Equitable Distribution

What Is Equitable Distribution?

Equitable distribution is a method of dividing property when a couple divorces. Courts in most states apply equitable distribution rules when a couple is not able to create a marital settlement agreement on their own through negotiation outside of court.

When equitable distribution rules apply, this doesn’t necessarily mean marital property (and marital debt) is divided equally. Instead, the goal is to divide assets fairly based on the couple’s unique circumstances.

Factors Courts Consider When Dividing Property

When a court is asked to decide how to split property, there are several factors it might consider:

• How much money and property each person had when they got married, and how much they have now.
• How long the marriage lasted, and the age and health of both people.
• Whether one person needs to keep the family home or other belongings for the sake of the children.
• Whether one person will lose inheritance or pension benefits because of the divorce.
• Whether one person will lose health insurance because of the divorce.
• Whether one person will receive spousal support (alimony) payments from the other.
• Whether one person contributed to buying or maintaining property, even if they don’t have their name on it (for example, a stay-at-home parent).
• Whether the property is easy to sell (liquid) or harder to sell (non-liquid).
• What each person’s financial situation will be after the divorce.
• Whether it is difficult to put a value on certain assets like a business or a professional license.
• How taxes will affect each person’s financial situation.
• Whether either person wasted (spent or lost) assets on purpose during the marriage.
• Whether either person gave away or sold the property for less than it was worth to try to keep it away from the other spouse in the divorce.
• Whether there was any domestic violence during the marriage.

The goal is to ensure that property is divided up in a fair way based on each spouse’s past contributions and future needs.

Equitable Doesn’t Mean Equal—Disproportionate Division of Assets

In New York, the law assumes that marriage is an economic partnership. However, like any partnership, not all marriages are equal economic partnerships. In some cases, one spouse may receive a much smaller share of the marital assets if they didn’t contribute much or if they behaved badly during the marriage. As courts have said time and again, “equitable distribution does not necessarily mean equal distribution.” Michaelessi v. Michaelessi, 59 A.D.3d 688, 689 (2d Dep’t 2009).

Court have held that “[w]hen both spouses equally contribute to a marriage of long duration, the division of marital property should be as equal as possible; however, equitable distribution does not necessarily mean equal distribution.” Davis v. O’Brien, 79 A.D.3d 695, 696 (2d Dep’t 2010).

Contact our firm about the division of assets in your case and how the facts of your case can impact the division of assets.

How Does Equitable Distribution Work?

In a settlement, couples can choose exactly how to divide up their property – even if it’s not a 50/50 split. Once they reach an agreement, it’s put in writing, including any terms related to alimony, child support, and other issues, before being submitted to the court. In most cases, the court will respect the couple’s decisions and approve the settlement, allowing them to divide their assets as they see fit.

Separate Property vs. Marital Property

Before dividing up property, both spouses must agree – or the court must determine – which assets are separate, and which are marital. This applies in cases of settlement or litigation. Separate property will not be split in the process of equitable distribution. Property acquired during the marriage, however, is presumed to be marital property and subject to division. This presumption may be overcome by the party seeking to prove it is separate, but absent such proof the default is to assume it is marital.

Separate property includes assets that each spouse owned before the marriage – unless it was converted to marital property. For example, if a spouse had a bank account solely in their name prior to marriage, and the account remained separate with no contributions from the other spouse, the individual who created the account would keep that account after divorce. However, if funds from a separate account we mixed with joint assets, those funds could be considered marital property through a process referred to as commingling or transmutation. Other examples of separate property include inheritances received by one spouse during the marriage (if not commingled with shared assets) and gifts given exclusively to one spouse that remained separate.

New York law defines separate property as:

• Property that either spouse acquired before the marriage
• Inheritances or gifts from someone other than your spouse
• Compensation for personal injuries (such as a settlement or jury award in an accident lawsuit)
• Any property that you and your spouse have described as separate property in a written agreement
• Property acquired in exchange for other separate property
• Any increase in value of separate property that isn't a result of the other spouse's contributions or efforts

Practical Considerations

By including that last factor, the law recognizes that it may be impractical to divide a business or professional practice. For instance, if one spouse plays an integral role in running a family-owned business, giving the other spouse an interest in that business could be counterproductive, especially if the other spouse has no relevant expertise. Similarly, a judge may not award an interest in a spouse's law practice to the non-lawyer spouse, because that spouse isn't licensed to practice law. In situations like this, the judge will typically award the actual business or professional practice to the spouse who's running it, and then award different property to the other spouse to balance things out.

Understanding The Rule Against Double-Counting

The rule against double-counting prevents a court from using the income associated with an asset for both dividing property and determining spousal support (maintenance). This rule generally applies when an asset in question is closely tied to the income stream, making them hard to separate.

This rule does not apply to tangible assets, like businesses that exist independently of the income they produce. For example, in a recent case, a court ruled that an eye surgeon’s medical practice was a tangible asset, allowing it to be considered both for asset division and for spousal support without violating the double-counting rule.

When courts need to value intangible assets – such as the future earnings of a business or a professional license – they often use a method called “excess earnings.” This method compares how much more the business or professional makes compared to someone in a similar role. The extra earnings, called “goodwill,” are then multiplied by a factor to determine the asset's value. If an asset's value is based on projected future income, the court uses that income only for dividing assets, not for calculating spousal support, to avoid double-counting.

If the court uses income to determine the value of an intangible asset, that income cannot be used again for spousal support. But if part of the income hasn't been “capitalized” (converted into an asset value), such as a reasonable salary for the spouse, it can still be used for both asset division and support without breaking the double-counting rule.

It is important to note that only income that has been capitalized and turned into an asset should be excluded from maintenance calculations. The court must determine how much of the spouse’s income has been turned into an asset and how much is still available for maintenance purposes. For instance, if a reasonable salary was excluded from the value of an asset, it remains available for spousal support without violating the double-counting rule.

In short, any income that has been turned into an asset can’t be counted again for support, but income that hasn’t been capitalized (like a reasonable salary) can still be considered for both purposes.