Prior to July 1, 2018, if a spouse came into a new marriage with a house from a prior marriage, barring some circumstances such as transferring the property into both new spouses’ names, the property was likely safe from equitable distribution if the new marriage ended up in divorce. A central question raised in the situation was what the courts refer to as “passive” versus “active” appreciation.
- Passive Appreciation: basically, this means that the value of the assets such as real property, stocks, art, etc. increased by no effort of the spouses, but rather because the upward fluctuation of the market on its own.Think about the stock market that goes up or down without any of us having any say.
- Active Appreciation: basically, this means that the value of the asset increased due to the efforts of the spouses, rather than because the market fluctuated upward on its own.
Here is a (close to) true story to illustrate:In 1980, a couple married. About 6 months prior to the wedding, the husband purchased a house for $35,000 for which he put $5,000 down at closing and mortgaged the rest ($30,000). The mortgage was in his name only, as was the house itself. That house became their marital home in which they lived for 27 years. Although they refinanced that property several times, both the title of the house as well as the mortgages remained in the husband’s name only, even though they used both of their incomes to pay the mortgage payments, insurances, taxes, general maintenance, and improvements, such as a carport that they built themselves. They were married 28 years before filing for divorce at which time the house was worth $235,000 (an increase in value of$200,000) with no mortgage left to pay.
Until July 1, 2018, other than the carport ($15,000 active appreciation)the law recognized the remaining increase in value as all passive, which meant that the wife was not entitled to her share of it even though she had paid the mortgage payments and all expenses out of her paychecks to the same extent the husband had.
The law now recognizes that the wife, under those circumstances, is entitled to her share of the increased value of that home.
Difference for the wife in this case:
- Before July 1, 2018 she got $7,500
- Since July 1, 2018 she gets $100,000
There is no telling whether the husband’s actions in not putting the house in both names was intended to cut the wife’s share in case of divorce. What is certain is that it didn’t seem fair for the court to not recognize the wife’s contribution during those 28 years and not award her half of the equity in their marital home.
The results in a court of law are not always what we might expect. Because the law states something on the day of your wedding doesn’t mean it will have remained the same on the day of your divorce. So, whether all you own is a house from a prior marriage or whether you own much more, a prenuptial agreement may very well be the surest way to provide you and your spouse peace of mind with respect to how what you own as well as what you owe will be divided in the event of a divorce.