Prenup Problems: Should A Marital Home be Separate Property?
{7 minutes to read} As we’ve been exploring in recent articles, a key function of pre-nuptial agreements lies in excluding certain assets from the marital estate and limiting certain marital rights. What are some ramifications of these limitations, and could they lead to inequitable results in the event of divorce?
Holding assets separately sounds simple enough — why would it cause issues down the road?
Answer: the nature of marriage is generally to have things all threaded together into one big tangle of indistinguishable strands, not intended to be disentangled without a lot of knots, breakage, and the employment of experts. Marriage, our legal system presumes, is a union in which life is approached as a partnership, a partnership wherein couples build assets through their combined efforts, accrue debt by mutual decision, and plan for a shared future in which their fortunes are integrated.
Some assets are more difficult to hold separately throughout a marriage. A marital home is possibly the most challenging. We’ll explore why.
When a Marital Home is Separate Property
Rather than speaking theoretically, in this case, examining an example is more useful. We turn to the case of Mary and Brian.
Mary purchased a $2 million home with savings she had prior to her marriage to Brian. The couple properly executed a prenuptial agreement that designated the home as the Wife’s separate property. Mary and Brian lived in the home for the entirety of their 20-year marriage. Although the Wife paid for the home, and the parties carried no mortgage on the property, there were annual expenses including homeowners' insurance and real estate taxes totaling approximately $50,000 which were always paid out of income earned during the marriage.
The home required several significant repairs, the receipts and invoices for which are difficult to fully reconstruct after 20 years. At year six of the marriage, the parties added a lagoon-style pool in the backyard, with landscaping to create a natural swimming-hole-in-forest effect. The costs were upwards of $148,000.
Then, in year 16 of the marriage, the parties added a pool/guest house with additional landscaping, enhancing the already imaginative oasis with what appeared like a faerie cottage. Both the Husband and Wife were very involved, working with the architect, and taking time off work to be home for contractors when required. The custom work included a special domed roof that charmed visitors with its subtle allusion to iced frosting and fairytale chic, and added significant cost to the project. The effect was a joy to Mary and Brian, both of whom were long-time J.R.R. Tolkien fans, sharing a longing to wander elf-infested forests and happen upon faerie lairs. The cost of this addition, approximately $425,000, was also paid from marital income.
During the marriage, the couple hosted many a fete in their garden, enjoyed their summers by the pool, and generally delighted in their guest cottage — where both Brian’s and Mary’s parents enjoyed many extended stays.
Although they had many satisfying years together, at year twenty, Mary and Brian decided to divorce. The parties have the home appraised and learn its value is $4.5 million.
Query: Does this entire value belong to Mary, as the prenuptial dictates? Brian would likely argue otherwise, citing, amongst other things, twenty years of marital contributions and a more than doubled value in the property.
If the parties utilized the property as a shared dwelling and jointly invested in the maintenance, upkeep, and improvement of the property, should both parties be entitled to some of the fruit of their ongoing investment?
What would the marriage have been like had the parties always regarded their home as the Wife’s sole property?
If the parties had kept their prenup front of mind throughout the marriage, how might Brian’s contributions to the home have differed? How might the parties have structured their financial matters? How would their deliberately, separately maintained finances have affected their marital relationship?
There might have been less cooperation in maintaining the home, less willingness to share in upkeep and improvement, and perhaps some power struggles over who controlled the family environment. There might have been less creative collaboration, the exercise of which brought both parties such delight.
Separateness and togetherness are both necessary ingredients of marriage and fundamental in the complex (possibly unmasterable) dance of intimacy. That said, keeping certain properties separate may tend to foster divisiveness and a disincentive to invest in the collective. This is anathema to at least one purpose of marriage — to build, and, in fact, to be more through togetherness than singularity.
In the absence of a prenuptial agreement, the law of equitable distribution governs.
What does that mean for a marital home? The analysis of marital versus separate property is far from an exact science, and the courts’ discretion widens (and sometimes confuses) the range of predictable outcomes in cases. However, there are some guiding principles, one of which we’ll look at here.
Active contribution to separate assets.
When the activity of either spouse during the marriage contributes to increasing the value of a separate asset, that increased portion of the asset would be considered marital property, to be apportioned to each spouse fairly in the event of divorce.
Taking our example: the Wife would be given a dollar for dollar “origination credit” for the 2 million dollars of her original investment, then the increased value of 2.5 million dollars ($4.5-$2.0) would need to be evaluated as to how much of the gain is attributable to the spouses’ activities as distinct from the gain attributable to market forces.
Generally, a marital home has a special treatment as a presumptively marital asset, so the tendency is to divide its value equally, less any clearly provable separate investment, such as, in our case, the Wife’s original investment.
Prenuptials aim to alleviate the inexact and muddy analysis needed to separate shared assets should divorce ensue. Unfortunately, messiness is part of love and life together, and much cannot be gracefully managed through artificial constructs such as legal contracts.
When contemplating marriage and considering entering a prenuptial agreement, one question might be, what sort of marriage is wanted? How much autonomy does each party require to feel nourished, energized, (fill in whatever is wanted), and how much union does each party want; not only in financial matters, but in all things?
Having a thoughtful approach to entering a marriage may help both people set high, realistic expectations that they can consciously manage throughout the relationship.
RACHEL ALEXANDER
Alexander Mediation Group