Virginia is an equitable distribution state, meaning that the court has the authority in any divorce to classify the property of the parties as separate, marital or hybrid. This classification is vitally important, because the court only has the power to divide marital and hybrid property—not any separate property.
The article Equitable Distribution: Using Separate Property For A Marital Loan explains the Virginia Court of Appeals decision rendered in Layman v. Layman and the impact on property classification when a party uses separate property throughout a marriage.
The Court of Appeals in David v. David, Va. App., Record No. 0653-12-2 (2015) recently highlighted another potential pitfall on the road to proving separate property is actually separate. The David case illustrates important issues when stock and investment accounts are concerned.
In David, the husband was actively employed as a financial adviser and prior to their marriage acquired and maintained a brokerage account. Under Virginia law there is a presumption that any property acquired before the marriage is the separate property of that spouse.
The process, however, does not end there. Virginia Code Section 20-107.3(A)(3)(a) allows a court to classify property one spouse brought into the marriage as a hybrid of marital and separate. Under this section, the spouse who did not own the property must prove two things to gain an interest in it: (1) that the value of the property saw substantial appreciation during the course of the marriage; and (2) that the owner spouse expended “significant personal efforts” on the property. If those two factors are met, the owner spouse must show that something other than their efforts, for example market appreciation, caused the increase in value. Otherwise, the court will classify the property as hybrid, with the increase in value attributable to the owner spouse’s personal efforts being marital property, subject to equitable distribution.
The Court of Appeals agreed with the wife in David that an increase in value of approximately $307,000 over eight years was substantial appreciation. The wife then had to show the increase was due to her husband’s significant personal efforts throughout their marriage. She testified during the initial trial that her husband devoted long hours to researching promising companies and stocks in which to invest. Her husband then countered that he rarely made trades, and invested for the long term.
The Court acknowledged that researching and selecting stocks could be classified as “personal effort” as defined under the Virginia Code, but qualified that “personal effort must be significant and it must substantially affect the value of property.” While the husband certainly exerted personal effort, the nature of the husband’s actions had to be addressed in the context of a financial investment. The Court took the position that it is customary to make routine adjustments to a stock portfolio; therefore those actions alone could not constitute significant personal effort.
Even the number of trades, on its own, cannot be conclusive. In David, the husband made 35 trades over the course of the parties’ eight year marriage and the Court of Appeals found that number was not particularly high.
However, coupled with the wife’s testimony that the husband spent hours researching his options and was preoccupied with growing the account, the Court of Appeals agreed with the trial court that the husband exerted significant personal efforts over the portfolio.
Although the Court of Appeals did not make a final determination on the property’s classification, David illustrates just one of the potential hurdles parties face in equitable distribution.
Equitable distribution cases are often quite complex and fact-specific. Representation by an experienced divorce attorney is essential. The experienced divorce lawyers at Livesay & Myers, P.C. can guide you through every step of the divorce process. Contact us to schedule a consultation today.