In Virginia, Equitable Distribution, sometimes referred to as “ED”, is the process by which Virginia judges will classify and distribute property owned by the parties in a divorce. This is an entirely system than those typically used in “community property” jurisdictions. Virginia is not a community property jurisdiction, and instead, is an equitable distribution jurisdiction. The presumption in community property states is that all marital property, or property acquired during the marriage, should be split exactly in half between the spouses. By contrast, in Virginia, an equitable distribution jurisdiction, the division does not have to be 50/50.
If you are able to settle your case, then you can avoid having a judge make these determinations. The statute governing the process is Va. Code Ann. § 20-107.3, but there is much caselaw that additionally informs Virginia courts on how to grapple with the nuances of property division during divorce. Keep reading to find out about how a Virginia judge classifies and divides the property at issue in a divorce.
Three Types of Property
There are three types of property in a divorce: separate, marital, and hybrid.
- Separate propertyincludes the property owned by one spouse prior to the marriage (and separately maintained throughout), inheritances and gifts made only to that spouse, and the property acquired after separation (even if the parties are still formally married at that point).
- At the Equitable Distribution Hearing: Separate property will usually not be subject to distribution by a Virginia judge and does not factor into the calculus for dividing other property, unless that property was paid for during the marriage using marital funds. For example, if you purchased a house before marriage, that house would typically remain separate property if you did not add your spouse to title, AND that house was paid for in its entirely before the marriage. If, however, only your down-payment for the house was made before your marriage, but the subsequent mortgage payments were made during the marriage, then under normal circumstances, the house would be part marital and part separate, i.e., hybrid property, even if you contend that it was your paychecks that covered the after-marriage mortgage property.
- Marital propertyis the property acquired during the marriage, regardless of which spouse purchased it. Gifts between spouses also constitute marital property, even if that gift came from a separate source.
- At the Equitable Distribution Hearing: Marital property is subject to equitable distribution, which means that the Court will divide it according to the factors listed in Va. Code. Ann. § 20-107.3(E). In Virginia, there is no default presumption that the property be divided evenly. (See, Crummett v. Crummett, 1994 Va. App. LEXIS 704 (1994)).
- Hybrid property is property acquired from a mixture of marital and separate funds. A common issue we see in our firm is where one spouse uses the proceeds from a house owned prior to the marriage (separate property), and he or she decides to use the proceeds from that home to buy a house during the marriage. In this case, we may be able to trace the funds from the proceeds of the separate property to arrive at a figure for the marital portion.
- At the Equitable Distribution Hearing: A Virginia court determines the value of the marital interest in the property and allocates accordingly. Courts sometimes use a formula known as Brandenburg to create a division that proportionately reflects the ratio of marital-separate funds used to acquire the property.
If your case proceeds to trial, your Virginia divorce attorney will use the information you provide, including canceled checks or other proof showing that the property should be entirely separate, entirely marital, or a combination (hybrid) of both. Your attorney should ask you to review tables or charts that she created that will be used in court with the underlying substantiation to arrive at figures for the equitable distribution hearing. This is where the discovery documents you exchanged will come into consideration because during an equitable distribution proceeding, each side will argue to the judge the types of classification that should be made.
The Personal Efforts Doctrine: Not So Separate Anymore
When separate property begins to appreciate or generate income during the marriage as a result of the significant personal efforts of one spouse, however, the separate nature of that appreciation or income generated comes into question. The “personal efforts” doctrine establishes when this income or appreciation should be distinguished as a marital interest in otherwise separate property. The “Personal Efforts” doctrine can render seemingly separate property hybrid.
Under the personal efforts doctrine, a marital interest in separate property when either spouse expends significant “personal efforts” during a marriage in managing a property, which as a result, substantially increases in value. The thinking behind this is that the personal efforts were made during a marriage, and thus, the personal efforts are tantamount to marital efforts because those personal efforts occurred during the marriage.
Va. Code Ann. 20-107(A)(3)(a) requires that the personal efforts be significant, and the increase be substantial for this type of finding. Furthermore, there must be a causal link (causation) between the efforts and the increase. So, if the value of separate property increases during the marriage, that increase can be marital only if the non-owning spouse expended significant personal efforts during the marriage toward the increase.
Since this requires case-by-case determination, whether any particular stock portfolio, parcel of real property, or other asset appreciates in value, the personal efforts doctrine can be a complicated and fact-specific inquiry when arguing that a Virginia judge should consider property to be converted from separate property to at least, hybrid property. The following cases illustrate the complexity.
Case 1: Outcome – Routine Stock Portfolio Adjustments Does Not Constitute Personal Efforts
In McConnell v. McConnell, a husband purchased approximately 100 shares of Berkshire Hathaway stock shortly before marriage and maintained those stocks for twenty years, some during the marriage. The husband, who had “knowledge and experience in investing”, saw significant appreciation in his stock during the time period in question. His wife argued that this increase was due to the husband’s personal efforts as defined in §20-107(A)(3) and therefore, the stocks should be treated as marital or hybrid property.
The Court found that the increase was not as a result of the husband’s significant personal efforts, as defined by the code. Rather, because the husband came up with the plan to purchase the stock before marriage, and merely maintained the stock during the marriage, only making “routine adjustments to the portfolio”, the property remained separate and not, as wife argued, part-marital or all marital. “In the context of a stock account . . . adding to stocks that are performing well and culling underperforming stocks – does not constitute significant personal effort”. McConnell, 2019 Va. App. LEXIS 182* (internal quotations and citations omitted).
To understand why the Court of Appeals decided that Husband’s personal efforts during the marriage were not the sole reason as to the $660,000 amount of appreciation for his initial separate property contribution to convert it to marital property, the Court found that although Husband was a “sophisticated investor,” his personal efforts in managing the stock didn’t really result in the appreciation, since his stocks hadn’t outperformed the S&P 500, or what would have passively occurred without his management, and as such, the entire appreciation was to remain his separate asset.
Case 2: Outcome – Customary Care and Maintenance of a Home Does Not Constitute Personal Efforts
In Martin v. Martin, a real estate saavy wife advised her husband to invest around $26,000 dollars of his separate funds in the house that they were living in, which they were about to lose to a partition sale. Consistent with the wife’s acumen, the house appreciated substantially. The wife also testified that she had used marital funds for the maintenance, upkeep, and improvements to the house. On appeal, the Court found that the wife’s actions constituted personal efforts that were significant enough such that the house should be considered hybrid property, and that the husband’s separate interests in the house were confined only to the $26,000 he had initially invested. Martin v. Martin, 25 Va. App. 551 (1997). Then the appellate decision was reheard, en banc. During the rehearing, the appellate court corrected the prior ruling, holding that it was error to find the wife’s maintenance of the home and her “suggestion” to purchase it in the first place constituted significant personal efforts. The Court explained that “customary care, maintenance, and upkeep” merely “preserve[d]” the value of the home, rather than “impart[ing] value to [it]”. Martin v. Martin, 27 Va. App. 745 (1998).
To understand this case, let’s look at the background:
Mr. Martin, husband, appealed the initial trial court’s decision to award him only his initial separate property contribution of $26,634.22 to buy the marital home upon Mrs. Martin’s suggestion. By the time of the divorce, the property was valued at $110,000. Mr. Martin appealed the trial court’s decision to disregard giving him a pro-rata appreciation of his initial $26,634.22 investment, and that the trial court and appellate court mistakenly found that the entire increase in value was marital because of Mrs. Martin’s significant personal efforts to increasing the value of the marital home. At rehearing, the Appellate Court found that the trial court failed to ascertain the actual increase in the husband’s initial separate property contribution to the property’s overall appreciation.
The Appellate Court, upon rehearing, further found that the wife did not prove that her significant personal efforts were of a nature sufficient enough to make the appreciation marital or that the home’s appreciation was because of her marital expenditures. This led the court to ultimately find that the increase should have been divided proportionally between the actual separate and marital shares pursuant to the factors set forth in Va. Code § 20-107.3(E).
Under that Virginia Code Section, the non-owning spouse, or Mrs. Martin, bears the trial burden of proving that marital property contributions or her significant personal efforts were made, and to show significant “personal efforts,” one has to show significant physical labor, efforts, intellectual skills, marketing activities, applied to the separate investment contribution. The initial trial judge never considered whether the additional appreciation was only passive appreciation in the house’s market value, not due to Wife’s significant personal efforts. Wife did not prove that her real estate acumen was significant enough to be considered personal efforts, or that marital funds were used to appreciate the home’s overall value. By applying the “Brandenburg formula,” Mr. Martin’s presumptive, separate overall share was $48,748 which was proportionate to the amount of his initial separate investment ($110,000 property value x $26,634 husband’s initial investment/$60,000 initial purchase price).
Wife never showed proof that her studying to become a realtor was a sufficiently significant personal acumen or that it was sufficient to meet the burden of proof set forth in Va. Code Va. Code § 20-107.3(E). This led the trial court to conclude that husband’s separate property interest was $48,784, the remaining $61,251 appreciation was marital.
Are you contemplating divorce? Do you have significant assets acquired before or during the marriage? An experienced Northern Virginia Family Attorney can review your assets to help you determine the extent of your divorce liability, while working toward presenting a reasonable settlement agreement to save the parties the time, stress, and cost of a judicial determination. The attorneys at Keithley Law, PLLC, PLLC have tried and settled many complex equitable distribution cases and have the knowledge and expertise to guide you through the process.