Divorce poses many questions about how assets will be divided. One area that often causes confusion is the concept of passive appreciation in nonmarital investment accounts. To better understand this issue, it’s essential to grasp the basic concepts of equitable property division and the distinction between nonmarital and marital property.
In Florida divorce cases, property is divided according to the legal standard of equitable distribution. This means that marital assets and liabilities are divided in a fair and just manner, which might not be 50-50.
Only marital property is subject to division in divorce. Marital property includes assets that either spouse acquired during the marriage, regardless of how the property is titled. Nonmarital property refers to assets owned by one spouse prior to the marriage or acquired through inheritance or gifts specifically to one spouse, and these are typically not divided in a divorce. Below, we will explore how nonmarital investment accounts – specifically, their passive appreciation – may be handled during divorce.
What are nonmarital investment accounts?
Nonmarital investment accounts are financial accounts that were owned by one spouse before the marriage or acquired during the marriage through inheritance or as a gift specifically to one spouse. These accounts are considered separate property and are not subject to division during a divorce. However, things can become complex when the value of these accounts changes over time.
Defining passive appreciation
Passive appreciation refers to the increase in value of an asset due to market forces, rather than any active contribution or effort from either spouse. For example, if an investment account increases in value because the stock market performs well, this is considered passive appreciation. Unlike active appreciation, which might occur if one spouse actively manages or contributes to the account, passive appreciation is generally not subject to division in a divorce.
Why is passive appreciation important in divorce?
Understanding passive appreciation is crucial in divorce proceedings because it can affect how assets are divided. While the original value of nonmarital accounts is not typically divided, questions arise when these accounts increase in value during the marriage. It’s important to determine whether this increase is due to passive or active factors, as this influences whether the appreciation is considered marital property.
During divorce proceedings, courts will examine various factors to determine the nature of passive versus active appreciation. This may include:
- Reviewing account statements
- Assessing any contributions made by either spouse
- Analyzing the management of the accounts
The burden of proof often lies with the spouse claiming that the appreciation is passive, requiring clear evidence to support their claim.
Examples of passive vs. active appreciation
Suppose that a spouse owned a stock portfolio before the marriage, and the market’s overall growth increased the portfolio’s value. In this case, the appreciation is passive and typically remains nonmarital property.
Conversely, if one spouse actively manages the account by making informed trades or reallocating investments, leading to an increase in value, this is considered active appreciation. For instance, if a spouse uses their financial expertise to strategically buy and sell stocks within the portfolio during the marriage, this active appreciation may be considered marital property and subject to division.
Protecting your interests
If you’re going through a divorce and have nonmarital investment accounts or other high-value assets, it’s essential to understand how passive appreciation might impact asset division. Consulting with a knowledgeable family law attorney can help you navigate this complex area and ensure your rights and interests are protected.