Equitable Distribution and How it Works

There are so many misconceptions about divorce and finances. One of the biggest and the one that trips people up quite frequently is the idea of 50/50 when it comes to dividing assets that have been accumulated during a marriage.

First and foremost, the thing to remember is that it has a lot to do with where you live. For instance, there are community property states like California and there are equitable distribution states like New York. Most states are equitable distribution states. If you live in a community property state, marital property, that is, property acquired during the marriage, automatically becomes jointly owned by both spouses, 50/50. That also refers to income — income earned during the marriage by either spouse is equal for both spouses, 50/50.

Conversely, if you live in an Equitable Distribution state, property acquired during the marriage and income earned is divided in such a way that is determined to be “fair” based on many factors. FAIR does NOT mean EQUAL! All assets and debts are accounted for and given a value based on a specific date chosen. This is usually referred to as the “cut-off” date and helps the couple to decide what assets are in which columns and what the totals are. For instance, with a 401(k) retirement plan, it is important to decide on a “cut-off” date because the contributions made AFTER that date are no longer considered marital property. In addition, anything contributed to that retirement account BEFORE the date of the marriage would be considered separate property.

Once that has been determined and the columns are created … Wife has a total of “$X”, Husband has a total of “$Y”, decisions need to be made for distribution of those assets. Sometimes, the picture is pretty clear, but when there are more complicated situations, there are factors that will be considered in determining who gets how much of what:

  1. Is there a pre-marital contract (prenuptial agreement) that determines the division of assets and income in the event of a divorce
  2. What is each spouse’s earning ability now and in the future
  3. What is each spouse’s financial need now and in the future
  4. What is the total value of the assets that each spouse holds
  5. What did each spouse contribute to the marital asset pool
  6. What is the age and health of each spouse
  7. What obligations, if any, are being paid by one spouse to the other (ie: child support or spousal maintenance)

When the couple themselves cannot come to a conclusive agreement regarding division of assets, the court will get involved. This is certainly not what anyone wants to see happen — having someone else decide what you get to keep and what you have to forfeit your rights to is not in an individuals best interest. This is where a mediator or collaborative team (attorneys, financial neutrals and family specialist) can help. It is their job to assist a couple in reaching a mutually agreeable outcome, outside of the court system. This saves the couple a great deal of time, money and heartache and creates an agreement that they can both move forward and live with.