Division of Property Lawyers in Manassas
Virginia has adopted the law of equitable distribution for the division of marital assets and liabilities in divorce. Marriage is seen as an economic partnership. Under Virginia law, property and debts must be categorized as separate, marital, or part separate and part marital. The marital assets and liabilities must be valued and divided equitably and not necessarily equally.
Classification of Property
Marital property refers to all jointly owned property and all other property obtained from the date of the marriage to the date of separation. Some common examples of marital property are the marital home titled in the names of both partners, or a retirement account that was created during the marriage, even though the account is only in one spouse’s name.
Separate (aka “nonmarital”) property is defined as all property acquired by either spouse prior to the marriage as well as all property acquired during the marriage as an inheritance or gift from someone other than the spouse.
Some common examples of nonmarital property are a vehicle given to one of the spouses by a parent and titled in the name of the receiving spouse, an inheritance from a relative, and cash gifts from third parties, but only if such inheritances and gifts are maintained separately from other marital assets. Marital property includes gifts from one spouse to the other, such as jewelry.
Part marital and part nonmarital is the third category of property. In this category, the application of the law is usually very complex. Following are some examples of property that is considered comingled:
- Income received from nonmarital property during the marriage, but only if such income can be attributed to the spouse’s individual effort. For instance, if one spouse inherits a family business before or during the marriage and both spouses work in the enterprise producing income, such income may be seen as marital property, notwithstanding that the enterprise is nonmarital property.
- Any increase in the value of nonmarital property during the marriage may be considered marital property to the degree that marital property or the personal efforts of either spouse contributed to such increases. Such personal efforts may be significant and result in substantial appreciation. For instance, if one party owned a business prior to the marriage, and during the marriage, either spouse, through personal effort, caused the property value to increase significantly. The increase in value may be considered marital property.
Division of a Business
There are various ways to divide a business, such as:
This is the most common way to divide a business. Just as the name suggests, one spouse buys out the business interests of the other spouse. If it is decided that both spouses are equal partners in a business, then the division is straightforward, at least in theory.
One spouse will be required to either pay the other party 50 percent of what the business is valued at or concede interest in another asset (such as the family home or a retirement account) as a way to equalize the asset division.
In general, a buy-out is only successful when the spouse taking ownership is able to transfer a lump sum to the other partner. If an agreement can be made, then it may be possible to structure a buy-out over time.
It is vital to remember that inequitable distribution states, such as Virginia, how a business is divided may be interpreted by the courts in an entirely different manner, accounting for various factors that could materially affect how much of the interest in the business each spouse is entitled to.
Not dividing the business is another way to deal with it. Co-ownership will allow both spouses to continue to own part of the business. Both spouses may continue to work at the business, enabling all business arrangements intact, depending on how amicable your divorce or separation is.
If the circumstances are less amicable, then both partners may keep interest in the business. However, one spouse may become an absentee owner and accept payments only to satisfy their share of marital assets. In order for co-ownership to be viable, a specific amount of trust and respect must remain between the couple.
Sell the Enterprise
Simply selling the assets of a business is sometimes the cleanest and easiest method to divide the assets. This provides a clean break from each other’s marital affairs and is usually done with other marital assets, such as the family home, as well.
One of the limitations of this route is that it can take a length of time to sell a business, particularly if the enterprise is not financially sound when it goes up for sale. The other drawback is that various smaller enterprises are also a direct reflection of the toil, effort, and sweat equity of the owners. It could be challenging to find another owner with the same level of passion as the present owners.
Yet still, one spouse may be more emotionally involved with the business than the other and will resist any attempt toward the sale of the business.
How do I Protect my Business during a Divorce?
There are various strategies a business owner can take to protect themselves from the effects of a divorce, the most common of these via a prenuptial agreement. This refers to a binding contract agreed to by both parties that is executed before marriage. It defines what occurs to all property, assets, and income from a business in the event of a divorce, separation, or death.
How is a Business Valued for the Purposes of Divorce Settlement?
When it comes to divorce, Virginia courts have conventionally relied on the concept of “intrinsic value” to calculate the business’s worth. There are three widely recognized valuation methods generally used to determine intrinsic value, which include:
The Income/Excess Earnings Approach
This is a comparison-based method, where the individual performing the valuation compares how much the spouse that runs the business makes to the average of someone in their peer group. If the party that owns the enterprise makes more, any so-called “excess earnings” are assigned to the business’s actual value.
The Asset Valuation Approach
In the asset valuation method, the business’s valuation is based on its assets. Consequently, it is typically ineffective in the valuation of enterprises with few tangible assets.
The Market Value (AKA Fair Market Value) Approach
In this approach, the individual conducting the valuation bases the intrinsic value of the business on the sale prices of comparable businesses.
The entire marital estate of the couple may be divided by the court, including the assets and liabilities. Similar to marital property, any debt acquired by either spouse during the marriage is a part of marital debt. In the event that either party acquired a separate debt, the court will direct that spouse to repay it.
For instance, if a couple uses a joint credit card to pay for a new roof on the marital home, the court will hold both parties liable for the debt. But if one partner acquired a debt before the marriage, following the couple’s separation, or did not use it for the marriage, the judge will most likely classify the debt as that party’s responsibility.
Courts can’t alter the agreement that spouses have with private lenders. Therefore, even if a court directs your spouse to pay a joint debt, the lender can and most likely will come after you for repayment if your spouse does not pay. For this reason, it is in the best interests of each spouse to transfer debts that they are responsible for into their name only to the extent that this is possible. If your spouse (or ex-spouse) fails to pay a debt and the lender comes after you to pay it, then you would need to bring your ex to court in order to obtain reimbursement from them.
In general, the value of marital assets and marital debts is determined by the date of the trial or evidentiary hearing. But there are certain exceptions to this rule. Additionally, a spouse may request the court to use a different valuation date. Depending on the specific situation, such a request may be granted.
It can be complex to value the marital share of certain retirement assets and may warrant the use of a valuation date rather than the date of trial. In such plans, the marital share consists of contributions to the plan and income on those contributions from the marriage date to the separation date. There may be additional adjustments to value due to market changes.
Division of Marital Assets and Liabilities
In dividing marital property and debts, the following aspects require consideration:
- The monetary and non-monetary contributions of each spouse to the welfare of the family.
- The monetary and non-monetary contributions of each spouse in the acquisition and upkeep and maintenance of such marital property of the couple.
- The length of the marriage.
- The physical and mental condition and ages of the parties.
- The factors and circumstances that led to the end of the marriage, particularly including specific grounds of divorce.
- How and when specific items of such marital property were obtained.
- The liabilities and debts of each party, the reason for such liabilities and debts, and the property which may serve as collateral for such liabilities and debts.
- The liquid or non-liquid nature of all marital property.
- The tax implications of dividing marital property.
- The expenditure or use of the marital property by either of the spouses for non-marital separate purposes or the dissipation of such money when it was done in anticipation of separation or divorce or after the last separation of the couple.
- Other factors that the court considers appropriate or necessary to arrive at a just and equitable monetary award.
An equitable division of marital property and debts does not necessarily amount to an equal division. These factors help the court establish how the assets and liabilities acquired during the marriage should be equitably divided.
What Happens to Your Retirement Account During a Virginia Divorce?
The most common kinds of retirement accounts are either classified as Contribution Plans (such as 401(k)s, IRAs, or Thrift Savings Plans) or Defined Benefit Plans, also referred to as pensions. In order to understand more deeply how Virginia law divides retirement account assets, it is important to explain the manner in which contribution and benefits accounts function.
Division of Defined Contribution Plans
A defined contribution plan requires both employers and employees to contribute a percentage of a paycheck or a set figure to a savings account on a monthly basis. These savings accounts grow until the employee retires. If the employee spouse contributes to a 401(k) or another retirement account, such as a 403(k) or IRA, during the marriage, Virginia courts will look at the following while distributing its value between divorcing spouses:
The Date of the Marriage
If the marriage lasted 15 years and the employee spouse contributed to the retirement account for 20 years, then contributions to the account in the years before the marriage will generally be exempt from asset division. Individual contributions made for those five years could be classified as separate property.
The 50 Percent Rule
The courts in Virginia want to ensure impartiality and equitableness when dividing the value of retirement accounts. In dividing assets from the years of eligible retirement contributions, Virginia law stipulates that the non-employee spouse must not get more than 50 percent of the marital value. Thus, if the non-employee spouse is entitled to a full 50 percent of the value of the retirement account, they would receive seven and a half years’ worth of contributions in the above example.
Dividing Defined Benefit Plans
Defined Benefit Plans are Pensions
One spouse may receive a pension from serving in the military, acting as a civil servant, or working in foreign service. Every month, employers contribute a set amount to an employee’s pension based on a specific and unique formula. The employee can access the account upon retirement. The court or the divorcing spouses may choose to undertake the following when dividing the value of a pension:
Divide after Valuation
Both spouses may choose, or courts may order, to have the present value of the pension determined by an actuary service. Subsequently, the spouses may decide to include the eligible part of the pension in the total value of asset division.
Divide at the Time of Retirement
At times, spouses may decide to divide the share on their own, on mutually agreeable terms. Subsequently, the non-employee spouse’s share will be paid to them at the time of retirement. In order to do this, the divorcing spouses may submit a Qualified Domestic Relations Order (QDRO) to the court, detailing the manner in which the pension assets will be distributed.
Notably, if both spouses are agreeable on a method of distribution, they may decide to divide the assets in a different manner than the court would, which could address their individual needs better at the time of the divorce.
In addition, the use of a QDRO makes it possible to avoid any penalties or tax fees related to withdrawing or changing a retirement account. A QDRO can make it easier to transfer portions of retirement accounts or pensions to a non-employee spouse without any adverse financial implications.
Qualified Domestic Relations Orders
A circuit court will need to enter a Qualified Domestic Relations Order (QDRO) to divide a 401(k) or 403(b) plan. This QDRO authorizes an employer to award an ex-spouse their share of the other party’s retirement account contingent upon the ruling of a circuit court and/or the separation agreement of the spouses.
A QDRO is necessary to divide a civilian or employer-provided pension during a divorce. Every pension, 401(k), or 403 (b) plan has its own unique stipulations and requirements governing a QDRO’s content to make sure that it conforms to the Employee Retirement Income Security Act (ERISA).
Speak to a Dedicated Virginia Divorce Property Division Lawyer
The signing of a Property Settlement Agreement (PSA) forms the core of a number of Virginia divorce cases. Therefore, it is vital to ensure that it is drafted properly. Remember never to sign a PSA or another agreement with your spouse, irrespective of how insignificant it may seem, without consulting your lawyer.
There are multiple facets to property division in a divorce case in Virginia. The experienced lawyers at Olmstead and Olmstead can offer strong legal representation and ensure that your future is protected during a divorce case. To schedule your initial consultation, message us online or call our office today at (703) 361-1555.