Property settlements can arise through agreement of the parties, subject to approval by the court, or by court order. Once approved, the settlement functions like a contract for enforcement or modification purposes. Some states use alternate terms to describe a property settlement, such as property agreement, settlement agreement, or separation agreement.
A property settlement involves the property that the couple obtained either before marriage or during marriage. The agreement also may include such issues as maintenance (otherwise known as ALIMONY) payments to one spouse or even custody of the children.
Two types of property that must be distributed in the settlement are community or marital property and separate property. Community or marital property consists of property that is purchased by either or both of the spouses during the time they are married. Property bought during the time the couple is married is presumed to be marital property regardless of how it was actually purchased. The assumption can be overridden only by "clear and convincing" evidence of the intent for the property to be the property of just one spouse. Separate property is property that is bought by either of the spouses before the marriage. Separate property can also be property received in exchange for other separate property, the interest on separate property, or anything that does not fall into the category of marital property.
When determining how the property will be divided, several problems may arise, including the problems of commingling and transmutation. Commingling occurs when separate and marital property are combined, or dealt with together, in a bank or financial account. When this happens, there is no distinction between separate and marital property. To prevent a finding that the commingled property is therefore marital property, the spouses need to keep separate accounts and records for each item of property. Transmutation involves separate property that the spouses have treated as marital property, making it impossible to tell what type of property the spouses had intended it to be. For example, transmutation occurs when the parties took title to property jointly but in reality only one of the spouses paid for the property. The best way to prevent commingling or transmutation from becoming an issue or hurdle in getting the settlement approved is to keep clear and accurate records.
A third problem that can arise relating to the property involved is the valuation date. The valuation date can sometimes determine which spouse receives property because a meaningful change in the value of some assets can affect their just distribution. Several dates can be applied, such as the date of trial, the date of separation, the divorce date, or the hearing date. Once the property is classified as marital or separate property and valued, the parties then must divide it between them.
The Uniform Marriage and Divorce Act (UMDA), which has been adopted in eight states, guides spouses and courts on what to consider when distributing property. The UMDA has two provisions that deal specifically with the disposition of the couple's property. One explains that the property should be fairly divided between the parties without regard to "marital misconduct." It lists factors to consider when apportioning the property, such as the "duration of the marriage, prior marriage of either party, antenuptial agreement of the parties, the age, health, station, occupation, amount and sources of income, vocational skills, employability, estate, liabilities, and need of each of the parties, custodial provisions, whether the APPORTIONMENT is in lieu of or in addition to maintenance, and the opportunity of each for future acquisition of capital assets and income." Contribution of the spouses to the family is also a consideration. The specific facts of each case must be examined to reach a fair and just division of property.
The other option given by the UMDA outlines a slightly different scheme of how property should be divided. First, each spouse's separate property is given to the appropriate spouse, then the rest of the property (the COMMUNITY PROPERTY) is divided without consideration of "marital misconduct." The factors to consider when making a division of the community property include the "contribution of each spouse to the acquisition of the marital property, including contribution of a spouse as homemaker; value of the property set aside to each spouse; duration of the marriage; and economic circumstances of each spouse when the division of property is to become effective." This option retains the distinction between property bought before the marriage (separate property) and property bought during the marriage (community property). Many states have adopted some form of these tests for their courts to use when dividing property at divorce. Once an agreement is decided upon, the property settlement has the same enforceability as a contract.
The settlement will usually be upheld by the courts unless it is found to be invalid. A court will rule that a property settlement is invalid if it is UNCONSCIONABLE, which means that the agreement is so unfair to one party that it must be modified. Whether an agreement is unconscionable is determined by the facts in each case. An unconscionability finding can be based on several factors relating to property settlement. Lack of disclosure by one of the parties can be one reason to find an agreement unfair. For example, if, when the parties met to discuss and divide their assets, one spouse did not reveal the existence of a particular asset, the other spouse, who later locates or hears of the asset after the property settlement has been approved, may seek to have the settlement overturned on the basis that he or she did not know of the asset at the time of the settlement. The court may modify the settlement to avoid further injustice to one party.
Another factor that could lead a court to find a settlement unfair is whether each party had independent counsel. Independent counsel is recommended when there is a large disparity between the parties' wealth. Independent counsel means that both parties choose their own counsel; if just one party selects counsel, the court could consider counsel to be nonindependent. Lack of disclosure and lack of independent counsel are two of the most common reasons why a court will find a settlement unfair to one of the parties.
The court may also find a property settlement unenforceable because of mistake, FRAUD, or UNDUE INFLUENCE. If the parties make a genuine mistake about the terms of the settlement, the court can reform or modify the settlement to correct that mistake. Fraud and undue influence are also reasons to alter or modify a property settlement. If one spouse fraudulently informs the other of property or assets during the process of negotiating the settlement, this action can be grounds for modifying the settlement. Undue influence means that one party used pressure or misrepresentations to force the other to sign or agree to the terms in the property settlement. When a court finds either fraud or undue influence, it modifies the property settlement to correct the unfairness.
Property settlements should be fair both in the process of reaching the settlement, avoiding any unconscionability or fraud, and in the division of the property, making an equal separation of the total marital assets. If the settlement is fair between the parties, the court is likely to enforce it.