NON-MARITAL INTERESTS: THE ROAD TO EQUITY IN A DIVORCE

Posted on Tuesday, May 26th, 2020 by Tim Simonson and is filed under Divorce,  Minnesota.

Minnesota divorce law requires that Courts assume all property owned by divorcing spouses is marital; meaning both spouses have an interest in everything they own. Minn. Stat. 518.003,,subd. 3b. And if either spouse wants to prove that property is non-marital, the burden is on that spouse to prove it was acquired independent of the marriage, through any of the following:

a) gift from a third party to only one spouse;
b) acquired by one spouse before marriage;
c) acquired in exchange for a non-marital item;
d) acquired after a divorce court has assigned a value to the parties’ estate; or
e) identified by a valid pre-nuptial agreement.

It can be ‘tricky’ to figure out what’s marital and what’s non-marital in some cases, and courts will recognize that property can be “both marital and non-marital.” Schmitz v. Schmitz, 309 N.W.2d 748, 750 (Minn. 1981). Marital and non-marital interests can be ‘commingled’, and non-marital property can lose its non-marital character unless it can be readily traced.” Wiegers v. Wiegers, 467 N.W.2d 342, 344 (Minn. App. 1991). There are a couple of tried and proven ways to ‘trace’ that non-marital equity.

The Schmitz Formula

Take, for example, a home. Wife uses her inheritance money (non marital because it was a gift to her) and uses it to make a down payment on a house that Wife and Husband purchase together. If they later divorce, Minnesota courts will use a formula, the Schmitz formula, to figure out how much of a non-marital claim Wife has in the house.

Courts will take the proportion of Wife’s down payment to the value of the house at the time of purchase, and multiplied that by the net equity in the home at the time of divorce. Brown v. Brown, 316 N.W.2d 552, 553 (Minn. 1982).

So, a $10,000.00 down payment on a home that is worth $100,000.00 in 2000, will have a 10% non-marital interest. Which means that in 2020, if the house is worth $200,000.00, Wife’s non-marital interest is now worth $20,000.00.

Not unlike marriage, the road to home equity isn’t always an easy one; it can involve home improvement, second mortgages, refinances, and home equity loans. What affect can these events have on a spouse’s non-marital interest, in light of what Courts have said about ‘commingling’ above.

The Dorweiler Formula

Refinancing a home does not automatically extinguish a non-marital interest. The “non-marital interest [in a homestead] is not lost or decreased by increasing the marital debt secured by a homestead.” Kerr v. Kerr, 770 N.W.2d 567, 570 (Minn. App. 2009).

In Dorweiler the Court considered what happens when funds are borrowed to make improvements to a home’s value. The Court will subtract the cost of the improvements from the present value of the home, to get the home’s net appreciated value. From that net value, the proportion of Wife’s non-marital down payment to the value of the home at the time of purchase, is multiplied, to get the value of Wife’s non-marital interest, in light of the refinance and home improvements. Derweiler v. Dorweiler, 413 N.W.2d 572, 576 (Minn. App. 1987)

So, in the case of the $200,000.00 home referenced above, if the home improvements cost $20,000.00, then the net appreciated value to the home is $180,000, and Wife’s non-marital share would be 10% of that, or $18,000.00.

Tracing a non-marital interest in accordance with Minnesota law can be challenging, even for courts. Present the right information for the Court to apply these formulae, is important.

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