What is a Property Division Agreement?
An Arrangement for Division of Property is an Agreement that a Judge Can Sign in a Divorce or Marital Separation
Under Family Code Section 2550 (or analogous law in other states), the community property (value of assets acquired during the marriage) has to be divided equally between spouses upon divorce, annulment, legal separation, or dissolution of a registered domestic partnership.
Clients often ask what can be done prior to divorce and the awaiting division of property. The answer lies in the family law court’s ability to approve a contract or agreement of the parties that agrees to divide the property differently than would be ordered by a judge. Family Code Section 2550 permits parties to enter into an agreement that provides for a distribution of property other than an equal division if the agreement is entered into voluntarily and knowingly with full disclosure of the value of the assets and is approved by the family law court. Typically, a "Marital Settlement Agreement" or "Stipulated Judgment" is our document of choice to set forth the parties’ agreement that is intended to be submitted to the court for approval. This provides the spousal support amount, amount and value of assets each spouse receives, the payment of debts, allocation of attorney fees, costs, expert expenses, etc. However, this can also be in the form of an "Interspousal Transfer Deed" and/or a "Quitclaim Deed." In a divorce action , a judge must sign the document approved by the parties or nothing (no agreement) occurs.
Parties coming to an agreement as to the disposition of property before filing for legal separation, dissolution or annulment based on the advice of an attorney will not be deemed to be prejudiced by the provisions of Family Code Section 2550 if the agreement is in compliance with the law and is entered into voluntarily.
When making an order for spousal support, the court must consider the guideline formula then determine if the guideline supports the award requested. If not, the court turns to the factors set forth in Family Code section 4320 to make a support order. Although an agreement that is not in compliance with Family Code Section 4320 would not be automatically fraudulent or void, it should be signed "without prejudice" so as to not be enforceable if the support amount or duration is challenged in the future. In addition, the court will accept or reject an agreement approved by the parties, except where a debtor spouse desires the right to receive property. In that case, Family Code Section 926 allows that court’s approval of an agreement to direct the trustee to distribute property of a trust to the debtor, even over a beneficiary’s demand to enforce a spendthrift provision preventing access to the property until a later date.
Key Components of a Property Division Agreement
A property division agreement typically contains three main elements: identification of shared or separate assets, division of debts, and explanation of how the property will be divided. In many cases, there is little dispute on the identification of the property. The only time there might be a problem with identifying property is if there were assets purchased towards the end of the marriage using funds from before the marriage. For example, if a couple made a joint purchase of a truck at the beginning of their marriage, and five years later used the money each had received as a gift from a grandparent to make the down payment on a jointly purchased home, there might be some discussion on whether the money is a marital or separate asset. It’s important for the parties to agree on the identification of property, as doing so will be helpful during the negotiation of the division of those assets.
Likewise, the division of debts is usually pretty simple for most couples. A couple can easily list the mortgage in the home if the couple plans to sell, and split the proceeds. If the couple is going to keep the home or other property they own, the debt will need to be identified, and how the debt will be paid divided.
The last major aspect of a property division agreement is how the property will be divided. In a real estate example: the couple can either sell the home, listing it with a real estate agent, pay off the mortgage, split the proceeds and go their separate ways, or one of the parties can buy the other out of the home by paying off the mortgage and keeping the equity. If the person is going to keep the house, there must be an identification of what that party will pay to the other in terms of equity. If the house will be sold, the parties usually agree to share the commissions and find a real estate agent.
Legal Requirements for Validity
Property division agreements are substantial documents. It is important that these documents are drafted and signed properly to avoid significant problems or misunderstandings in the future. While property division agreements can be legally binding once they are signed by the parties, judges will not enforce them unless they have been properly incorporated into an official court order.
For example, in a dissolution of marriage (also known as divorce), court approval is required before agreements are legally binding. Some people mistakenly believe that because the parties previously agreed to the terms of their divorce, including property division, the agreement is binding without further action. This is not, in fact, the case. In a divorce proceeding, property issues must be specifically incorporated into the final decree of dissolution of marriage. The language that must be included in a final decree of dissolution of marriage varies by state with different requirements.
Some states require a judge’s signature on the final property order (the order that incorporates all the terms agreed upon by the parties, including property division) for it to be enforceable. Others do not. However, even if a signature is not mandated, some require the property division agreement to be submitted to the court for approval in writing. Still other states may require the parties to submit a proposed form of order and schedule a hearing so a judge can approve it orally on the record. The goal of each state is the same, however: to ensure that if there is an issue with the terms of the property division (i.e. the agreement is unfair, one party did not fully disclose assets or debts, etc.), the judge has an opportunity to determine whether or not the the agreement should be approved.
Negotiating a Fair Property Division
When litigants cannot come to an agreement on the property division, the court in a dissolution action will consider several statutory factors and divide the marital property accordingly. But before litigants get to that point, they will most likely engage in some sort of good faith negotiation – and a few strategies can help make that process more effective.
First, correct characterization of assets as marital or nonmarital is critical. Illinois law provides that the parties’ premarital assets are presumed to be nonmarital unless:
Another important character issue is determining whether any property was acquired before the parties entered into their marriage. That is, suppose Husband owned a car before marriage, but Wife began to make the car payment during marriage and insures the car during marriage; what is the character of that car as of the date of dissolution? There are three concepts to explore even for property acquired before marriage.
For further illustration, we presume that Husband had a 401(k) retirement account with ABC Company on Jan. 1, 2010, that he had paid $20,000 into the account through payroll deductions, and that there was $100,000 in the account as of the date of dissolution. The approximate division of that account to equalize those amounts is set forth below.
Another important consideration when drafting a property division agreement is determining what happens if either spouse becomes disabled after the agreement is signed. Consider the case of the husband whose employer sponsored a 401(k) retirement account. He worked for 20 years and then became disabled. The account held $2 million. Does the wife still get her $500,000 in that account? Or is there a modification clause that allows the account to be reallocated if either spouse cannot meet current expenditures due to a disability? That might be a fair solution.
As another example, when one or both spouses must subsidize a minor child’s higher education, there should be a discussion about paying for college after the entry of the agreement. What will happen if the husband sends one child to college and the wife does not send the second child the same year? Will the delay in college be treated as a temporary property equalization payment if the children are roughly the same age?
If both lawyers put their heads together and mutually craft such a creative strategy, then both the client’s best interests and the lawyer’s time and effort are duly rewarded in the process.
Common Issues and How to Address Them
The most common challenges with property division are disagreements about the division and/or valuation of assets. Many people are emotional about the belongings they will part with. Family heirlooms may cause tension between you and your spouse who may believe they deserve such items. You might assume that he or she will keep those things because they inherited them. However, an inheritance during your marriage may be considered marital property depending on which state you live in and whether the inheritance was meant to benefit both of you. Valuation of business interests and other intangible assets (like retirement funds) may be hotly contested. If you have assets that are difficult to value then you should, if possible , rely on independent appraisals to establish the value of those items.
If you have tried negotiating a property division and have not come to an agreement then the next step is to try to mediate with a third party. This can be a divorce lawyer or a mediator who focuses on family law. A third party may be able to see things a bit differently and help convince you that an agreed upon solution is the best solution. Mediation is particularly useful for people who are separating and divorcing amicably. The mediator does not decide for you but rather helps you find a way to make decisions collaboratively. This helps to inform your decisions and educate you about various options.
If mediation is not possible or you did not reach an agreement during the process then it is time to litigate your case. This decision will need to be made with your attorney. In many cases you and your lawyer will decide that the most cost-effective method of reaching an agreement is to go to court. Property division issues are complicated and time-consuming. A lawyer can advise you about your options, the strengths and weaknesses of your case and whether an acceptable settlement could be negotiated with the other side.
Role of Mediation and Legal Assistance
Generally speaking, mediation and other settlement discussions can happen at any stage of a divorce case. However, they do tend to occur around the time when both parties can most benefit from some extra guidance. There are two main reasons for this. First, property division in New Jersey is quite complicated, as we discussed in "Filing For Divorce: An Overview of Property Division." Understandably, often neither party wants to commit to a certain outcome without professional guidance. Secondly, both parties may not realize the extent to which both parties will be affected by a particular property division agreement. A lawyer will take the long-term implications into consideration when discussing an agreement.
Mediators and lawyers also have the experience to negotiate shared parenting plans where all children’s needs voted on properly by concerned parents. Both mediators and lawyers understand the emotional impact on both the children and parents alike when children divide their time between homes. Therefore, if you are considering or in the midst of negotiating a property division agreement, you should strongly consider getting the advice of a mediator or a lawyer.
Impact of State Laws on Property Division
Each state has its own laws and criteria for determining how property will be divided during a divorce, and the complete scope of what a court is allowed to do can be unclear until you review the statutes in your particular state. Determining what constitutes "marital" versus "non-marital," for example, is subject to differing interpretations in different states. Understanding these provisions is critical to drafting an agreement that will stand up legally. The law generally gives family courts broad power to divide assets equitably, or fairly, in a way that is unique to the family in question. However, most states start out with a presumption that everyone who contributed to the growth in value of a couple’s property should get a share of that growth, in direct proportion to their contribution. Some of the factors that courts are supposed to analyze when dividing assets include: Certain states, which are referred to as "community property" states, have laws that differ significantly from the other significant number of "equitable" states. Community property states usually divide property acquired during a marriage by some kind of mechanical approach based on the percentage and length of the marriage. Assets that are usually considered community (to be divided) property are wages, real estate, bank accounts, and most other items that were acquired during the marriage. However, property that individuals acquired during the marriage may also be considered community property if it was set aside for marital use or if both spouses’ names appear on the title.
It is often far more difficult to split not only the non-marital but even the marital assets, when couples have individually owned substantial sums. Likewise, recreational property may be particularly difficult to divide if it is a family heirloom, or holds recreational value for only one party. Attempting to avoid conflict by simply splitting a vacation home or yacht evenly between the parties can place a debtor spouse’s overall personal net worth at serious risk, as there are very few ways to convert such property into cash. In this situation, it is often far more financially prudent to sell the property, and divide the proceeds, many times with the right to first refusal and often with the right of the spouse who has the least interest to buy half of the equity in the property thereafter for 50% of the fair market value. Similarly, it may make sense to sell investment property that held particular value to both spouse’s before the divorce, and use the cash to buy investment property at the same value after the divorce, making the investments easier to split in the future.
Even careful planning will not always prevent a divorce from coming to pass, however, especially in the event one spouse dies after the completion of an asset division. Death after a divorce can become particularly complicated if there are children involved, as the death of one parent or spouse can mean that a second spouse is disinherited, and the children receive a windfall.
Updating Property Division Agreements
Property division agreements are not set in stone, especially when it comes to changes in financial or life circumstances. Some of the more common conditions under which a property division agreement should be adjusted may include the following:
Child support increase.
Child support decrease.
Child custody modification.
Spousal support increase.
Spousal support decrease.
Health care/medical expenses increases.
Health care/medical expenses decreases.
Sometimes the events prompting a divorce agreement modification are fairly straightforward, such as when one of the dependants goes away to school or turns 18 years of age.
In addition to more obvious situations, however, events such as job loss, promotion , or serious medical issue may necessitate an amendment to the property division agreement.
In some cases, the parties may simply be in accord with the necessity for a revision. In other situations, advice from a qualified family law attorney may become necessary to convince the judge of the need for a modification.
With relatively minor amendments to property division agreements, the process is relatively simple. The parties file the document with the court, and the court reviews it. However, when the need to modify is due to a change in child support or spousal support, the process becomes a bit more involved.
As with any legal proceeding, it is best to consult an experienced family law attorney with any of your family law or divorce matters.