Dividing Property in Divorce: Marital and Nonmarital Property and the Source of Funds Theory
In Maryland, when a couple divorces, three steps are taken to deal with the distribution of property: 1) Determine whether the property is marital or nonmarital (using the Source of Funds analysis, discussed below); 2) determine the value of the marital property; 3) finally, make an equitable distribution.
The Source of Funds theory was articulated by the Maryland Court of Appeals in Grant v. Zich. It requires that courts examine where assets originated – from either a marital or nonmarital source. (Marital property is property acquired in marriage, with a few exceptions. An example of nonmarital property would an asset that a spouse owned before marriage and continues to own.) Unlike other states, Maryland does not make a presumption that commingled property, titled to both parties, is marital property by default. Instead, “regardless of title, property is characterized as part marital and part nonmarital when it ‘is acquired by an expenditure of both nonmarital and marital property....’” In other words, if nonmarital property was used to purchase an asset during the marriage, that asset, even though acquired in marriage, is not automatically considered marital property. The portion that is traceable as nonmarital property is not subject to equitable distribution (split with the other spouse). This means that one spouse is not entitled to the nonmarital portion contributed by the other.
One spouse may assert that an asset be characterized as marital property because the nonmarital contribution was a gift. In some states, the nonmarital portion is presumed a gift, and the asset would be equitably split. But in Maryland, the spouse asserting such a gift claim would have the burden of proving that the contribution was intended as a gift.
Still, the spouse claiming nonmarital property has the burden of directly tracing the funds back to a nonmarital source. If a contribution of nonmarital property is not directly traceable, then all property acquired in marriage, regardless of title (with some limited exceptions, such as gifts from third parties and inheritance), is considered marital property.
In Maryland, the goal in dividing property in divorce is equitable distribution – that is, a just and fair division (not necessarily an equal, or 50/50 division) of property to the parties involved. Equity, or fairness, trumps title or other considerations in division of property and marital award.
In summary, in Maryland, property acquired in marriage is not necessarily ‘marital.’ The presumption that the property is marital can be rebutted by directly tracing the funds to a nonmarital source. The source of the funds ultimately determines what is marital or nonmarital. The exception is real property (real estate) titled in tenants in the entireties (the marital home, for example), which is considered marital property by default. The real property exception derives from statute. Courts may not use the source of funds theory for real property. This helps ensure that non-monetary contributions to the marriage are recognized in divorce, not just monetary contributions. Equities can still be balanced from real property, but it must be done via Martial Award in accordance with the 11 factors of the Family Law Article, §8-205. The 11 factors are as follows:
(1) the contributions, monetary and nonmonetary, of each party to the well-being of the family;
(2) the value of all property interests of each party;
(3) the economic circumstances of each party at the time the award is to be made;
(4) the circumstances that contributed to the estrangement of the parties;
(5) the duration of the marriage;
(6) the age of each party;
(7) the physical and mental condition of each party;
(8) how and when specific marital property or interest in property described in subsection (a)(2) of this section, was acquired, including the effort expended by each party in accumulating the marital property or the interest in property described in subsection (a)(2) of this section, or both;
(9) the contribution by either party of property described in § 8-201(e)(3) of this subtitle to the acquisition of real property held by the parties as tenants by the entirety;
(10) any award of alimony and any award or other provision that the court has made with respect to family use personal property or the family home; and
(11) any other factor that the court considers necessary or appropriate to consider in order to arrive at a fair and equitable monetary award or transfer of an interest in property described in subsection (a)(2) of this section, or both.
These factors offer the court wide latitude in making considerations for marital award and balance both the monetary and non-monetary contributions of each spouse, among other considerations.
Between tracing the source of funds and balancing the above 11 factors in cases of a marital award, divorce can present a number of difficulties both for the parties involved and for courts. This is why you should retain a lawyer to work through these issues on your behalf.
Fred Antenberg is an attorney in Columbia, Maryland who handles family law issues in Howard County, Maryland and surrounding counties. Call Fred at 410-730-4404.