An In-Depth Look at Active Effort in the Appreciation of Nonmarital Assets

When a couple gets married, any assets they acquire are considered to be owned by both of them. If one spouse wants to prove that some assets are not shared, they have to show evidence that they kept those assets separate from everything else. This could mean keeping them in a separate bank account or making sure they are titled in only one person’s name. If one spouse can prove that they actively worked to make their own assets grow during the marriage, the growth or earnings might be considered shared property. However, if they can show that the growth was mostly due to things like investments or other passive efforts, it might still be considered their own. Under Florida law, when it comes to dividing assets in a divorce, the efforts to grow an asset are classified as either active or passive. To prove that the effort used in growing the asset is passive, it must be shown that it could have been achieved with little or no effort and that the significant work put in is unrelated to the increase in value. Active effort is defined as the enhancement in value and appreciation of nonmarital assets resulting from the efforts of either party during the marriage or from the contribution of marital funds. The key is that the growth in the asset must be a direct result of the effort. This means that when a couple is getting a divorce, they have to figure out if the increase in value of their assets came from work put in during the marriage or if it was due to other reasons. Passive income is money you earn with little effort, like from investments or rental properties. When it comes to dividing assets in a divorce, the effort put into growing a premarital asset matters. If a lot of effort was needed to make it grow, it may still be considered separate from marital assets. But if the growth could have happened easily, then it’s not considered active improvement. Tangential effort, which is only indirectly related to the growth, also doesn’t count as active improvement. So, a premarital asset may still be considered separate if the effort put into it was only tangential. The concept of “foundation of efforts” means that both marital and nonmarital effort contribute to a result. For example, stock options and pensions are considered to be built on a foundation of efforts because they require years of service before they can be fully earned. It’s important to consider both active and passive efforts when determining the classification of property in a marriage. In classifying efforts for divorce proceedings, there are tools like “golden handcuff,” “performance-based,” “employer intent,” and “cutoff date” that can help but also confuse the results. The intent of the employer can be hard to determine, and things like stock vesting and company acquisitions can impact this. The “cutoff date” is the last date that property can be considered marital, and “performance-based” perks can have nonperformance components. So, these tools can help, but they also add to the confusion. Under Florida law, proving that the value of an asset increased because of active management involves two steps. First, you need to show that the asset was actively managed, meaning there was effort put into it. Then, the court has to agree that the effort contributed to the asset’s growth. If the asset was acquired during the marriage, it is assumed to be marital property, unless the owner can prove otherwise. This might involve comparing the asset’s growth to market indexes or other benchmarks. For closely held businesses, it’s more complicated and requires looking at many factors. If you believe the court got it wrong about active management, you should challenge the ruling right away. Keep in mind that Florida law in this area is not fully developed yet. In Missouri and North Carolina, courts consider certain factors when determining if a spouse should receive a share of the increase in value of the other spouse’s nonmarital property. These factors include the nature of the investment, the involvement of an investment broker, and whether the spouses made investment decisions on their own.

When it comes to the cutoff date for determining marital property, effort that is unrelated to the growth of an investment is considered tangential to the growth. For example, extra effort required to vest stock options before the cutoff date is marital property, even if the awards are made after the cutoff date. However, there are exceptions, such as when a top management employee’s effort can affect the growth of a company.

In general, very few stock options have targets built in, so the growth resulting from meeting targets would be considered active improvements. In simple terms, when it comes to dividing property in a divorce, it’s important to consider the effort put into the property. Even if something like stock options or retirement benefits haven’t fully vested yet, the effort put in during the marriage still counts. This also applies to things like workers’ compensation or disability benefits. If the effort to improve something happens after the date when the couple separated, it might not be considered marital property. But if the effort is more of a passive kind, it could still be considered part of the marital property. It’s important to keep an eye on the laws in Florida and other states when it comes to this issue. When you have stock options from your job, the work you do after a certain date can affect whether those options become fully yours or not. If the extra work is related to your past service, it’s considered passive effort and can lead to more of the stock options becoming yours. But if the extra work is only related to the stock options becoming fully yours, it’s considered active effort. In Florida, the law says that any salary increases or benefits earned after the cutoff date are not shared in a divorce, even if they come from work done before the cutoff date. In simpler terms, when it comes to splitting up property in a divorce, the courts tend to use a theory that doesn’t work well for complicated financial assets. Instead, they should use a different theory that takes into account both spouses’ efforts in building up the assets. This way, the property can be divided fairly based on the work both spouses put into it. When measuring the growth of complicated financial instruments involving joint effort, each piece involves both active and passive efforts. The nonowning spouse wanting to share property now has the burden of proving a marital portion, while the owning spouse has to show a nonmarital portion to keep it. This is based on the 1988 equitable distribution statute in Florida. The law also states that any transactions that happen after a certain date can affect the division of property. The court decided that unvested stocks were awarded for marital effort because they were given for past service and had a provision for immediate vesting in case of death or disability. Other cases have also made similar rulings based on the contribution of each spouse to the marital assets. This is important because it shows how the law considers the effort put into earning assets during a marriage. The rulings in these cases showed that even a small amount of effort in managing a business could make it considered joint property in a divorce. The rulings also addressed how disability retirement benefits should be divided in a divorce. The Florida courts have made it clear that once someone earns retirement benefits, the city or state cannot reduce those benefits, even if the legislature changes the rules. Disability retirement benefits are considered part of retirement benefits, and cannot be converted into disability benefits. When a married couple splits, the retirement benefits earned during the marriage are considered marital property and must be divided fairly. Michael R. Walsh and Jerry Reiss are experienced lawyers who have written about this topic. We are sharing information from the Family Law Section, which is led by Maria C. Gonzalez and edited by Sarah Kay. The section is focused on teaching its members the importance of serving the public and improving how the law is practiced. They also work to advance the study of law.

Source: https://www.floridabar.org/the-florida-bar-journal/an-in-depth-look-at-active-effort-in-the-appreciation-of-nonmarital-assets/