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New York Appellate Court denies separate property credit for marital home

Every few weeks it seems there is a new decision by a New York court, trial or appellate level, that speaks to the importance of obtaining a prenuptial agreement before marriage. Last month, in Klauer v. Abeliovich, the First Department (which handles mid-level appeals from Manhattan trial courts) issued just such a decision.

First, some background on how property division traditionally occurs in New York divorces. There are two kinds of property at issue in a marital dissolution: separate property, and marital property. Separate property is defined fairly narrowly – a few specific types of property, like inheritance or personal injury awards, are separate property, as is any property existing before you married your spouse. Importantly, separate property may not be divided or apportioned by a divorce court – it is owned by one spouse alone.

Marital property, on the other hand, is fully subject to division by a court, and it is defined broadly, to give power to the idea that marriage is, at its base, an economic partnership between two people. Anything earned by or accruing to either spouse during a marriage is marital property (with the specific exceptions noted above). If something is tagged as being marital, guess what? Regardless of which spouse earned it, bought it, or paid for it, it is getting divvied up by the court.

As you might imagine, fights happen between divorcing spouses over whether a property counts as “separate” or “marital.” This largely occurs because separate property can become marital if certain steps are taken. For example, if you have a bank account with a million dollars in it before you get married, then during the marriage, you deposit your paycheck into that account while also deducting household expenses – you may very well have just turned your million dollar pot into a marital one, and it is getting divided up in your divorce. Whoops!

This brings us to prenups. Of course, in a prenuptial agreement, couples are free to divide up property as they see fit, regardless of whether it is marital or separate and regardless of what the law says – that’s the whole purpose of a prenup. But even absent such an agreement, there are a few mechanisms in the law that allow a spouse to try and reclaim funds that are, if strict definitions are being applied, “marital.”

One of these mechanisms is the so-called “separate property credit.” Here’s how it works: if you take a million dollars of separate property money and use it as a down payment for a home purchased during a marriage, you can get that money back in a divorce, even if you decided to title the home in the names of both spouses. Get it? You get a million dollar “credit” for the funds you put in.

Which brings us, finally, to Klauer v. Abeliovich. In that decision, which you can read in its entirety here, the First Department declined to award the wife a requested credit for the million-plus dollars of apparent separate property funds she invested in a co-op on Fifth Avenue purchased during the marriage, and in the names of both spouses.

I know what you’re thinking. “But you just went on this long explanation about how you can get your money back when you use it buy marital real estate!” And that’s true. But the courts have discretion. Perhaps more surprisingly, the wife here actually won at the trial court level – she was awarded a credit of $350,000 for the down payment on the co-op. But the Appellate Division of the First Department felt differently and took that credit back, citing the idea, previously mentioned, that “[m]arriage is an economic partnership” and that “economic decisions made by parties in an intact marriage should be respected[.]”

What’s the lesson here? If there is any doubt about whether the money you enter a marriage with will stay your money, get a prenup. The court system is unpredictable, and it’s too risky to rely on things like “separate property credits” when at the end of the day, the whims of one judge could cost you hundreds of thousands of dollars. Read more about prenups here, and if you are interested in speaking to a family lawyer about the process of obtaining one, contact our firm at this link.

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