What is Equitable Distribution?

A majority of states in the U.S., including New York and New Jersey, are “equitable distribution” states.

Equitable Distribution means that, when a couple divorces, all marital property and marital debts are divided equitably, or fairly. Although this often results in marital property and debts being divided equally, it doesn't always. An equitable property division can be one that is fair, considering what each spouse contributed to the marriage and what each spouse will need to move forward.

Marital Property

Marital property is all property that was acquired between the date of your marriage and the date of the filing of a divorce action or the execution of a separation agreement. In mediation, an agreed cut-off date can be agreed.  Marital property can also include an increase in the value of separate property if the increase occurred during the marriage and was due, in some part, to the efforts of the spouse who did not own the property.

Marital debts include credit cards, bank and private loans, and other obligations incurred during the time you were married. Although it usually does not matter who incurred the debt, a spouse may not have a responsibility to repay a debt if the spouse who incurred it did so solely for his or her own interest. And if marital funds were used to repay separate debts, those funds may be recouped into the marital estate.

Separate Property

Separate property includes all property acquired before your marriage or after the execution of a Separation Agreement or the commencement of a divorce action or agreed cut-off date. Separate property also includes gifts that you received from someone other than your spouse, property that you received through an inheritance or money you received as a result of a personal injury settlement.  Separate property also includes anything designated as separate property in a valid pre- or post-nuptial agreement. Although it does not have to be distributed upon a divorce or separation, you should still list all separate property in your settlement agreement. 

Division of Marital Assets and Liabilities on Divorce

Marital assets and liabilities are usually distributed equally, but when courts decide "equitable" distribution, the law provides 14 factors to consider when determining how to distribute marital property and debts, such as:

• each spouse's income and property when they married and when they filed for divorce

• the duration of the marriage

• each spouse's age and health  

• the need of the parent with custody to live in the family home and use or own its effects (furniture and so on)

• the pension, health insurance, and inheritance rights either spouse will lose as a result of the divorce, valued as of the date of the divorce

• whether the court has awarded spousal maintenance (alimony)

• whether either spouse has an equitable claim to marital property to which that spouse does not have title, based on that spouse's contribution of labor, money, or efforts as a spouse, parent, wage earner, or homemaker, including contributions to the other spouse's earning potential (by, for example, working to put the other spouse through school)

• the liquid or non-liquid character of all marital property

• the probable future financial circumstances of each spouse

• if the marital property includes a component or interest in a business, corporation, or profession, the difficulty of valuing that interest and whether it would be desirable for that interest to be retained intact, free from claims or interference by the other spouse

• the tax consequences to each spouse

• whether either spouse has wastefully dissipated marital assets

• whether either spouse has transferred or encumbered marital property in contemplation of divorce without fair consideration, and

• any other factor the court expressly finds to be a just and proper consideration.

In the real world, courts can use these factors can be used to justify whatever division of property and debts a court might subjectively consider  "equitable".  From our experience, in mediation, the division is most often done on a 50:50 basis, but there is a legal basis for for negotiating another result that might be fair under your circumstances.  

Pension and Retirement Accounts

Since a pension is a form of deferred compensation for services rendered at some earlier date, if the services were rendered during the marriage it is marital property even if the payments are not received until after the separation or divorce.

There are (generally) two kinds of pension and retirement accounts. The first kind, which is used mostly by larger companies and municipalities such as New York State, is a Defined Benefit Plan.  These plans pay the employee a lifetime benefit determined by a combination of the length of service and salary. The employee is usually allowed to designate a beneficiary who will continue to receive a portion of the benefit after the death of the employee.

The second kind is a Defined Contribution Plan. These accounts include IRA’s, SEP’s, 401(k)’s, profit sharing plans, and deferred compensation plans. The amount in your account determines how much you will receive. Once you have used up the fund, you will no longer receive any payment. Any money left in your account upon your death can be left directly to a named beneficiary or paid to your estate.

Because a Defined Benefit Plan pays a lifetime benefit in the future based upon your time of service and salary, its value cannot be compared to the value of a Defined Contribution Plan unless you obtain an "actuarial evaluation" to determine its "present-day" value. This "actuarial evaluation" will be a dollar value that represents what the pension would be worth if it was an IRA or 401(k). The amount that you or your employer has contributed to a Defined Benefit Plan is not the present-day value.

Instead of obtaining a "present-day value", you can elect to divide a Defined Benefit Plan by paying the non-employee spouse a portion of the retirement benefit the employee spouse receives when he or she retires. This is done using a formula that pays the non-employee a fraction of the benefit the employee receives based upon the length of time you were married while a member of the pension. 

You should also know that both types of accounts are in "pre-tax" dollars. That is, you will be taxed when you receive the money. However, you can transfer an interest in either type of account to your spouse without penalty or taxes (until distribution) by using a court order called a Qualified Domestic Relations Order (QDRO).

In negotiating division of retirement assets, we need to be careful comparing "pre-tax" accounts to post-tax accounts as the comparison is "apples to oranges".  If possible, it's best to compare pre-tax accounts separately from post-tax.  Otherwise, we can discuss formulas for comparing values of both. 

Real Estate

When determining what do to with your real estate, you may want to consider if the property will be sold, transferred to one of you, or if one of you will occupy the property for a specified period of time such as the graduation of a child from high school, the remarriage of the occupant, or a specific date in the future.

Many couples will try to keep the house until all the children graduate high school if there are only a few years left unless they simply can’t afford it or the other parent is in immediate need of the proceeds from the sale of the home.

If you are keeping the house together you should decide who will be responsible for paying the mortgage and the other expenses such as the taxes, utilities, maintenance, insurance, repairs, etc. until the house is sold or transferred to one of you.

Since a bank will usually not remove one name from the mortgage unless the other person refinances it in his or her name, you may also want to decide if you will keep the current mortgage or refinance it.

Keeping the current mortgage may limit one of you from obtaining another mortgage in order to purchase a new residence and also continues to make both of you liable if the payments are missed or late. A refinance will probably require you to demonstrate the financial ability to make the mortgage payments on your own and may also entail closing costs. 

If you intend to sell the property or if one of you will be refinancing it to buy the other out, it is wise to formulate a contingency plan in case the property does not sell or the bank does not approve the refinancing.  You may also want to determine how you will agree on the selling price if a dispute should arise.