An Important Calculation in the Marital Estate

In dividing the marital estates, the appreciation of assets, both separate and marital, present difficult questions. Assets appreciate actively, which means as a result of improvements or actions by its owner, such as building a fireplace in the marital home, or passively, which means as a result of changes in the market, such as during the house boom. This sounds simple, but like everything in the context of divorce, it becomes more complicated.

Very often judges face complicated arguments about the active and passive appreciation of assets that are in part marital and in part separate. For example, in general, in a private company headed by a single owner all appreciation is generally active, but one of the most difficult situations in family law happens when courts must deal with the appreciation in the value of private, family-run businesses. Active or passive appreciation can become something of a Gordian knot in the case of private business that is separate property when marital or community funds are commingled with uncompensated contributions of a homemaking spouse. This situation happens very frequently, such as doctors who employ their spouses as secretaries.

The management of separate property investments can become problematic, particularly during the wide gyrations of the financial markets. When one spouse plays an active role in the management of separate property investments, the other spouse may claim that the increase should be marital, particularly when it is the husband managing the wife’s property. By the same token, a wife whose investments take a plunge may allege dissipation because her husband mismanaged her money. At the least, both spouses should have some idea of the original cost of an asset because this number is used to calculate any appreciation.

In general, courts have held that when a nonmarital asset appreciates because of the efforts of either party, the appreciation becomes marital. The asset need not be money. In a 1991 Montana case, a court held that a wife who had managed her husband’s collection of baseball cards should share in the appreciation of the collection.

One of the more difficult situations arises when separate property appreciates during the marriage. In general, in dual-classification, equitable distribution states, active appreciation that results from marital efforts is marital property while passive appreciation remains separate property. Courts look on appreciation as a result of marital efforts as active, and appreciation as result of market forces or third-party as passive.

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