Divorce in New Jersey: Understanding Premarital Assets

Video Transcript 

My name's Robert Bonavito, New Jersey forensic accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only. If this was a litigated matter, I would take a different approach, have different conclusions, based on different facts and circumstances.

Today, I'm gonna discuss Understanding Premarital Assets. What is a premarital asset? Well, it's pretty much what I just said. It's premarital, meaning it was an asset before you were married. And this becomes a big concern in a lot of matrimonial matters when someone's going through a divorce because it's not part of the marital property, it's the one spouse can prove that this was a premarital asset that existed before we were married. And the reason we have this is because a case back in 1974 right here, and let me just read it real quick, "In the event of a divorce, we will not qualify as an asset eligible for distribution, that if property owned at the time of marriage later increased in value, such increment enjoys a community property, and that income or other usufruct derived from such property, as well as any asset from which original property may be exchanged or into which, or proceeds of sale may be traced or shall similarly be considered separate property of the particular spouse."

What does that mean? Well, I mean, it's typical legal writing, but basically what they're saying is, if you have an asset that was premarital and you can prove it was premarital, that marriage will be excluded from dividing up at the end of the marriage. And for example, if you have a house or a rental property somewhere, and you get married, but you never move into that house, and you buy a house when you get married with your partner, well, that house that you bought is now marital property.

But if you don't involve the other assets in the marriage, you may be able to exclude them. But again, you have to prove it. Okay? You can't just say it was premarital. You have to prove it's premarital, prove it wasn't co-mingled, prove that you didn't use marital assets to keep it alive. And one way you do this is looking at the asset, and seeing if it is a passive or active asset. Now, if it's an active asset and I'm working on it during the marriage... For example, if I'm working on it, and my wife's enabled me to work on it, and improve the value of that asset, well, guess what? A lot of that asset is gonna be included in the marital property. I'm gonna have to show which portion is premarital, and then substantiate the value that it increased during the marriage, and then the difference between those two is gonna be included and it's gonna be divided between the spouse and then the husband and the wife.

And the burden of establishing immunity is on the monied spouse. This is important. I mentioned it before. You have to be able to prove that this is an asset that existed before, and you didn't co-mingle it with the marriage at all. And if you did co-mingle it, what percentage? So you have to establish that. And how do you do that? Well, we do this a lot. We'll go in, and we'll value the company as of the date of marriage, and then we'll evaluate it as the date of divorce. And the increase in value, assuming that it was an active asset, not a passive, an active asset. So let's say a company is worth $10 million. Or I think I have an example here.

Let's look at this next slide. Okay, so, for example, a spouse owns a cable company, and this is an actual case that at the time of marriage it was worth about $50 million. The company has experienced management and does not require participation in the business by the spouse. After 23 years of marriage, the spouse has filed for divorce. The business appraiser has determined that the passive growth of the asset was about 7%, calculated as follows: $230 million was the value at the date of divorce, at the date of marriage, it was $50 million.

Now, a couple of things can happen here. First of all, we can take the $50 million off the table because that was premarital, right? Which would leave $137 million of value that increased during the marriage. Now, that may have to be divided between the husband and the wife. But, if you're able to show that that was passive, and had nothing to do with the owner, with the spouse, you can exclude this whole asset. And that's something we look at in every single divorce, and we do an analysis to determine what's premarital and is it an active or passive asset.

This is a very important topic if you own a business or have any type of investments, because like I said, it may or may not be part of the divorce, depending on how you handle that testimony. My name is Robert A. Bonavito, New Jersey forensic accountant. If you have any questions feel free to email me or give me a call.