Minnesota Divorce and Property Distribution

Property and Debt Allocation in Minnesota Divorce

provided by Eric C. Nelson, Esq.

I. Marital Property.

In Minnesota, all property acquired during the marriage by either party is presumed to be marital property. This means that earnings and property acquired by either spouse are viewed as joint property. The philosophy underlying this is that marriage is a full partnership, and that the contributions of a homemaker are equal in value to those of the bread-winner. This marital property includes pensions and retirement investments acquired or earned during the marriage, as well as equity in property built up during the marriage.

The controlling legal principle which determines the Court's division of marital property is the rather broad standard of what is "just and equitable." In general, this means that each party gets half the value of all the marital assets.

II. Non-Marital Property.

There are two main forms of non-marital property:

1. Property acquired before the marriage (or in exchange for property acquired before the marriage).

2. Property acquired as a gift or inheritance made by a third party to one spouse but not the other (or any property acquired in exchange for such property).

For example, if prior to the marriage I own a Corvette, and during the marriage I trade the Corvette in for a mini-van, then the mini-van is my non-marital property.

Likewise, if during the marriage I am given a Steinway piano from my aunt, then that piano is my non-marital property. If I sell the piano and use the proceeds to buy a Savings Bond, then the Savings Bond is my non-marital property.

Similarly, if during the marriage I inherit $10,000, then that $10,000——or whatever I buy with it is my non-marital property. Why is this important? Because unlike marital property, non-marital property belongs wholly (100%) to the person who acquired it. Although the Court has some authority to award a spouse up to one half of the non-marital property of the other spouse, this is only in cases of unfair hardship, and is extremely rare.

One caveat: the burden of proof is on the person claiming a non-marital interest in property to prove that the property is in fact non-marital. Therefore, when you acquire property by gift, or want to protect pre-marital property from being awarded to your spouse, you must be very careful not to commingle the property with marital property e.g., don't deposit it into any joint accounts, or it becomes very difficult to trace.

III. Pension and Retirement Interests.

Frequently, one party or the other has acquired a pension or retirement interest of some kind during the marriage. The portion of such a retirement interest that was acquired during the marriage is marital property, and each spouse is generally entitled to half of the value of that pension or other retirement interest (401k, IRA, etc.). If there are not enough other marital assets to compensate the other spouse for half of the marital value of the retirement interest, then the Court will order the distribution through what is known as a Qualified Domestic Relations Order, or QDRO (pronounced "quadro," in legal jargon).

IV. Real Estate.

It often happens that one spouse or the other has a house prior to the marriage, but with an outstanding mortgage, which is in part paid off during the marriage. The Court has developed methods for apportioning the value of such real estate to give one spouse credit for his or her non-marital interest, while giving the other spouse credit for half of the value of the equity increase in the house during the marriage. Note that it does not matter which party wrote the mortgage checks every month. Earnings by either party during the marriage are marital earnings, and to the extent that the parties acquire increased equity in a piece of real estate during the marriage as a result of paying down the mortgage with marital earnings, both parties are entitled to half the value of the marital equity.

The formulas for calculating these interests are complicated, but basically, a party's non- marital interest is calculated as follows. First, one calculates his or her non-marital interest at the time the property was acquired. This is calculated as a percentage. It is equal to the ratio of non- marital equity in the property at the time it was acquired to the fair market value at that time. For example, if you have a house worth $100,000 at the time of marriage, and at the time of marriage you have $40,000 equity in the house, then you have a 40% non-marital interest in the house. This percentage non-marital interest remains constant, regardless of whether the property appreciates or depreciates in value during the course of the marriage.

Now, to determine your non-marital interest at the time of the dissolution as a dollar figure, you simply take the current fair market value and subtract the remaining encumbrances (and also the selling costs, such as realtor's commission and closing costs), and multiply the difference by 40%.

So for example: if the fair market value of the house at the time of the dissolution is $120,000 because of appreciation, and the remaining encumbrance is only $40,000 because $20,000 was paid off during the marriage, the your non-marital interest would be 40% of $80,000 ($80,000 being the net sale proceeds after paying off the mortgage, assuming no selling costs). 40% of $80,000 is $32,000, which would be the dollar figure of your non-marital interest. The remaining $48,000 would be the parties' marital interest, which would be divided equally. Note that this procedure works the same way when the parties acquire a house during the marriage using gift, inheritance, or other pre-marital assets of one or the other spouse.

V. Debt Allocation.

As with property, the Court is required to apportion marital debt in a manner that is "just and equitable." Unlike with marital property, however, the Court has much broader discretion to apportion the debt, as long as the apportionment has an acceptable basis in fact and principle. Normally, each party will be assigned half of the marital debt. Even so, if one or the other party has debt that was more of a benefit to that spouse as an individual, the Court may apportion the debt differently. A party is not free to rack up a credit card or other debt in one's pure self- interest, and expect the other spouse to pay half, particularly where the debt was incurred without the other party's knowledge or without the other party's consent.

VI. Final Tip.

Unless you have a great deal of trust remaining in your relationship, it is wise at the time of separation or imminent dissolution to take your share of the funds in any marital accounts and put them in a separate account in your own name, to protect them from depletion. Likewise, cancel all credit cards which your spouse has authority to use, to prevent any running-up of debt. I see it happen all the time.

Eric C. Nelson, Esq.
Old Republic Title Building
400 Second Ave. S.
Suite 700
Minneapolis, Minnesota 55401
(612) 321-9402