The scary implications of codifying Kaaa v. Kaaa for nonmarital property owners, part 2
Yesterday, we introduced the issue of whether and how a Florida judge in a divorce should classify and divide passive appreciation on nonmarital real estate that secured a mortgage paid down with marital funds. As we said, the Florida Supreme Court faced this issue in Kaaa v. Kaaa.
Historically, passive appreciation in this scenario was normally not divisible marital property. Things have evolved with the nonowner-spouse of the separate property now having a way to get a marital interest in certain circumstances.
The Kaaa coverture fraction
In Kaaa, the court established a formula to determine if and how much passive appreciation of a nonmarital asset becomes a marital asset when marital funds paid down a mortgage on that property. The court said that the “coverture fraction” is the dollar amount of the mortgage on the date of marriage divided by the property’s fair market value on that day. This fraction is multiplied by the amount of passive appreciation accrued from the marriage date through the divorce date. The result is the amount of passive appreciation classified as a marital asset subject to equitable distribution at divorce.
Legal advocates and legislators met this pronouncement with a fair amount of concern. For one thing, the numerator of the coverture fraction – the mortgage balance at marriage – did not reflect the amount of marital funds that paid down the mortgage during marriage, whether it was one payment or years of payments. The formula tied the amount of passive appreciation becoming marital to the mortgage balance at the beginning of marriage.
Kaaa becomes statute, mostly
In 2018, the Florida legislature passed a law that codified the principles of Kaaa and its formula into law by amending the equitable division in divorce statute. In response to public criticism, lawmakers tweaked the formula by replacing the mortgage balance at marriage with the amount of mortgage paid down using marital funds during marriage, creating a more proportional depiction of the amount of marital money invested into paying down the debt, then reflected in the amount of passive appreciation deemed marital.
The legislation, effective July 1, 2018, also provided that a party may ask the court not to apply the formula if it would be inequitable, allowing a judge to rule differently if the situation is unusual and application would be unfair.
It doesn’t have to be scary
A spouse who does not want to split passive appreciation of nonmarital property in divorce according to the current formula can try to negotiate a private settlement of property division issues with the other spouse, usually through their respective lawyers. There may be other circumstances in the overall divorce that make compromise on the passive appreciation issue attractive. If the parties do not settle the issue, the judge will have to divide the passive appreciation according to the formula, unless one of the parties can make a persuasive argument that to apply it would be inequitable.
Or, anyone going into a marriage who owns real estate should speak to an experienced attorney well before the ceremony about the possibility of using a prenuptial agreement to preserve passive appreciation as nonmarital property in case of divorce or make a different arrangement. It also may be possible to negotiate a postmarital agreement (valid agreement between spouses during marriage).
