed post I will discuss how different valuation methods are used at times when dealing with more complex issues such as business interests, professional partnerships, certain investment devices, and similar types of assets.

• How is “value” established?

A court cannot guess at the value of property. Expert witness testimony from appraisers is frequently relied upon to establish the value of significant assets such as real property (homes and land) and business interests (such as family businesses or professional partnerships). However, an owner’s opinion as to the value of property may also be considered.

To avoid the costs of expert witness appearance fees and trial preparation costs, divorce lawyers frequently obtain appraisals and try to reach an agreement on valuation prior to trial. The use of agreed upon neutral appraisers, tax assessed values, Kelley Blue Book values and similar resources may significantly lower the costs of divorce litigation.

• The value of property may be adjusted.

Liens on property, such as mortgages or car loans, must also be accounted for when valuing property. If a spouse has paid down a loan during the parties’ separation then the increase in equity resulting therefrom may be considered that spouse’s separate property and be deducted from the final value used by the court.

Costs of selling the property such as broker’s fees in the case of houses may also be taken into consideration under certain circumstances.

• The valuation date is usually the date of the final divorce hearing.

With the exception of retirement assets, the value of marital property is usually determined as of the date of the equitable distribution hearing. Equitable distribution evidence is almost always heard with all other evidence. In rare instances, equitable distribution is heard separately in what is referred to as a “bifurcated divorce”.

Either party may request that the court use a different valuation date but the court is not required to do so. A request for the court to use a different valuation date must be filed no less than 21 days prior to the equitable distribution hearing.

The most common valuation issues that require experienced attorneys and experts are those that involve businesses. These may include corporations, partnerships, professional entities, and other forms of enterprise or investment. There are several methods for valuing businesses. The one used in each particular circumstance depends on the type of business and the goal of the advocate. A more detailed discussion of business valuations may be provided in a future article or appended to this article. If your divorce will involve a business valuation and you must obtain the advice of an experienced divorce attorney before reaching any settlement and most certainly before going to court.

Step 3: Dividing marital and property.

Once all property has been classified in the marital property has been valued the final step is to divide the marital property between the divorcing spouses.

In Virginia divorces, there is no presumption that marital property should be equally divided between spouses. However, the equal division of property may be used as a starting point for ultimately determining how marital property should be equitably distributed. It must be noted again that there is no presumption that property should be equally divided.

• Factors courts must consider when dividing marital property.

Virginia Circuit Court judges are required to consider specific factors when equitably distributing marital property. These are:

1. The contributions, monetary and nonmonetary, of each party to the well-being of the family;
2. The contributions, monetary and nonmonetary, of each party in the acquisition and care and maintenance of such marital property of the parties;
3. The duration of the marriage;
4. The ages and physical and mental condition of the parties;
5. The circumstances and factors which contributed to the dissolution of the marriage, specifically including any ground for divorce under the provisions of subdivisions (1), (3) or (6) of § 20-91 or § 20-95;
6. How and when specific items of such marital property were acquired;
7. The debts and liabilities of each spouse, the basis for such debts and liabilities, and the property which may serve as security for such debts and liabilities;
8. The liquid or nonliquid character of all marital property;
9. The tax consequences to each party;
10. The use or expenditure of marital property by either of the parties for a nonmarital separate purpose or the dissipation of such funds, when such was done in anticipation of divorce or separation or after the last separation of the parties; and
11. Such other factors as the court deems necessary or appropriate to consider in order to arrive at a fair and equitable monetary award.

Any of these factors may be found at the center of highly contested equitable distribution proceedings. All of them deserve a separate analysis that would be too detailed for this particular summary.

Circuit Court judges are given broad discretion when weighing and applying these factors. The role of decision-making discretion vested in the trial courts cannot be underappreciated. It is a common theme in our educational materials. Trial court equitable distribution awards are rarely reversed on appeal. This is why effective advocacy in your divorce is so important.

Case decisions interpreting the factors informs and directs judges’ decision-making. Such influences must be accounted for in the presentation of evidence and arguments to a court that is dividing significant or complex assets. The outcomes in the classification and valuation stages also impact the final property division and must be methodically planned and prepared in order to set the best possible stage for the final decision dividing the marital property and debts.