Premarital Assets are not Always Excluded from Equitable Distribution

Posted on Saturday, October 10th, 2009
Theodore Sliwinski, Esq.

1. I am terrified at the prospect of getting married. I have saved a nice nest egg for the past ten years, and I don’t want to lose it if I should get divorced. Are there any types of circumstances when premarital assets are not excluded from equitable distribution?

The black letter rule is that premarital assets are not subject to equitable distribution. N.J.S.A. 2A:34-23(h) provides in pertinent part:

However, all such property, real, personal or otherwise, legally or beneficially acquired during the marriage or civil union by either party by way of gift, devise, or intestate succession shall not be subject to equitable distribution, except that inter-spousal gifts or fights between partners in a civil union couple shall be subject to equitable distribution.

Thus, generally whenever a person owns an asset before getting married, then this asset is excluded from equitable distribution.

However, there are exceptions to every general rule. Lawyers would not make any money in divorce court if there were no legal exceptions to litigate over. The major exception occurs when assets are purchased in contemplation of marriage. If a person uses funds to purchase a home in her or her name, and if the home is then used as the marital home, then some courts could deem the purchase to have been made in contemplation of marriage. Thus, this once excludable asset could be considered to have been transformed into a marital asset.

2. Could you please cite and explain the most important case that addresses the contemplation of marriage doctrine?

The most important case is Weiss v. Weiss, 226 N.J. Super. 281 (App. Div. 1988).  Here, the Appellate Division addressed the issue of an asset purchased in contemplation of marriage. The court held that a home that a home that was purchased during a six-month engagement period was a marital asset. Therefore, the court held that the home was subject to equitable distribution. The court took into consideration all of the facts and circumstances of the relationship. The wife was actively involved in making improvements to the home before and after they got married. The wife was very involved with the husband in the decision to purchase the home. Despite these facts, the home was titled solely in the husband’s name throughout the marriage. In summary, based on these facts the court held that the home was subject to equitable distribution even though the wife’s name was never on the home’s title.

3. Could you cite and explain any other legal authority that addresses the contemplation of marriage doctrine?

Another illustrative case is Winer v. Winer, 241 N.J. Super. 510 (App. Div. 1990). Here, the husband purchased a condo more than one year before the parties got engaged. The condo was purchased with inheritance money. The parties lived together in the home for one year before they got married. Thereafter, the husband rented out the condo. The title to the condo was always in the husband’s name. At the trial the judge held that the former husband purchased the condo in the contemplation of the marriage. Therefore, the court held that the condo was subject to equitable distribution.

The case was then appealed. The Appellate Division upheld the case. The Winer court held that the husband purchased the condo in contemplation of marriage. Thus, the court held that the marriage actually started one year before the actual ceremony.

Another similar case is Raspa v. Raspa, 207 N.J. Super 371 (Ch. Div. 1985). Here, the court once again held that a home purchased before the marriage with premarital funds was not excluded from equitable distribution. The court rendered this decision even though the wife had no involvement with the purchased of the home. The wife did assist with making the mortgage payments. She also contributed to pay for the maintenance expenses.

4. I owned $200,000 worth Exxon stock before I got married. Three years later I am now getting divorced from my wife. My Exxon stock is now worth $300,000. Is my Exxon stock now subject to equitable distribution?

Maybe a part of it is subject to equitable distribution. The general rule is that premarital assets are not subject to equitable distribution still applies. The initial $200,000 investment of Exxon stock is a premarital asset and it is not subject to equitable distribution. However, a vexing issue is whether the $100,000 increase in the value of the Exxon stock is part of the marital estate. There are many divorce cases wherein the value of a home, an IRA, brokerage account may increase in value over the course of the marriage. In these cases, the increase in the value of the asset must be carefully scrutinized. The first step is to assess whether the increase in value that was caused by additional contributions to the IRA, mutual fund, brokerage account, or to the home. If the added contributions or improvements to the home were acquired during the marriage, then the appreciation may or the value of improvements may be subject to equitable distribution.

Here, at least an argument can be made that the $100,000 in the appreciation of the Exxon stock should be part of the marital estate. However, it also could be argued that the Exxon stock is a premarital asset, and it is also a passive asset. The husband could also argue that the wife made no contributions to purchase any additional Exxon stock, and that she contributed nothing to enhance the value of the Exxon stock.

An illustrative case is Mol v. Mol, 147 N.J. Super. 5 (App. Div. 1977). Here, the Appellate Division held that any increase in value during the marriage of the husband’s interest in a small corporation would only be considered for equitable distribution to the extent that the increase in value was attributed to the expenditures and effort by the wife. See, Scherzer v. Scherzer, 136 N.J. Super. 397 (App. Div. 1975).

5. What is the difference between an active asset or a passive asset?

If any asset has increased in value, then the legal analysis must be made whether the asset is an active asset or a passive asset. An active asset is one when both spouses actively contribute to an account, or they both improve the value of a home. Meanwhile, the term passive means that the increase of a financial account or of a home, was caused exclusively by the result of market conditions, that are beyond the control of either spouse. See, Scavone v. Scavone, 230 N.J. Super. 482 (Ch. Div. 1988);(affd, 243 N.J. Super. 134 (App. Div. 1990).

A passive asset that is also a premarital asset and it is generally excluded from equitable distribution, even if it increased in value during the marriage. For example, if a brokerage account increased in value because of the stock market conditions then it is excludable from equitable distribution. However, if the brokerage account increased in value because it was actively managed by both spouses, and if it increased because of both spouse’s efforts, then part of the account may be subject to equitable distribution. Meanwhile, if the brokerage account increased in value solely because of the efforts of the owner, then the increase in value is not subject to equitable distribution.

6. What is the critical case on the doctrine of the classification of active and passive assets?

The critical case is Scavone v. Scavone, 243 N.J Super. 134 (App. Div. 1990). In this case, the issue was the valuation date of a seat on the New York Stock Exchange (N.Y.S.E.) that was owned by the husband. This was considered to be a passive asset whose value increased from the date of the filing of the complaint to the date of the trial. The court held that the N.Y.S.E. seat was a passive asset, and its value increased from the date of the filing of the divorce complaint to the date of the divorce trial. The court reasoned that the increase in the value of the seat was caused “solely by market forces and not by the defendant’s husband’s efforts or diligence. Therefore, the increase in the value of the N.Y.S.E. seat was not considered to be a marital asset.

7. What could happen if premarital assets are commingled with joint marital assets?

This could create a mess. The commingling of premarital assets with jointly held marital could transform a premarital asset into a marital asset that is subject to equitable distribution. An illustrative case is Nahar v. Nahar, 2005 WL 3526088. Here, the Appellate Division ruled that the wife’s premarital funds became subject to equitable distribution because she placed these funds in a joint account during the marriage. Thereafter, these funds were placed in a joint account and used to purchase a condo.

8. What is the best way to protect a premarital asset if there are divorce proceedings?

We don’t live in a fantasy world. Divorce is a harsh reality that more than one half of married couples will face. Therefore, it is critically important to try to protect any premarital assets in the event there is a divorce. If a spouse has any premarital assets whether by his own savings, or by an inheritance, then these assets should be kept separately. These premarital assets should not be commingled with the other spouse. Moreover, the other spouse’s name also should not be placed on the account.

A person who has substantial premarital assets should always try to have a prenuptial agreement executed that outlines each party’s legal right to retain his and her separate property that was owned prior to the marriage. However, given the “touchy” nature of this subject this may not always be a feasible option. Therefore, if obtaining a prenuptial agreement is not feasible, then a person should be diligent and try to keep any inheritance and premarital accounts as separate as possible. If any premarital accounts and mixed and matched with marital accounts, then in the future it may become virtually impossible to separate them. Therefore, the majority of the judges will simply conclude that most mixed accounts are joint marital assets, and simply ignore any active verses passive asset analysis.

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