PRE-MARITAL ASSETS, POST-MARITAL GAINS – HOW PRE-NUPTIAL AGREEMENTS CAN HELP COUPLES TAKE CONTROL IN EQUITABLE DISTRIBUTION

By Martin Kofsky, Matrimonial and Family Lawyer

On September 30, 2010, the Supreme Court of Florida issued its opinion in
Kaaa v. Kaaa, 2010 Fla. LEXIS 1628 (Fla. Sept. 30, 2010). In Kaaa the Court considered whether the post-marital appreciation of a piece of real property that was purchased prior to marriage was a marital asset subject to equitable distribution.

The Kaaa decision is significant first because of the direction that it provides to trial courts regarding the character and treatment of the post-marital appreciation of pre-marital property. In addition, there is nothing in the Kaaa decision that specifically limits its application to real estate. In that regard, Kaaa may create some tension with existing cases dealing with the marital appreciation of non-marital property.

The second and more practical aspect of Kaaa concerns the importance of prenuptial and postnuptial agreements. For either the couple whose pre-marital home is their single largest asset, or for the couple who may own many homes and other assets subject to equitable distribution, Kaaa speaks to the need to consider and create a plan for the management and disposition of assets in the event of a divorce. Being proactive and stating your wishes clearly provides certain and valuable guidance in the event of a divorce.

The facts of Kaaa are common and unremarkable. Situations like the facts seen in Kaaa are common in Miami-Dade, Broward, Palm Beach and Martin Counties and the results of the Kaaa decision will resonate throughout divorce cases in our region.

Katherine and Joseph Kaaa married in 1980 and resided in a home that Joseph Kaaa purchased about six months before the marriage for $36,500.00. During the marriage, marital funds were used to pay down the mortgage as well as to improve the home by renovating the carport. In addition, the home was refinanced multiple times during the marriage but the wife was never granted an interest in the property. The parties agreed that that the value of the marital home was $225,000 and the remaining mortgage balance was about $13,000. The parties had not entered into a prenuptial or postnuptial agreement so it was up to the court to decide what assets were marital and would be equitably distributed in the divorce.

The trial court found that the marital home itself was the husband’s non-marital real property and that the mortgage balance had been reduced by about $22,000 during the marriage. The court also found that the carport renovation increased the value of the home by $14,000. In its final judgment, the trial court found that the total enhancement in value of the home (the value of the mortgage reduction and the carport), was approximately $37,000 and that this was the amount that was subject to equitable distribution.

The husband was ordered to pay the wife an equalizing payment for her one-half interest in the value of the value of the carport plus the reduction of the mortgage, or about $18,000, for her equitable distribution relating to the marital home. The husband was awarded the home itself. The wife appealed the final judgment of divorce claiming that the trial court’s equitable distribution analysis was wrong.

The wife argued that the trial court made a mistake by not equitably distributing the full value of the appreciation of the marital home because the husband paid the mortgage, insurance and taxes with his income, which was a marital asset. The wife argued that she was entitled to receive an additional $84,160.50 which represented the equitable distribution of her interest in the appreciation of the marital home.

The Florida Supreme Court agreed with the wife, holding that the use of marital funds to pay the mortgage and other expenses associated with the otherwise non-marital real property made the appreciation of the marital home a marital asset that should be equitably distributed.

All equitable distribution analyses begin with the presumption that there should be an equal distribution of marital assets and liabilities. This presumption works like the midpoint on a balance scale. Without evidence that supports a different result, the scale remains in balance – and the distribution of marital assets remains equal. But the court can consider a number of factors and, possibly, shift, the balance in favor of one party or the other.

In Kaaa, the value of the marital home appreciated $188,500.00 during the marriage. Under certain circumstances, the appreciation of a non-marital asset can be included as a marital asset. The appreciation of the marital home in Kaaa was such an asset and the court concluded that the appreciation of the value of the marital home was properly considered a marital asset because marital funds or the efforts of either party contributed to the appreciation.

The rules that emerge from Kaaa are: (i) an asset brought by one spouse prior to the marriage that appreciates during the course of the marriage, solely on account of inflation or market conditions, becomes in part a marital asset, if it is encumbered by indebtedness which marital funds service; (ii) each spouse’s funds are to be considered marital funds, and when marital funds are used to pay the mortgage and other obligations, the appreciation of the asset that occurred during the marriage should be subject to equitable distribution; and (iii) the appreciation in value of the marital home and the marital home itself are, under the circumstances found in Kaaa, to be treated as separate assets. In effect, the home remains the husband’s pre-marital property but the appreciation is a marital asset that has to be divided.

Now that the Florida Supreme Court has decided this issue, the treatment of the passive appreciation of a pre-marital home whose debt is serviced by marital funds will be a marital asset subject to distribution in divorce cases. A prenuptial or postnuptial agreement can be used to contractually determine whether assets are marital or non-marital and whether, as seen in Kaaa, the appreciation of a non-marital asset is a marital asset subject to equitable distribution or not.

Whether divorcing or in need of pre-marital counseling, couples can benefit from the assistance of an experienced divorce, family and marital attorney. Property issues in divorces can become quite thorny. Even where you do not anticipate the accumulation of great wealth during a marriage, there are a number of assets that should be considered as a part of any marital plan. How will you divide your pensions or 401k accounts? How will pre-marital property be treated when such property is encumbered by a loan that is paid for with marital funds? For example, jewelry, boats, cars, timeshares, homes, and other assets that were acquired before marriage but had loans outstanding at the time of marriage could conceivably fall within the reach of Kaaa. You can also contractually determine issues such as alimony in a prenuptial or postnuptial agreement. All couples can benefit from effective prenuptial or postnuptial planning with the assistance of an experienced family law attorney.

Florida marital and family law is constantly changing. There will be more to come on this and other issues concerning Palm Beach, Broward, Miami-Dade and Martin County divorce and family law matters.

 

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