In a Maryland divorce, a couple’s assets, property, and debts must be resolved before a judge will sign the final decree. For some families, this looks like each spouse keeping what they each have and going their separate ways. For most families, this involves division of property, which is often one of the most complex aspects of the divorce process.

Before negotiations can begin, property must first be characterized as either marital or non-marital. The equitable distribution process can become even more complicated when marital and separate property has been commingled, and its origin must be determined through clear tracing.

Key Takeaways

• In a Maryland divorce, assets are classified as either marital property, non-marital property, or partly both if able to identify each part. Only marital property is subject to division.
• When property is partly marital and partly non-marital, the origin of the asset must be properly traced to determine whether it should be characterized as separate property. If tracing cannot identify that non-marital party was kept sufficiently separate from the marital part, then the asset may be commingled (too mixed up to separate) and is treated as marital.
• Commingling can be avoided by ensuring marital and non-marital assets are kept in separate accounts and non-marital funds are not used to purchase or improve marital property (and vice versa).
• Prenuptial and postnuptial agreements can also be used to classify property as marital or non-marital (often based on title and disregarding source of funds), overriding how state law would treat the asset.

Understanding the Difference Between Marital and Non-Marital Property

Under Maryland’s equitable distribution law, only marital property is subject to division in divorce, unless a prenuptial or postnuptial agreement specifies otherwise, or property has been commingled to the point that non-marital and marital property can no longer be separated. Marital property consists of any assets acquired by either spouse during the course of the marriage, regardless of which spouse’s name the property is titled in.

In contrast, non-marital property (also referred to as “separate property”) includes any assets that were owned by either spouse before marriage and certain other categories of assets. Non-marital property can also include the following:

• Inheritances: An inheritance received by either spouse before or during the marriage is considered separate property and belongs to the spouse to whom it was bequeathed.
• Third party gifts: Gifts made by third parties to either spouse before or during the marriage typically constitute separate property, unless the gift was specifically given to both spouses.
• Personal injury awards: A pain and suffering award issued in a personal injury action may be considered the separate property of the injured spouse. However, an award for lost wages may be viewed as marital property and subject to division since it is typically meant to replace income and pay bills.
• Assets obtained using funds that are entirely traceable to separate property: An asset may retain its non-marital character in divorce if it was purchased solely with funds that can be clearly traced back to one spouse’s separate property and no marital funds were used for the purchase or to maintain the asset.
• Assets excluded by agreement: A valid prenuptial or postnuptial agreement can specify how property should be treated in the event of divorce. If such an agreement characterizes property that would otherwise be classified as marital property as separate property, it would be excluded from division.

Critically, if separate property is placed into a joint bank account and commingled with marital funds, it runs the risk of losing its exempt status during divorce if it cannot be traced. In such cases, the spouse claiming that the property should be characterized as non-marital has the burden of proving it is a separate asset through clear tracing.

Tracing Property to Determine its Origin

Property tracing in a Maryland divorce refers to the process of tracking the history of an asset to prove whether it should be characterized as marital or separate. This typically involves investigating the paper trail associated with the asset. For example, if a spouse claims assets used to purchase a home as non-marital property, they must be able to show the exact flow of the separate funds directly from the sale into the purchase, in particular to the down payment. Without bank records or other documents showing how the non-marital funds moved into the purchase, tracing would fail and the court is expected to treat the property as marital.

Often, a forensic accountant must be brought into a case where commingled assets are involved. They can suggest what evidence is needed and analyze it to see if successful tracing is possible. Such evidence may include bank statements, property deeds, estate disbursement records, tax returns, investment portfolio history, and any other documentation relevant to how the separate asset was originally acquired.

How to Avoid Commingling Marital and Non-Marital Property

The best way to avoid commingling marital and non-marital property is to ensure these types of assets are kept in separate accounts. Avoid depositing any separate funds into joint checking or savings accounts that are used to pay for marital obligations, such as a mortgage, vacation, or household costs. In addition, assets meant to remain separate should not be retitled jointly.

Similarly, refrain from using marital assets to pay for separate property, such as paying down associated debt or making improvements to real estate owned by one spouse prior to the marriage. Although doing so would not automatically convert the entire separate asset into a marital asset, using marital funds in these ways can result in the separate asset acquiring a marital component. That marital component can be divided in divorce.

If separate funds are used in connection with a marital transaction, it’s crucial to maintain clear documentation to preserve traceability. Without keeping proper records, a court may presume the asset is marital. Importantly, executing a valid prenuptial or postnuptial agreement can reduce any uncertainty about how an asset should be treated in divorce. When properly drafted, these agreements can override state law regarding property division in divorce, provide greater predictability, and reduce the time and expense that may be associated with tracing an asset in litigation.

Contact an Experienced Maryland Family Law Attorney

If you have questions or concerns regarding property division in divorce, it’s crucial to have a skilled attorney by your side who can ensure marital and separate property is properly classified and your rights are protected. As a “life changes” attorney, Lindsay Parvis is committed to helping clients make informed decisions as they move forward to the next chapter of their lives. Contact Lindsay Parvis today to schedule an appointment to discuss your case.