Separation of Assets IAQ: Home Equity

Last month, we did a couple of IAQs — Infrequently Asked Questions — about child custody. We got a little bit of positive feedback about that, so we decided to do a similar short series about separation of assets. Today, we’re going to talk about one of the more interesting quirks about how the court handles equity.

Premarital vs. Marital Equity
There was a recent case (Boras v Boras, 2016) in which a couple was married for several years. One brought a house into the marriage, and had a significant amount of equity in the home when they married. Once married, that partner quitclaimed the home to the couple, then took out (and paid off) a loan against the home’s equity during the marriage. That partner then claimed during the divorce that the courts should treat the premarital equity as separate property, leaving it entirely to them and then splitting the remainder of the house.

The other partner used the quitclaim and the loan payoff to argue that the entire house should be considered marital property.

The courts decided that, because the loan was used to buy furniture for the home (rather than to do anything to add to the home’s actual value), it was irrelevant. They further found that the quit-claim was never intended to transfer premarital equity to the couple — only current ownership. The other partner appealed, and the court of appeals ruled that the original court had made no mistakes, so the decision held and the precedent solidified.

So, if you have equity in a home and then get married, it’s entirely possible to ask the courts to treat that premarital equity as an independent asset, separate from any marital equity. This applies even if you’ve taken legal action to assure that the home itself is considered marital property.

Exceptions
Of course, if you’ve taken action that commingles the premarital equity with the rest of the equity, this does not apply. This could happen, for example, by you taking a loan out against the equity of the home that is larger than the marital equity (thus necessarily including a portion of the premarital equity), spending it on marital expenses, and then repaying the loan from marital income. At that point there is no legal way to determine “which dollars” of the premarital equity were used for marital expenses, thus all of the premarital equity must be considered a marital asset.

You can also circumnavigate the entire situation by assuring that the home never becomes a marital asset at all. This, however, takes special attention: the default by law is that a home is split in a divorce, even if it was wholly owned by one partner going in. The two easiest ways to ensure that a home remains a separate asset are:

• Create a prenuptial (or postnuptial) agreement that specifies that the home is not a shared asset and that it goes with you if and when you divorce. This is the less-reliable method, because the courts can still declare that the home be treated differently if it is obviously inequitable that the home go with you.
• Create a business, quitclaim the home to the business, and then make sure your spouse never gets involved with the business. The shares of the business might be split between you in the interest of equitability, but the assets — such as the home — remain in the control of the business.

If you own a home and you had meaningful equity in that home when you got married, it’s worth consideration during a divorce — don’t pass up an opportunity to ensure the court treats your premarital equity properly!