Nevada is a community property state. This means all assets and debts considered community property will be divided equally during a divorce. This where you get old adage, “I gave her half of everything”. You don’t typically give up more than half. You may have heard some horror stories where a spouse took everything but the shirt off his back. This is probably not the true story. It’s just what giving up “half” feels like.
Separate property is not divided. Each spouse keeps 100% of all debts or assets considered separate property. In order to understand this more, you first have to understand what community property is. Everything which is not community property is separate property.
The simple definition of community property is any property earned or acquired during the marriage, with the exception of property acquired by gift or inheritance. Being married automatically clicks in the community property clause. Nevada law states “anything acquired after the marriage is assumed to be community property”. You do not need to add your name to everything purchased for it to be considered community property. You cannot simply disinherit your spouse from property purchased after the marriage date.
Examples of Community Property
- Automobiles, Motorcycles, 4 Wheelers, and Boats or Other Vehicles
- Marital Home, Rental Home
- All Bank Accounts
- Individual Retirement Accounts (IRA’s), Pension Plans, or 401K’s
- Stocks, Bonds, Cash & Savings Accounts
- Furniture and Personal Belongings
- Business or Business Property
For a more thorough understanding, NRS 123.220 defines “community property” as, “All property, other than that stated in NRS 123.130, acquired after marriage by either husband or wife, or both.
Immediately, we can see that there are several exceptions to an asset being community property. The most common of the exceptions is property owned by one party prior to the marriage, brought into the marriage, and maintained as his or her separate property during the marriage. All property of either spouse owned before marriage, and acquired afterwards by gift, bequest, devise, descent or by an award for personal injury damages is separate property.
The second most common exception to “All” property is when the parties prepare and execute an agreement in writing indicating that certain property is the separate property of a spouse regardless of when or how it was acquired. We have two common agreements couples use;
Examples of Separate Property
- Inherited Property
- Property Acquired Prior to Marriage
- Portions of a Personal Injury Award or Workers Compensation Award
- Gifts to Either Spouse by a Third Person
Nevada law gives either spouse power to control the community property, except that neither spouse may dispose of any property without permission. This means if you mortgage, sell, or transfer community property assets, both spouses need to agree with the transfer. Neither spouse may make a gift of property without the consent of the other spouse. Neither spouse alone may buy, sell, or mortgage community property, without the other spouse. Neither spouse alone may buy, sell, or encumber the assets owned or managed without the other spouse.
Debt can be classified as community or separate as well. Debts will need to be divided the same way property or assets are divided. Community debts are divided equally. Separate debts are not divided. Separate debts can give you legal protection from your spouse’s creditors. Nevada law says that “Neither the separate property of a spouse nor the spouse’s share of the community property is liable for the separate debts of the other spouse”.
This is a legal shield against your spouse’s creditors.
Examples of Community Debt
- Any Debts Owed to Banks
- Credit Cards
- The Home Mortgage
- Home Improvement Loan or Second Mortgage
- Car or Boat Loans
- Loans Payable to Relatives or Friends
- School Loans
- Unpaid Medical Bills
Commingling can be a dirty word. Seriously, it’s when you dirty separate property by mixing it with community property. You have contaminated the separate property and now may need to divide it equally.
If a spouse has separate property, the spouse must keep it separate. Whether property has been kept separate is a factual issue which must be proven. The court requires clear and convincing evidence the separate property has been contaminated.
For example, if a spouse receives an inheritance (separate property) and uses it to buy other real estate. If the separate property can be tracked to another separate property asset, it would continue to be separate property. If separate real estate is titled jointly or if title is transferred to a spouse, there is a strong presumption that a gift was intended and that it is no longer the separate property of the gifting spouse. Payment of a mortgage, or improvements (including labor) on real estate with community property funds results in a proportionate conversion of separate property to community property. These are examples of clear and convincing evidence of a change from separate to community property.
In the case of Sprenger v. Sprenger, 1994, the wife tried to use a change in the name of a business and the fact that she signed some corporate documents as a shareholder to claim a transmutation of community assets. The court held this was not clear and convincing evidence of transmuting separate property into community property. Why? Because the signing of documents and giving of a few shares didn’t contaminate the separate property enough. This is where the word “commingling” comes in. The court must feel the separate property has become too intertwined with community property to call it separate property.
Dividing Community Property
In a divorce, a party’s attorney must perform three functions with respect to the division of a couple’s assets. First, to determine what the assets are. Next, to determine whether each asset is separate or community property. Finally, the attorney must determine a value for each asset.
The starting point for determining income and assets is NRCP Rule 16.2, which provides for the mandatory disclosure of all income, assets, and debts. This is ordinarily accomplished through the completion of a court-approved General Financial Disclosure Form, including pay stubs or other evidence of income. This sounds fairly simple; however, you should seek the help of a good divorce lawyer, to help with completing this form and attaching the necessary documents. The documents may be the most important aspect as the court requires documents to support income, debts, and value of assets.
There is also a Detailed Financial Disclosure Form that the parties may request in a case that involves income of more than $250,000, assets of more than one million, or when a spouse is self-employed. You will absolutely need a divorce attorney to complete this form.
Once all assets of the parties in a divorce action have been determined, the issue of whether they are separate or community property is very important, as that determination will dictate how the property will be divided. If property is the separate property of one spouse, he or she will normally be allowed to keep it because it is not a martial asset. Conversely, community property is considered to be the product of a marriage, like a partnership, and should normally be divided equally upon the marriage’s termination.
Properties acquired during marriage are presumed to be community property, and the presumption can only be overcome by clear and certain proof. If the spouses do not make any efforts to keep property separate, commingling may occur (particularly in a long term marriage), and the assets are likely to become community property. If the facts are too complicated, the Family Court Judge can divide the property as it deems appropriate based upon the evidence.
Unequal Distribution of Property
There are circumstances in which a court may make an unequal distribution of the community property. Nevada law instructs the judges to divide the community property equally. The law also give judges the ability to make an unequal distribution of property. Judges “Shall, to the extent practicable, make an equal disposition of the community property of the parties, except that the court may make an unequal disposition of the community property in such proportions as it deems just if the court finds a compelling reason to do so and sets forth in writing the reasons for making the unequal disposition.” The compelling reason wording is what divorce attorneys look for.
As an example, if one spouse in a divorce action needs support for which there are no funds available, then the court is authorized to provide for an unequal division of the community property to provide for the spouse who needs support. This could be accomplished by transferring an income producing property to a spouse if the other spouse has insufficient funds to pay alimony.
Another example is marital waste. If a spouse disposed of community property without the approval of the spouse then the judge may make a ruling of unequal distribution. If one spouse takes community property and wastes it, hides it, or uses it for his or her own sole benefit (sometimes called “wasting” in a divorce situation), a court would probably consider the wasting spouse as having received the property and would decrease that spouse’s share of community property. This would be a “compelling reason” for an unequal division of community property.
Valuing Community Property
Finally, all assets need to be valued as of the date of trial, not the date of filing. Every asset needs a value so that the court can show how it is dividing up the assets and that it is being done fairly. The disclosures under NRCP 16.2, as discussed above, would be the starting point for easily valued assets, but would not be much help in the case of rental properties or a business.
Placing a value on these types of assets can be particularly difficult. It will likely be necessary to employ some type of appraiser. The opposing attorney may also hire one and then the court will need to decide between the two if they arrive at different values. Although this is a simplification, there are basically three methods of valuing assets: asset approach, market approach, and income approach. Which one is most appropriate depends on the type of asset and the circumstances.
The asset approach is similar to using a balance sheet. The individual assets are valued and the liabilities deducted. This method has its limitations as the future profits could be greater than reflected in the current value of the assets. The market approach basically involves coming up with a value by drawing comparisons between the businesses of the parties to what similar businesses are selling for. This assumes a willing buyer and seller with all necessary relevant knowledge. The income approach looks at the income the business puts in the pocket of the owner, and then picks a capitalization rate to compute the value of the asset. For example, if a business produces a yearly profit of $10,000 and the capitalization rate is 10%, then the asset is valued at $100,000. Capitalization rate is the rate of return on the investor’s money and would vary depending on the type of business.
The trial court has to justify its basis for the business’s valuation which can be done by make specific findings of fact. However, Nevada divorce courts prefer the income approach. To use the asset approach or market approach would require particular circumstances.
Valuing an asset is sometimes not as simple as determining a value for a property, as property can be part separate and part community. In 1973, the court realized separate property sometimes benefits from efforts of community property. Let’s suppose you start a law practice with $10,000 in separate assets. After a 20-year marriage your spouse files for divorce and your law practice in now worth $1,000,000. You would want to argue that the practice is all yours because you kept it separate; however, you would be wrong. It’s not fair for the separate property owning spouse to keep all the increase in value. Your years of hard work are a community asset, which was used to improve your separate law practice. It must be divided appropriately, giving the community its share.
The in 1973 the court ruled, “that the increase in the value of separate property during marriage should be apportioned between the separate property of the owner and the community property of the spouses. Profit or increase in value of property may result either from the capital investment itself, or from the labor, skill and industry of one or both spouses or from both the investment of separate property and the labor and skill of the parties. Where both factors contribute to the increase in value of a business, that increase should be apportioned between separate and community property.
Malmquist v. Malmquist
What about when community property money is used for a separate property? In 1990 the court ruled on this in Malmquist v. Malmquist. If one spouse makes payments on separate property during the marriage from his or her own earnings, such payments constitute community property and convert part of the separate property to community property. The court developed a formula to determine the value of payments made on a mortgage of separate property and generally reimburse the community for improvements made on separate property.
Pension plans, IRA’s, 401(k)’s, and other retirement plans need to be divided. Retirement benefits present some unique issues. How long have the spouses been married while the employee has been contributing to the plan? What is the value of these community deposits? Because of these complex issues a qualified retirement plan will not accept a generic court order. The math in valuing and dividing the balance is too complex for a generic order. Instead you must use Qualified Domestic Relations Order (QDRO) . A QDRO is a specific order drafted by a specializing attorney, or CPA. A QDRO is drafted after the final decree is drafted and presented to the plan administrator. In a QDRO, you have specific computations to the value the plan, and detailed explanation of how the accounts will be divided amongst the spouses.
Dividing Social Security
Social security is a quasi-retirement plan. What if you spouse earned double your income for the last 10 years? She will be receiving more in retirement than you. Shouldn’t you get credit for the income he was earning?
Social Security benefits are not assignable under Federal Law. Therefore, a court cannot award one spouse’s social security to the other. However, a divorced spouse can claim Social Security benefits of one-half the ex-spouse’s benefits based on an ex-spouse’s earnings if the marriage lasted at least 10 years and such benefits are greater than the former spouse would receive on his or her own earnings. There are a few other requirements to getting such benefits that can present problems.
If the divorce occurs before either party starts collecting Social Security, both spouses must be age 62 for the lower wage earner to apply. Second, the lower earner must not have remarried before age 60 or must end that marriage to obtain benefits. Third, the lower earning ex-spouse must be divorced for two years to collect benefits. In practical terms it means that if the lower wage earning ex-spouse plans to apply for Social Security retirement benefits within the next two years, then she or he should apply to collect first, then file for divorce second. If the lower earning ex-spouse plans to keep working for the next two years, then this rule will not apply.
The lower earner can collect even though the higher earning ex-spouse never applies for Social Security or is not collecting because she or he is earning too much. The lower earner also benefits from the higher earning ex-spouse’s delay in retiring as well as the higher earner’s increased Social Security payment due to additional years of work.
A court could consider a spouse’s current Social Security when considering the issue of entering an order paying maintenance to the other spouse to perhaps equalize the benefits so both spouses receive the same benefits; or, a court could take the amounts of social security benefits a spouse would receive when considering the need for alimony or reduce the present value of future social security benefits to present day dollars and make an uneven division of assets. However, such a determination would require that potential tax consequences be taken into account.
Offer of Judgement
During the course of a divorce proceeding, one or both spouses may be interested in resolving the matter without having to go to court. If you know what property is community property, and you know the value of the property, then why spend attorney fees going to trial? The spouses are, of course, free to enter into settlement at any time after the divorce has been commenced. However, Nevada law provides for a specific means to make an offer to settle a case before trial and adds an element of risk for the other spouse should they choose not to accept the offer.
The statute allows either or both spouses at any time up to 10 days before trial to serve upon the other spouse a proposed resolution to be made the order rather than having a judge decide the issues after a trial. If not accepted within 10 days, the offer is deemed rejected and withdrawn. Either spouse can still make another offer.
If the other spouse accepts the offer, the court approves the proposed judgment, making it the order in the case and eliminating the need for a trial. If the spouse rejects an offer and ends up getting a worse outcome after trial, then that spouse may have to pay the other spouse’s additional attorney’s fees and the costs of any expert witness fees whose services were necessary to prepare for or appear at trial.
Therefore, a spouse who receives an Offer of Judgment (OOJ) would want to weigh very carefully the possibility that they might not do better at trial before rejecting the offer.
Suppose an asset is forgotten and not brought to the court’s attention. Perhaps the court left the asset out of the judgment. Maybe your spouse was trying to hide an asset from the court. Thus the asset has not been classified as separate or community and has not been divided between the parties. If it is discovered before the final decree, then the court’s judgment can be adjusted. If the omitted asset is found after the decree has been finalized then a motion for omitted assets can be filed. The Nevada courts frown upon a spouse hiding assets and will make new orders dividing the property or debt.
Post Decree Modifications
There may also be instances where the parties may need to come back to the court after their divorce is final. The court can make orders affecting the rights of the parties after the divorce is final if the circumstances of the parties have changed. For example, the Court in Siragusa v. Siragusa, 1992, held that the husband’s discharge in bankruptcy of a judgment requiring him to make payments to the wife for her share of the community property would constitute such change. The court awarded the wife additional alimony as a remedy for husband discharging his debt to her in bankruptcy. This case is especially interesting since alimony, once it has been terminated, is normally not modifiable and the wife in Siragusa had already received her 60 months of alimony.