March 21 2011

Valuing the Marital Component of a Premarital Asset Contributed to the Marriage in Equitable Distribution in Bucks County Divorce Actions: The Vanishing Credit

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A frequent issue that arises in Pennsylvania divorce cases is how a premarital asset that was contributed to the marriage should be handled in equitable distribution. A premarital asset is an asset that one party possessed before the marriage. Such an asset is deemed “contributed to the marriage” or converted to a marital asset when it is put into joint names or used to purchase a joint marital asset. A classic example of this is when one party uses premarital funds as a down payment toward the purchase of the marital residence, which is deeded in both parties’ names.

In equitable distribution, the party contributing the premarital asset almost invariably seeks to have the full value of the converted asset returned to them as a separate asset and not included in the marital estate for equitable distribution purposes. Of course, the non-contributing spouse invariably argues that the entire value of the premarital asset should be deemed a martial asset and be subject to equitable distribution, because the asset was contribute or “gifted” to the marriage. Thus, the dilemma is how to fairly or equitably handle this issue.

Under Pennsylvania law, once a premarital asset is put in joint names or contributed or gifted to the marriage it becomes a marital asset subject to equitable distribution. Therefore, in this regard, the non-contributing spouse is correct in asserting that non-marital assets contributed to the marriage are marital property subject to equitable distribution. However, Pennsylvania law also requires that the court consider a spouse’s contributions to the marriage as a factor to be considered in equitably dividing marital property. Therefore, the contributing spouse has a strong argument that some or all of his or her contribution should be returned in equitable distribution.

While not the official law of Pennsylvania, the Bucks County Divorce Master’s Office most often applies a very fair formula for equitably distributing premarital assets contributed to the marriage, which is known by Bucks County divorce attorneys as the “vanishing credit,” because the contributing spouse’s credit essentially “vanishes” over a twenty-year period. In short, the Bucks County Divorce Master’s office will consider 5% of a premarital asset converted to a joint marital asset or “contributed” to the marriage per year and subject to equitable distribution. The remaining percentage will be deemed a separate asset and returned to the contributing spouse in full.

For example, suppose a spouse contributes $100,000.00 of premarital funds to purchase a jointly owned marital residence. Further, assume that the marriage is a ten-year marriage and the marital residence was purchased and the premarital funds contributed two years into the marriage. To calculate the marital component of the contributed funds, the Bucks County Divorce Master’s Office will multiply the number of years elapsed between the contribution of the funds and the date of separation, in this example 8 years, by 5%, which equals 40%. Therefore, The Bucks County Divorce Master’s office will recommend that 40% of the $100,000.00 be considered as martial property subject to equitable distribution. The Bucks County Divorce Master’s Office will further recommend that the remaining 60% of the $100,000.00 be returned to the contributing spouse as separate property.

Of course, if one (or both parties) does not accept the Bucks County Divorce Master’s recommendation and takes the issue of equitable distribution to trial before a judge, a judge will likely not apply the vanishing credit (at least explicitly), since that is not the official law of Pennsylvania. However, the ultimate decision on equitable distribution by the judge may practically be very similar in result.

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