What is Division of Property?
The concept of division of property and how it is divided is a frequently visited issue when it comes to divorce. Oftentimes people are unsure of what they will be left with after a divorce. Louisiana recognizes the concept of community property and the matrimonial regime.
In divorce proceedings, the term property means more than just land. The term property refers to both tangible and intangible property. Tangible property includes land, houses, structures, vehicles, boats, campers, and electronics. Intangible property includes bank accounts, retirement funds, and pensions.
Automatically on the date of marriage, the couple enters into something called a matrimonial regime. The matrimonial regime is defined in Louisiana statute as a system of rules that controls the ownership and management of property between married persons and to third parties. Essentially, the matrimonial regime determines when, and who property obtained during marriage can go to. There are three types of matrimonial regimes; legal, contractual, and partly legal partly contractual.
How are 401k plans divided?
Like all other community property, in Louisiana, anything earned or contributed to a 401k during the matrimonial regime will be divided in half.
Let’s take a look at an example situation:
Prior to marriage, you have put $10,000 into a 401k (or other retirement plan). You and your spouse then got married on January 1, 2010, and contributions were made to the 401k account. On January 1, 2016, you and your spouse file your petition for divorce requesting to terminate the matrimonial regime. Over the last six years, the account grew to $60,000. This means that during the matrimonial regime, you and your spouse contributed $50,000 to the account.
After separation, is money received from property distribution taxable?
Completing taxes during separation and divorce can be difficult and confusing. It is recommended that you consult with a tax professional. Additionally, the IRS has information on its website concerning taxes during divorce proceedings.
Generally, there is no recognized gain or loss on the transfer of property between spouses, or between former spouses if the transfer is because of a divorce. You may, however, have to report the transaction on a gift tax return.
If you transfer income producing property (interest in a business, rental property, stocks, or bonds), you will need to include on your tax return any profit or loss, rental income or loss, dividends, or interest generated from the property during the year until the property is transferred to your spouse. Your spouse will then report any income or loss generated or derived after the property is transferred to him/her.
If you transfer interest in a passive activity to your spouse, you cannot deduct your accumulated unused passive activity losses allocable to the interest. Your spouse then increases the adjusted basis of the transferred interest by the amount of the unused losses.
If you transfer an investment credit with recapture potential to your spouse, then you do not have to recapture any part of the credit. Your spouse may have to recapture part of the credit if he or she disposes of the property or changes its use before the end of the recapture period.
If you transfer interests in non-statutory stock options and non-qualified deferred compensation to your spouse, then you do not include any amount in gross income upon the transfer. Your spouse then includes an amount in gross income when he or she exercises the stock options or when the deferred compensation is paid or made available to him or her.
For more information on taxes, consult with a tax professional or visit the IRS website at https://www.irs.gov/publications/p504/.
Are there tax implications with selling the marital home during the division of property?
Completing taxes during separation and divorce can be difficult and confusing. It is recommended that you consult with a tax professional. Additionally, the IRS has information on its website concerning taxes during divorce proceedings.
If you sold your main home (marital home), you may be able to exclude up to $250,000 (up to $500,000 if you and your spouse file a joint return) of gain on the sale.
If you sell property that you and your spouse own jointly, you must report your share of the recognized gain or loss on your income tax return for the year of the sale. Your share of the gain or loss is determined by your state law governing ownership of property.
For more information on taxes, consult with a tax professional or visit the IRS website at https://www.irs.gov/publications/p504/.
Does spousal support and child support affect property division?
No. In Louisiana, child support, spousal support, and property division are separate from one another.
How does reconciliation affect property division?
Reconciliation does affect community property division. If you and your spouse reconcile, your community regime will be reestablished, effective back to the date you filed your original petition for divorce. However, if prior to the reconciliation, you and your spouse signed a matrimonial agreement stating that the community regime would not be reestablished upon reconciliation, then the agreement would stand and the regime would not be reestablished.
What is equitable distribution? Does Louisiana follow equitable distribution?
Equitable distribution is the equal and “fair” distribution of community property. Louisiana does follow equitable distribution. Essentially, this means that when any community property is partitioned, the courts aim to divide everything equally.
What about the business?
Sometimes, the situation arises in a divorce proceeding in which the parties own a business. This can become a complex issue to deal with when partitioning property. Remember that property means more than just your home and your vehicle. Property in a divorce proceeding refers to both tangible and intangible property. Tangible property includes land, houses, structures, vehicles, boats, campers and electronics. Intangible property includes bank accounts, retirement funds, and pensions. In this case, property is also your business. Any property your business owns from the building it operates out of to the income it generates will be reviewed during community partition in a divorce proceeding.
It is also important to remember that the way in which property is acquired will affect how it is partitioned. In this case, the way in which you acquired or started your business will affect how your business will be partitioned. Property may be acquired through purchase, gift, donation, intestate, or a will.
All property must be classified as either separate, or community. Anything you acquired prior to getting married would be considered your separate property. Once you are married, and you and your spouse acquire property together, all of that would be community property. That means not only things purchased after you were married, but things donated to you and your spouse jointly and anything purchased with joint funds. For example, the truck that you purchased when you graduated high school prior to your marriage would be considered separate property. However, the house, camper, and savings account that you and your spouse acquired after getting married would be considered community property. The classification of property, whether it is separate or community, does not change. Separate property belongs completely to the person who acquired it. Community property gives one half interest to each spouse. If you are acquiring property with separate funds, it may be helpful to obtain a declaration of acquisition of separate property so that you will have full ownership with less confusion in the case of partition.
Now let’s apply this to your business ownership. For partition, it will depend how you acquired your business. For the moment, we are just going to talk about just the business itself, not the income it generates.
Let’s look at an example situation:
Prior to your marriage, you started a business as a private contractor. You purchased the building you operate out of, all of the necessary equipment, and vehicles. Since all of this property was purchased with your individual and separate money, it will be classified as separate property. You operated your business for five years prior to getting married. During that time, your business was profitable and your take home salary was $50,000 per year. In the last five years, you took home $250,000. This money is in a savings account and has not been spent. Since this is income that you made while you were single, it will be classified as separate property.
You and your spouse then got married the following year. You and your spouse were married for five years. During those years you made $40,000 per year, totaling $200,000. This year, you and your spouse decide to get a divorce. Your divorce process takes one year. In your original divorce petition you requested that the community property regime be terminated. The income that you made during your marriage is classified as community property. This means that $200,000 is your spouse’s community property. This money is in a savings account. Since you requested that the community property regime be terminated in your original divorce petition, the community regime ceased to exist and collect more property and therefore, income you have generated since then will be solely your separate property.
Let’s recap:
The $250,000 you made prior to your marriage is your separate property. You are entitled to all of your separate property. The $200,000 you made during the course of your marriage is community property since it was acquired during the existence of the community property regime. Therefore, you have interest in one half of the amount, and your spouse has interest in the other half of the amount. This means that $100,000 belongs to you, and $100,000 belongs to your spouse.
If we total these amounts, you have $350,000 that belongs to you, and $100,000 belongs to your spouse.
Let’s continue:
Since the property that was acquired to build and begin your business was acquired prior to your marriage, it belongs to you. That is your separate property. From this situation, looking at only the business assets alone, you will retain the business and the property belonging to it as well as $350,000. Your spouse will retain $100,000 from the community property regime.
Of course this was a fairly simple example and rarely are partitions dealing with businesses that easy. There is usually spending, comingling of assets as well as joint ownership interests in the business itself.
Let’s take a look at a different situation:
You and your spouse met in medical school and became doctors. After graduating, you and your spouse got married. Immediately after, you each opened your own private practice. You each operated your practice for six years. Over the course of those six years, you made $2,400,000 of income. Your spouse made $2,700,000 of income during that time. You and your spouse then decide to get a divorce. In this situation, regarding only your and your spouse’s businesses, there is no separate property. Since you both acquired your practices after you got married, all income and property acquired for the businesses was acquired during the existence of the community property regime. This means that all property and income of each of your medical practices is community property.
In this case, during a partition, everything will be divided in half regardless of which spouse owned which business. So, you $2,400,000 will be divided in half, leaving each spouse with $1,200,000. Your spouse’s $2,700,000 will be divided in half, leaving each spouse with $1,350,000. This means that total, each spouse will retain $2,550,000.
Remember that this calculation is done only looking at the assets and income of the business, not the debts and expenses. All debts and expenses acquired during the marriage will also be community property and be split evenly between the two spouses.
To add to this example, let’s then say that your practice is in its own building which you own. You acquired this building for your practice after you were married. You purchased the building for $500,000 and $200,000 remains on the note. Your spouse on the other hand, rents an office out of a larger building from a landlord at $5,000 per month. The rent is due on the first of each month.
In this example, the note on your building is considered debt. You have been occupying the building and you are paying the bank so that you will eventually own the building outright. On the other hand, your spouse’s rent is not considered debt. Rent is generally considered an expense of the business. Here, the rent is a monthly expense. So the only debt of the community, concerning the businesses at least, is your remaining $200,000 building note. Since debts acquired during the community property regime are also split evenly between the spouses, $100,000 of debt will remain with you, and your spouse will be responsible for $100,000 of debt as well.
Let’s recap:
In total, you and your spouse are each keeping $2,550,000. Additionally, each spouse will be responsible for $100,000 worth or debt. After paying the debt, each spouse will be left with $2,450,000.
Again, this was a relatively simple situation. As previously mentioned, situations become more complex when there is comingling of funds, or when a spouse helps the other’s business by funding it with separate property.
Let’s take a look at a reimbursement situation:
Reimbursement is a claim for a portion of money to be paid back. Often in property partitions we see reimbursement claims for rent or for mortgage depending on which spouse will remain in the martial home, and which spouse must seek residence elsewhere. But what about business reimbursement? Can a spouse file claim for reimbursement when they spent their own separate money to further the other’s business?
Well, it depends. As you have probably figured out by this point, timing has a lot to do with classification of property and how it will later be partitioned. So these questions boil down to a big picture question. Were community funds used to benefit the community, or were separate funds used to benefit the community.
For example, let’s say that you and your spouse met in 2010. At that time, you had $20,000 in a personal savings account. You have documentation showing the balance of the account, and that the date is before the date of marriage. In 2011, you and your spouse got married. Since the date of marriage you have not contributed anything to your separate account. Now, let’s say that your spouse wants to open their own business. To help your spouse get started, you contribute $12,000 from your separate account to your spouse’s business.
Let’s pause for a minute and recap:
The $12,000 that you contributed was separate property (money), from a separate account. Your spouse’s new business is community property. Why? Because it was acquired during the marriage and the existence of the community property regime. This also means that any income your spouse takes home from the business is also community property.
In this case, you used separate property to fulfill a community obligation. When this occurs, you have a reimbursement claim for one half of the money that you contributed. Why only one half and not all of what you contributed? Since you contributed to a community obligation you also received benefit from it. After all, your spouse made income from the business, and your spouse’s income benefits both of you.
So here, since you contributed $12,000 of separate funds to a community obligation, you have a reimbursement claim for $6,000.
Let’s take a look at the opposite situation:
Still sticking with reimbursement claims, we have another situation that often arises. What happens when community funds are used to fulfill a separate obligation? It’s a very similar answer. There will likely be a one half reimbursement claim.
For example, your spouse owns a business prior to your marriage. Your spouse purchased the building that the business operates out of. There is $50,000 left on the building note when you and your spouse get married. Since this $50,000 of debt was acquired prior to the marriage and prior to the existence of the community property regime, it is your spouse’s separate debt. You and your spouse both continue to work. You both deposit your paycheck into a joint account. Since your paychecks (income) are acquired during the marriage, they are automatically classified as community property.
You and your spouse decide to take money from the joint account and pay off the $50,000 building note. One year later, you and your spouse decide to get a divorce. When property is being partitioned, you will have a reimbursement claim for one half of $50,000. Why not all of it? Because the $50,000 was never all of your money. It was always community money. The community money was then used to fulfill the separate debt of your spouse. Since everything in the community is then divided equally during property partitioning, you have a one half reimbursement claim for your portion of the community money spent of your spouse’s debt.
Partitioning property concerning a business can often be a complex issue. However, the examples above may be helpful in understanding the process of how partition works.
Does it matter whose name is on the vehicle note?
More important than whose name is on the vehicle note, is when the vehicle was purchased. If the vehicle was purchased before marriage and before the community property regime started, then the vehicle is separate property. If it is separate property then, in the case of partition, the vehicle would go to the spouse who owns the vehicle.
If the vehicle was purchased during the marriage, then the vehicle will be community property, regardless of whose name is on the vehicle or note. When tangible property such as a vehicle is community property, one spouse will generally retain the vehicle by essentially “buying out” the other spouse’s half interest in the vehicle.
Does it matter whose name is on the house note?
More important than whose name is on the house note, is when the house was purchased. If the house was purchased before marriage and before the community property regime started, then the house is separate property. If it is separate property then, in the case of partition, the house would go to the spouse who owns the house.
If the house was purchased during the marriage, then the house will be community property, regardless of whose name is on the house note. When tangible property such as a house is community property, one spouse will generally retain the house by essentially “buying out” the other spouse’s half interest in the house. Another option would be selling the house. If the house is sold, then the proceeds from the sale will be divided equally between the spouses.
Does it matter who is the owner of the business?
More important than whose name is listed as the business owner, is when the business was established. If the business was established before marriage and before the community property regime started, then the business is separate property. If it is separate property then, in the case of partition, the business would go to the spouse who owns the house.
If the business was established during the marriage, then the business will be community property, regardless of whose name is listed as the business owner. One spouse will generally retain the house by essentially “buying out” the other spouse’s half interest in the house. Another options would be to sell the business if possible. Once the business is sold, the proceeds from the sale would be divided equally between the spouses.
Will I still get half of our money if I have not worked during our marriage?
Any money that you or your spouse makes during your marriage is classified as community property regardless of the person who actually physically earned it. If you and your spouse have been married for twenty years, and you both then decide to get a divorce, all assets and debts are still going to be split equally, regardless of your employment history.
Look at it this way; in staying home and taking care of the children, house, pets, etc., you enabled your spouse to be able to work the job that your spouse did. Had you not been at home, your spouse would not have had that job, or would have had to pay someone to complete the tasks that you did as the homemaker.
However, now that you and your spouse have made the decision to get a divorce, you will likely need to find work. During the divorce proceeding you may be eligible for interim spousal support, and depending on the facts of your case, you may or may not be eligible for final spousal support. Should you qualify for spousal support, it will not likely be enough to live off, hence the need for you to secure employment as soon as possible.
What if my spouse does not work and does contribute to the home?
Very rarely are there circumstances in which a “stay at home spouse” honestly, and truly does nothing to contribute to the home. Sometimes, a client who wishes to file for divorce will explain in a meeting that his/her spouse just sits at home and watches television all day. Often, this is an exaggeration or misconception of how the “stay at home spouse” spends his/her time. But for the sake of argument let’s say that the “stay at home spouse” actually does nothing to contribute to the home. As unfair as it sounds, the “stay at home spouse” is still entitled to half of all community property including income.
What is the matrimonial regime?
Automatically on the date of marriage, the couple enters into something called a matrimonial regime. The matrimonial regime is defined in Louisiana statute as a system of rules that controls the ownership and management of property between married persons and to third parties. Essentially, the matrimonial regime determines when, and who property obtained during marriage can go to. There are three types of matrimonial regimes; legal, contractual, and partly legal partly contractual.
What is a contractual regime?
A contractual regime is sometimes referred to as a prenuptial (or postnuptial) agreement. Since under a legal regime, all community property is divided in half, with a matrimonial agreement you and your spouse can agree to keep all property as separate property, even after you are married. To be a complete contractual regime, the agreement, also referred to as a matrimonial agreement, would need to establish that all property is to be classified as separate. Since the base legal regime comes from Louisiana statutes, the matrimonial agreement is subject to certain limitations that cannot be contracted around. One example of such limitation is the inability to waive interim periodic spousal support.
In order to form a contractual regime prior to marriage, you and your spouse must have written agreement, mutually agreed upon. The agreement must be executed before a notary public, or other officer authorized to perform that function, with two witnesses who sign the document, along with the spouses and the notary. Alternatively, the spouses may sign the written agreement in private, and later acknowledge to a notary public that each signature is their own.
After marriage, should you and your spouse decide to form or modify a contractual regime, you must file a joint petition to the court, explaining why it is in the best interest of each spouse to have a contractual regime, and obtain court approval.
What is a legal regime?
It is easiest to think of a legal regime as the “base” regime. The legal regime resembles the default regime that you and your spouse will fall under if no actions are taken to form a different type of regime.
A legal regime is the “community of acquets and gains” and applies to all spouses domiciled in Louisiana, regardless of where they were married. Basically, a legal regime is all past, present, and future community property. Imagine the legal regime is a treasure chest, and everything inside is community property. The treasure chest only opens by using two keys; one that you have, and one that your spouse has. During the time of your marriage, the treasure chest is always open. Everything you earn and acquire is placed in the treasure chest and everything your spouse earns and acquires is as well. If the time comes that you and your spouse decide to file for divorce, at some point during those proceedings, the treasure chest will be shut. Once it is closed, everything you or your spouse acquires from that day forward belongs to each of you as separate property. When the time comes for the division of community property, you and your spouse will either have an agreement or a court order itemizing what each of you will take out of the treasure chest. In a legal regime, since you and your spouse each have a key, you are each entitled to exactly one half of anything in the treasure chest, regardless of how much each of you contributed to it.
As simply put, a legal regime entitles each you and your spouse to one half of all community property.
What is a prenuptial agreement?
In Louisiana, a prenuptial agreement is an agreement that is signed by the spouses prior to marriage. Since under a legal regime, all community property is divided in half, with a matrimonial agreement you and your spouse can agree to keep all property as separate property, even after you are married. To be a complete contractual regime, the agreement, also referred to as a matrimonial agreement, would need to establish that all property is to be classified as separate. Since the base legal regime comes from Louisiana statutes, the matrimonial agreement is subject to certain limitations that cannot be contracted around. One example of such limitation is the inability to waive interim periodic spousal support.
Who gets the house?
Two of the most common questions that arise during the division of property include:
- Who gets to own the house?
- Who gets to live in the house until the divorce is final?
When divorce proceedings are initiated, who will be staying in the house during the pending litigation is one of the first things that will need to be sorted out. In doing so there are a few things to consider.
You and your spouse may come to an agreement outside of court regarding who will be living in the house. You should be aware that in doing so, the spouse who agrees to leave the house will lose their right to a rental reimbursement claim (this right may be reserved if in the written agreement the spouses include language protecting the rental reimbursement claim). Rental reimbursement is payment reimbursing the spouse who moved out for one half of fair rental value. The spouse who remains in the house will be required to pay the full monthly mortgage payment on the house, but is entitled to a mortgage reimbursement claim. A mortgage reimbursement claim will allow the spouse who remains in the house to recover one half of the mortgage payments from their spouse.
If you and your spouse cannot come to an agreement about who will remain living in the house, the court will order one spouse to leave after a contradictory hearing. Generally, the spouse in custody of the child will be awarded occupancy of the marital residence. The court will take into consideration the income of each spouse, the economic status of each spouse, and the needs of the children. The court will make the determination that best serves the interest of the family. Until the contradictory hearing occurs, both spouses have equal right to remain in the house. Once the court issues an order stating who needs to vacate the house, the couple must abide by the order. At the time of the order, the court will decide whether or not to award rental reimbursement to the spouse who must leave the home. The court will also determine the amount of the rental reimbursement at that time. The spouse who remains in the house and pays the mortgage in full, will be entitled to a mortgage reimbursement claim.
What is mortgage reimbursement?
A claim for mortgage reimbursement is made in efforts to grant the spouse who remained in the marital residence one half of the amount paid on the mortgage from the time of the order until the partition of the property. The amount will be for one half of the mortgage payments since the payments are made on the martial residence, which is community property.
What is rental reimbursement?
A claim for rental reimbursement is made in efforts to grant the spouse who vacated the marital residence one half of the fair market value of rent from the time of the order until the partition of the property. In essence, the mortgage reimbursement claim from the spouse that remains in the home, and the rental reimbursement claim from the spouse that vacates the home, often come close to balancing out.
Who gets the dog?
In Louisiana, pets are considered property. The spouses should try and come to an agreement about who will keep any pets acquired during the marriage since technically, the pet would be community property. However, if the spouses are unable to agree, the court will award the pet to one of the spouses after considering who legally owns the pet (if acquired as separate property), and who can better care for the pet.
Can I keep my engagement ring?
Since an engagement ring is generally given to the spouse prior to marriage, it is considered a gift and therefore separate property. Should you wish to keep your engagement ring, it is likely that you will be able to keep it.