How Property is Divided Under New York's Equitable Distribution Law
When people decide to use the mediation process to reach a separation agreement, they have the option of following the principles of property distribution that are set forth in New York's statutes and case law or they can choose to deviate from New York law and opt for a different scheme of property distribution that might make more sense to them in the context of their lives. In either event, they should have the benefit of understanding how New York's property distribution laws would apply if they were to utilize the traditional adversarial legal system.
The following is a somewhat simplified primer on New York equitable distribution law.
New York is one of the majority of states that employs an "equitable distribution" scheme to the division of property when there is a divorce. There are three steps to this process:
Classification of property (i.e., whether it is "marital" and subject to equitable distribution or separate and is awarded to the spouse in whose name it is titled); Valuation; and Distribution.
There is a presumption that all property owned by the spouses, regardless of in whose name it is titled, is marital property to be divided "equitably" between them in the event of divorce. The spouse who claims that property is his or her separate property has the burden of proof to show that the source of the property falls in one of the "separate" categories:
(a) property that he or she had prior to the parties' marriage that has not been placed in the joint names of the spouses.1
(b) property that a spouse inherited, either before or during the marriage that remains titled in the name of the spouse who inherited it;
1...or property that can be traced by a clear paper trail to such property. An example of this would be a bank account in Wife's name at a bank that existed prior to the marriage that was closed and the funds transferred to a different bank.
(c) property that was gifted to one spouse by anyone other than the other spouse;
(d) property that a spouse received as compensation for personal injuries in a law suit.
In all of these cases, the property claimed to be "separate" must not have been comingled with marital property or earnings or placed in the spouses' joint names.
There are two exceptions to the stringent rule that separate property must not have been comingled with marital property:
(a) If funds (for instance, Husband receives an inheritance check of $100,000) are placed in the spouses' joint account solely for convenience until the check clears and then are withdrawn and placed in Husband's individual account that meets the other requirements of a separate asset, the funds will still be considered the Husband's separate property.
(b) If there is no clear paper trail, but there is no other explanation for the source of the funds that are claimed to be separate, they may still qualify as a separate asset. By way of example, immediately prior to the marriage, the Wife has a bank account that contains $100,000 . During the course of the marriage, she deposits her earnings into that account, and at the time of the parties' divorce, the account contains $150,000, but only $50,000 can be traced to the Wife's earnings, the
$100,000 may qualify as the Wife's separate asset.
Property that falls into any of the above categories will be deemed the separate property of the spouse in whose name it is titled. Where things get more complicated is in determining whether the appreciation (i.e., increase in value) of separate property remains separate or is deemed marital. If the increase in value is due solely to market factors, it will be separate. For example, if at the time of the marriage, Husband owns 100 shares of stock that have a market value of $1,000 but during the course of the marriage the value has increased due to the stock market to $2,000, the entire amount will be his separate property. If, however, the increase in value of the asset is due to the efforts of either spouse, the appreciation will be deemed to be marital. For example, Wife has a small business that is worth $500,000 at the time of the marriage. During the course of the marriage, the Wife works in the business and it increases in value to $1,000,000. The appreciation ($500,000) will be deemed to be a marital asset.
The term "Property" in New York includes a very broad category of assets. Real estate, bank accounts, deferred assets such as 401(k) plans, IRA's and pensions, tangible property such as furniture, art, automobiles, and certain intangible property such as licenses, degrees, and even "enhanced earning capacity" can be deemed assets subject to equitable distribution.
Once marital and separate property have been classified, it becomes necessary to value each asset. Bank accounts and other monetary assets are valued as of market value. When dividing those assets, it may be necessary to factor in any tax consequences, such as capital gains tax.
If an asset's value is not readily determinable, it may be necessary to have it evaluated by an expert. Real estate appraisers and forensic accountants are the two experts most frequently called upon to assist in that process.
New York employs an "equitable distribution" of assets that does not necessarily mean an equal division of assets, although there has been a clear trend to divide assets equally, especially in long-term marriages. Factors that may be taken into consideration include the length of the marriage, the amount each spouse's separate property, and whether either spouse has wastefully dissipated marital assets.