CHAPTER FIVE

Financial Aspects of Marriage

Barbara and Tom are getting married. Their finances, which generally had been separate, now will be more closely linked when, for example, they buy a house together, open a joint checking account, apply for credit cards, and file joint tax returns. What are their new rights and obligations?

If a couple divorces, the classification of property is an important factor in deciding how the property will be divided. This chapter presents general rules regarding classification of property and debts, but it is important to remember that rules have exceptions and that state laws vary.

Most property that is acquired during a marriage is considered marital or community property. For example, wages earned by the husband and wife during marriage generally are considered marital property. If one or both spouses buy a house or establish a business during the marriage, that usually will be marital property, particularly if the house or business is purchased with the earnings of both spouses.

Separate or nonmarital property is property that a spouse owned before the marriage. Separate property also includes inheritances and gifts (except perhaps gifts between spouses) acquired during marriage. During and after the marriage, each spouse may keep control of his or her separate property. Each spouse may buy, sell, and borrow money on his or her separate property. Income earned from separate property, such as interest, dividends, or rent  are generally classified as separate property. However, in some states, these profits may become marital property.

Similarly, if property increases in value (“appreciates”), during the marriage, that increase may be classified as separate property, although in some states, the increase could be regarded as marital. The classification of an increase in value as separate or marital may depend on the degree of effort that resulted in the increase in value. If the effort was passive (such as an increase in value of stock in an investment account), the increase in value is more likely to be classified as separate or nonmarital. If, on the other hand, the increase in was the result of active efforts (such as managing a business), the increase in value may be classified as marital.

Separate property can become marital property if it is mixed with marital property. If, for example, a wife owned an apartment building before the marriage and she deposited rent checks into a joint checking account, the rent money can become  marital property, although the building is likely to remain the wife's separate property as long as she kept it in her name. If the wife changed the title of the building from her name alone to the names of both herself and her husband, that can convert the building into marital property. In addition, if one spouse put a great deal of work into the other spouse's separate property, that could convert the separate property into marital property, or it could give the spouse who contributed the work a right to some form of payback. If a spouse, during the marriage, devoted significant effort to his or her own separate property, that also could create an obligation to pay back the marital estate. Chapter 10 will discuss how courts divide marital property in a divorce.

A husband and wife may own property together during the marriage. This occurs automatically in community property states. Nine states--Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, as well as Puerto Rico--use the community property system. These jurisdictions hold that each spouse equally owns the income earned and property acquired during a marriage. This is true even if one spouse supplied all the income.

• Forms of Property Ownership
• Debts
• Second Spouses Beware
• Taxes
• Gifts Between Spouses
• Doing Business Together