Source of Funds Theory
When a husband pays for a property both before and after the marriage is it marital or nonmarital property in a divorce? ?It could be all nonmarital because it was owned before the marriage. Or it could be all marital as the trial court found in Harper v. Harper, 94 Md. 54; 448 A.2d 916 (1982).
The Maryland Court of Appeals looked at cases and theories in several other jurisdictions and decided that it was part marital and part nonmarital, concluding that:
The appropriate analysis to be applied is the source of funds theory. Under that theory, when property is acquired by an expenditure of both nonmarital and marital property, the property is characterized as part nonmarital and part marital. Thus, a spouse contributing nonmarital property is entitled to an interest in the property in the ratio of the nonmarital investment to the total nonmarital and marital investment in the property. The remaining property is characterized as marital property and its value is subject to equitable distribution. Thus, the spouse who contributed nonmarital funds, and the marital unit that contributed marital funds each receive a proportionate and fair return on their investment.
In plain English, the Appellate Court was telling the Trial Judge to figure out how much the husband paid before the marriage and how much he paid during the marriage. Then calculate the percentage of each to the total. Finally, take those percentages times the equity in the property.
Let’s look at an example. A husband pays $50,000 before marriage and $100,000 during the marriage for a property. The total is $150,000. One third ($50,000/$150,000) would be his nonmarital property. Two thirds ($100,000/$150,000) would be marital property.
However, that’s not the end of the story. The Appeals Court sent the case back to the Trial Judge with instructions on the next step — to equitably distribute the marital property. We’ll talk about that, as well as what happened in Harper and other cases, in future articles.
Related posts:
