Colorado is an equitable distribution state and property division is therefore divided “equitably” or “fairly” rather than “equally.” Property division occurs at permanent orders, which is typically the final hearing in your case. The judge will look at several factors to determine how to “fairly” divide your assets and then choose who gets what.
Read on to learn more about everything the judge will look at and how they determine what is “fair.”
Basic Property Division Concepts
Colorado courts are required to divide marital property equitably, which simply means “fairly.” The term “equitable” does not mean “equal,” it means “fair.” Because of this, a Colorado court does not need to divide your assets in half—they can actually divide them 60%/40% or in some other manner, depending on the circumstances.
Most importantly, Colorado courts may not consider “marital fault” in deciding how to divide the assets. The term “marital fault” generally means wrongdoing that caused the divorce such as an affair, lying, or being abusive. While these factors may affect parenting, they are not allowed to be considered in dividing property. The judge will instead look at the following factors:
- The contribution of each spouse to the acquisition of the marital property, including the contribution of a spouse as homemaker;
- The value of the property set apart to each spouse;
- The economic circumstances of each spouse at the time the division of property is to become effective; and,
- Any increases or decreases in the value of the separate property of the spouse during the marriage or the depletion of the separate property for marital purposes.
In most cases, the contributions of both parties are equal. The statute specifically instructs courts to consider the “contribution of a spouse as a homemaker” and Colorado judges will often treat the spouse’s contributions as having been equal. However, courts have great latitude to make an equitable distribution of property based on the facts of each case.
You may be wondering at this point, if the court is simply going to consider everyone’s contributions equal and divide the marital estate in half, what is there to argue about? As a short answer, lots.
The judge may only divide “marital property” and must set aside each party’s “separate property.” Because of this, many arguments relate to what is marital and what is separate. Other arguments relate to the valuation of each piece of property and the allocation of that property to each spouse. For example, one spouse may own a business that they believe is worth very little, whereas the other spouse may believe it is worth millions. Moreover, both spouses might agree to a 50/50 division, but disagree as to who gets what, such as the marital home.
Read on to learn some of the more advanced concepts:
Marital vs. Separate Property
In general, marital property is all property acquired after the parties were married. Separate property is all property acquired before the parties were married or any property gifted to either party during the marriage or any property inherited by either party during the marriage. Because the court only divides marital property and not separate property, what is marital and what is separate is important.
The decision about what is marital and what is separate can have a huge impact on your case. For example, suppose a couple has $200,000 in marital property but one spouse has $100,000 in separate property as well. Assuming a 50/50 division, the spouse with separate property will be allocated their $100,000 in separate property as well as half of the marital estate—another $100,000. In this circumstance, although the division of marital assets is 50/50, one spouse is taking $100,000 from the marriage and the other spouse is taking $200,000.
The statute (C.R.S. § 14–10–113) categorizes separate property as follows:
(2) For purposes of this article only, and subject to the provisions of subsection (7) of this section, “marital property” means all property acquired by either spouse subsequent to the marriage except:
- Property acquired by gift, bequest, devise, or descent;
- Property acquired in exchange for property acquired prior to the marriage or in exchange for property acquired by gift, bequest, devise, or descent;
- Property acquired by a spouse after a decree of legal separation; and
- Property excluded by valid agreement of the parties.
To simplify this list a bit, almost all separate property is either of two things:
Property inherited by a spouse before or during the marriage (often from a family member who passes); and,
Property acquired before the marriage (stuff the person owned before they got married).
Appreciation on Separate Property is Marital Property
The rule on separate property is subject to an enormous exception—appreciation (something else that attorneys often argue about). Under Colorado law, appreciation on separate property is marital property. The statute (C.R.S. § 14–10–113(4)) states:
Subject to the provisions of subsection (7) of this section, an asset of a spouse acquired prior to the marriage or in accordance with subsection (2)(a) or (2)(b) of this section shall be considered as marital property, for purposes of this article only, to the extent that its present value exceeds its value at the time of the marriage or at the time of acquisition if acquired after the marriage.
Under this rule, suppose that a stock account is owned at the time of marriage and it is worth $1,000,000. Suppose that the marriage lasts for 20 years and the stock account is worth $4,500,000 after that amount of time. Only the initial $1,000,000 is separate property and the rest is all marital (subject to some nuanced legal arguments and rules).
“Tracing” Separate Property
The general rule is that property is presumed to be marital. Another general rule is that the party asserting that property is separate has the burden of proving that it is separate. A final rule is that property that is titled in both spouses’ name is considered to be marital and where a party transfers their separate property into a marital account, it will be considered marital property (as a so-called “gift to the marriage”). All of these general rules have exceptions, but in general, these rules give rise to a concept called “tracing.”
Tracing is an accounting term that describes the process of “tracing” a separate asset as it changes form and amount over time. Going back to the $1,000,000 stock account above, what if that account was sold and the proceeds were used to purchase a piece of real estate—is the piece of real estate separate? What if the account went from $1,000,000 down to $750,000 and then it was sold to purchase a piece of real estate? What about the opposite? What if it went up and then it was sold to purchase a piece of real estate? Even more complex, what if the stock account was sold to buy ten different pieces of real estate, some of which were then sold over the years?
Because the party asserting that they have separate property has the burden of proving that it is separate, the party who has this account must “trace” the flow of the money over time. In the example where the stock account is sold and ten different pieces of real estate were purchased, such a scenario would keep an accountant very busy. Although this introductory guide cannot cover all aspects of tracing and how it works, understanding the general concept is helpful and you should consult with an attorney about the specifics of your case.
Important Tip: Income on Separate Property
Even where property is separate, Colorado treats the income generated from separate property as marital. This often arises with rental real estate or stock accounts. The real estate may be separate, but the rental income is marital.
Dividing Marital Property
Once the court decides what is marital and separate property, it will divide the marital property equitably. In general, most courts will divide the marital property in half. However, courts are instructed to review the “economic circumstances” of each spouse. In most cases, the spouse’s economic circumstances are exactly the same because everything is marital property. However, in cases where one spouse is allocated substantial separate property, that spouse may have greater “economic circumstances.”
Take the example above. If there is $200,000 in marital property and $100,000 in separate property, one spouse will take far more property than the other. Also consider that one spouse may earn far more money than the other and maintenance may not account for the entire difference. Where one spouse has much greater “economic circumstances,” the judge may consider dividing the marital property in a 60%/40% fashion.
Using the example above, $100,000 in separate property would go to that spouse and then the judge would divide the remaining $200,000 with $120,000 going to the spouse with no separate property and the remaining $80,000 going to the spouse with separate property. The ultimate division is then $180,000 to $120,000.
There are very few cases that explain how a Colorado judge ought to consider the “economic circumstances” of the parties and courts are given extremely wide latitude to decide what is “fair.” In most cases, your attorney will argue for a division that is fair and you must simply hope that the judge agrees with you.
Most practicing divorce attorneys use a document called an “Asset/Debt Spreadsheet.” Some attorneys call it a “Property Division Spreadsheet” or something like that. In general, the spreadsheet is an Excel document that identifies the value of each asset as well as who is being allocated that asset. The spreadsheets are used during negotiations, mediation, and even at trial. The spreadsheet will identify every asset, the asset’s value, the supporting documentation, such as bank statements reflecting the value, and the allocation as to who the property goes to.
Some assets will be allocated to one party, some to the other, and some will be split. For example, where the parties agree to sell an asset such as the marital home, it is often “split” because no one knows exactly how much the house will sell for or the precise amount of commissions that will need to be paid at closing. Other assets are allocated to each party, such as a bank account. As a general matter, attorneys try to allocate assets to each party that they already own (i.e. you would get your own bank accounts and stock accounts etc.). This is helpful because it cuts down on the work that must be done afterwards. Rather than transferring a bunch of accounts or splitting things, each party keeps as much of what is in their name as possible.
One common misunderstanding that parties have is with the double-entry bookkeeping system in the asset-debt spreadsheet. In a divorce, you are NOT going to divide each asset in half. Most times this is impossible. One party will get one asset and the other party will get a different asset.
This causes problems in cases where one party believes a certain asset has sentimental value. For example, in cases where a party inherits something, they often believe that it is entirely theirs. But as is explained above, the appreciation on separate property is marital. Nevertheless, some spouses ignore the law and demand that they be allocated what is “theirs.” However, using a double-entry bookkeeping system, everything is divided evenly anyway—even if each spouse receives offsetting assets. That is, the spouse with the inheritance might get to “keep” their inheritance, but the other spouse ends up getting something else in exchange (i.e. one spouse keeps their inheritance, the other keeps the marital home).
Income vs. Assets
Questions often arise about the difference between income and assets. An asset is something that the parties own that has value that is realized upon sale. Income is the money produced by the asset on an ongoing (or semi-ongoing) basis. For example, consider a rental property. The property is an “asset” in that it has value if it were sold. It also has an “income” component in that it produces rental income each month.
The “asset” is considered as part of property division but the “income” is considered as part of maintenance and child support. That is, if you are allocated a rental property in a divorce, it is both an “asset” and “income” to you. Take special care to consider which of your assets are “income-producing,” such as rental properties, stock accounts, oil and gas interests, etc. as these assets affect each party’s income. Indeed, sometimes maintenance can be offset entirely by allocating the lessor-earning spouse income-producing assets such as oil & gas interests or rental properties.
Personal property consists of things like furniture, jewelry, and household goods. In a divorce, these items are essentially valued at “garage sale value,” which is almost nothing. Most attorneys advise clients to divide personal property themselves and “in kind.” The term “in kind” generally means that the items will not be valued and offset like the rest of the assets. One party will take one item, and the other party will take another item and so on and so forth.
In contentious cases, parties can hire a “personal property arbitrator” who will oversee the division of personal property. On some occasions, the parties each bring a moving truck to the marital home and the personal property arbitrator can make decisions on the spot about who gets what.
In general, you do not want to be paying attorneys hundreds or thousands of dollars to argue about who should get what. This is not a valuable use of your money.
Unique Property Division Issues
No-Fault vs. Fault-Based Divorce
A “no-fault divorce” is a divorce where the parties are not required to prove fault whereas a “fault divorce” is where certain “grounds for divorce” need to be proven. In general, Colorado refers to the breakdown of the relationship as a marriage that is “irretrievably broken.” In the old days, parties to a divorce needed to allege one of several “grounds for divorce” such as adultery, cruelty, abandonment, mental illness, and various others. The various “grounds for divorce” are seen as outdated, and Colorado has replaced them with the “no-fault” rule where parties can get divorced at any time for any reason (other states do still have some remaining elements of fault-based divorce).
Because divorces in Colorado are treated this way, each party’s indiscretions during the marriage are irrelevant and are usually not considered by the court. However, Colorado courts make a significant distinction between what they term “marital fault” and “economic fault.” Generally, “marital fault” is the type of fault that is excluded from evidence and includes affairs and other the like. See, e.g., In re Marriage of Jorgenson, 143 P.3d 1169, 1173 (Colo. App. 2006) (“Marital fault or misconduct may not be considered by the trial court when it is dividing the marital assets.”).
“Economic fault,” on the other hand, is where one of the parties engages in behavior that harms the marital estate financially. This type of fault is considered in determining who should get what in the divorce. Where one party committed “economic fault” or “dissipated” money, the Court may award them less and you more. On occasion, such dissipation can be linked to an affair where the spouse purchased an expensive gift for the paramour. In that instance, the money spent on the paramour is “economic fault,” but the fact that the person had an affair is irrelevant and is considered “marital fault.” For some more tips on dealing with cheaters, take a look at our blog on the topic.
Tip: Proving Economic Fault is Very Difficult
Colorado courts will only allocate economic fault to a party in the most extreme cases. As a general matter, stupidity, reckless spending, and gross mismanagement of marital funds is not necessarily a slam dunk for proving economic fault.
If your spouse is spending money on paramours, driving a business into the ground, or spending all of the marital funds on gambling, prostitutes, and drugs then you need to do something about it. Do not rely on the court system to fix the issue months or years later. The best way to preserve your rights is to stop the money from leaving your bank accounts, not to let it happen and then cast blame later. You can do this by (1) filing for divorce and seeking court intervention or (2) speaking to your spouse about the issues and trying to ensure that the money is no longer removed from the accounts.
A contentious issue in high-asset divorces is the valuation of businesses. Why that is can often be explained by the fact that one spouse or the other owns or operates the business. Normally, if assets can be allocated to either party, there is an incentive on both sides to come to a reasonable valuation. If the price is too high or too low then neither side can play any valuation games because they will each just switch the allocation. For example, let’s assume the marital home is worth $600,000, but one side is arguing that it is worth $500,000. The other spouse may simply say, “fine, take the house at that price.” The ability to “switch the allocation” forces people to be a bit more reasonable.
However, with a business, it is often assumed (or required) that the spouse who owns or runs the business will be allocated it. Because of this, the spouse with the business has an incentive to value the business for as little as possible and the other spouse has an incentive to value it as high as possible. Although “how” a business is valued is beyond this introductory guide, suffice it to say that it is complicated, and accountants can come to very different conclusions about how much a business is worth. It is not uncommon to see multimillion-dollar differences in the value of a business in a divorce.
Look at some of our other articles and blogs dealing with the more complex aspects of business valuation.
Retirement Accounts & Investments
Retirement assets are unique for several reasons. These assets are particularly relevant to those of you who are close to or in retirement.
First, these assets must be divided under special rules and using specialized orders and documents. This is because retirement accounts and assets are often strictly regulated under federal law. These include pensions, 401k accounts, and other forms of retirement assets. The specialized orders that are used to transfer these accounts are called “Qualified Domestic Relations Orders” or “QDROs.”
Second, these assets often have “deferred” tax consequences. In general, this means that the taxes are paid at some later date, either when an early withdrawal occurs or when you retire. Many attorneys try to balance the amount of each asset that each spouse is allocated. That is, maybe each person will get some real estate, some cash, some retirement accounts, and some portion of the marital debt.
Third, pensions can be even more complicated. Pensions are “earned” over time. Often, some portion of the pension is earned while the spouses are married but another portion is earned before the marriage. Only the “marital fraction” is marital and the pension may not be divided evenly, but rather in accordance with the number of years that the spouses were married compared to the number of years the pension was accrued. This is called the “time-rule formula” or sometimes the “Hunt formula” after the case that created the rule.
Trusts increase the complexity of any divorce three-fold. As with business interests, a thorough explanation of complex trust law is beyond the scope of this introductory article. However, you should know a few things.
First, trusts often bring outsiders into your divorce. For example, a trust may create a beneficial interest in yourself and your siblings. The same trust may appoint your mother or father as trustee. Because of this, the other beneficiaries (your siblings) and the trustee (one of your parents) may need to be involved in your case. This is often the case where a trust was formed by parents who live out of state and on behalf of several children (one of which is you or your spouse).
Second, trust issues require technical expertise and if trust issues arise in your case, you must hire one of the better divorce attorneys in town. Here’s why: in a divorce, trust issues create a complex intersection of (1) family law, (2) trust law, and (3) accounting, all of which are different disciplines. For example, trust law may dictate the terms of the trust and who is a beneficiary under the trust. Family law may dictate what that status means in a divorce. Accounting principles may dictate the value of that interest and when it must be valued. Making matters more complicated, this analysis may need to be performed at multiple—or many—time periods (date of creation of the trust, date of marriage, and date of divorce). If trusts are at issue in your case, there is absolutely no question that you need to seek legal advice from a very experienced attorney. Do not mess this one up.
Third, trusts are often misunderstood—even by the people who set them up. You may think that a trust works a particular way and be mistaken. Even worse, many trusts are set up in other states where the law is different. The people setting up the trust assume that the only law that matters is the trust law of the state where the trust is created. Wrong. If you are getting divorced in Colorado, then Colorado family law may affect you. The attorneys at Griffiths Law have advised countless families that the trust they thought was protected in a divorce is not indeed protected because Colorado family law is different from the state where the trust was set up.
Common Question: If the trust is created in a separate state and all the assets are elsewhere, what can a Colorado court do about it?
Answer: Many things. Remember, the Colorado court has jurisdiction over you, your spouse, and your entire marital estate. Just because the assets and trust are elsewhere does not mean that the Colorado court cannot either (1) order you to do things, (2) acquire jurisdiction over the trust or trustee, or (3) give your spouse everything BUT the trust assets.
A judge presiding over a dissolution of marriage has enormous power to issue orders forcing people to do things far beyond that of a typical case. Indeed, it often surprises many lawyers who do not practice family law just how much power a domestic relations court has. You do not want to “find out” what a domestic relations court can order you to do.
Learn more about some of the more complex areas of trust law from our blog, “Determining When Trusts are Property for the Purpose of Equitable Division.”
Complex Compensation Packages
Many high-asset and high-income divorces involve executives. These executives often have “executive compensation packages” where they earn their money in a variety of ways. These include restricted stock units (RSUs), stock options, deferred compensation plans, profit sharing agreements, phantom equity awards, among others. These packages can be difficult to understand and difficult to value. Often, the money is “awarded” in one year and “vests” in another, creating a differentiation between when the money is given to the person and when they are entitled to receive it.
Fairly simple executive compensation plans can be examined by attorneys and accountants. However, occasionally you may want to retain an expert in the area of executive compensation to explain why, how, and when an executive will be paid certain amounts. For example, some executives get paid a large sum of money when they leave the company. But what if the executive is about to leave but then starts the process to divorce. The executive has not yet left and has not yet received the exit compensation. However, they are going to.
Another issue can be performance-based compensation. Many executives are paid if and when certain milestones are met. Because divorce can happen at any time, often it is during the middle of a performance period and it is not clear whether the performance milestones will be met. Because of this, it is hard to determine whether certain monies will be earned, how much, and when. An executive compensation expert can assist you in figuring out what portion of the executive compensation package is marital and what its value is.
Property Division Strategy
Central to your case is your strategy on property division. What are the assets and debts of the marital estate? What is the value of each? Which ones have the most value to you? Which ones produce income? Which ones are the easiest to manage? Which ones have tax consequences? Which ones can you only access when you retire?
These questions (and hundreds more) should be considered by you and your attorneys. Depending on the complexity of your case, you may use family law attorneys, trust attorneys, accountants, appraisers, and other experts all to value and assess your property. Using these experts, you will value and assess each item and eventually create an asset/debt spreadsheet that includes every asset and debt you and your spouse have. The spreadsheet will then allocate assets and debts to each party until you have a division that you find to be acceptable.