In a prior post, we discussed how property is classified between "Marital Separate Property" and "Marital Partnership Property" ("MPP") in Hawaii during a divorce. In this post, we will review how MPP is categorized and distributed.
In Hawaii, it is important to note that Hawaii Revised Statutes Section 580-47(a) affords the family court wide discretion when dividing MPP. The Hawaii Supreme Court has espoused using business partnership principles as guidance when divvying up MPP and, therefore, treats a marriage like a business partnership. While the Hawaii Supreme Court has recognized that "there is no fixed rule regarding property division other than what is provided in Hawaii Revised Statutes Section 580-47", the family court may use something called the Marital Partnership Model, which is based on the Hawaii Uniform Partnership Act, as guidance.
As a result, MPP in a divorce is placed into one of five categories and where a piece of property is placed will generally determine how the property is ultimately distributed. Remember, these are only general guidelines and there is no guarantee of a 50/50 split. The court has the discretion and equitable authority to divide MPP as it sees fit. The following are the categories established by case law in Hawaii:
Category 1: The net market value [NMV], plus or minus, of all property separately owned by one spouse on the date of marriage, but excluding the NMV attributable to property that is subsequently legally gifted by the owner to the other spouse, to both spouses, or a third party.
What this means: Hopefully, 100% of premarital property owned by each spouse will be returned to the respective parties. The NMV is determined at the date of marriage.
Category 2: The increase in the NMV of all property whose NMV on the date of marriage is included in Category 1 and that the owner separately owns continuously from the date of marriage to the date of the conclusion of the evidentiary part of the trial [DOCOEPOT].
What this means: Appreciation from all Category 1 property will likely be divided between the two parties with a 50% cap for non-owner spouse. NMV determined at date of divorce.
Category 3: The date of acquisition NMV, plus or minus, of property separately acquired by gift or inheritance during the marriage but excluding the NMV attributable to property that is subsequently legally gifted by the owner to the other spouse, to both spouses, or to a third party.
What this means: Hopefully, 100% of gifts and inheritances acquired during marriage that weren't separated are distributed to back to the owner-spouse. NMV is date of acquisition.
Category 4: The increase in the NMV of all property whose NMV on the date of acquisition during the marriage is included in Category 3 and that the owner separately owns continuously from the date of acquisition to the DOCOEPOT.
What this means: Appreciation of Category 3 property will likely be divided between the two parties with a 50% cap for the non-owner spouse. NMV is determined at the date of divorce.
Category 5: The difference between the NMVs, plus or minus, of all property owned by one or both of the spouses on the DOCOEPOT minus the NMVs, plus or minus, includable in categories 1,2, 3, and 4.
What this means: This is basically the catch-all category where the "leftover" property goes. Usually this includes joint marital property and all jointly and separately owned property purchased with marital funds or resulting from marital efforts.
Categories 1 and 3 are considered the parties' "capital contributions" to the marriage/partnership and according to partnership law, are likely to be returned to the respective parties. Categories 2 and 4 are "during the marriage increase in NMVs of Categories 1 and 3 properties" and are considered "partnership profits" to be generally shared equally.
The Supreme Court of Hawaii has stated that "if there is no agreement between the husband and wife defining the respective property interests, partnership principles dictate equal division of the marital estate where the only facts proved are the marriage itself and the existence of jointly owned property."
Having a valid premarital or post-nuptial agreement can help protect each parties' personal assets (and their appreciation during the marriage) by qualifying them as Marital Separate Property and also provide a framework for how MPP will be divided and distributed in event of a divorce.
Though statistics vary, it is generally thought that around 30-40% of marriages in the U.S. end in divorce. Obviously people don't get married with the goal of legally separating in the future, it is a possibility that should be considered. For those who are already married or couples contemplating marriage, understanding how property is divided and distributed in a divorce in Hawaii is an integral part of estate planning.
In this post, we will review how property is categorized and divided by the court during a divorce. In Hussey v. Hussey (1994), the Hawaii Intermediate Court of Appeals provided three classifications of property, which are as follows:
Premarital Separate Property: This is property owned by each spouse prior to their marriage/cohabitation. When two people marry, this property becomes either "Marital Separate Property" or "Marital Partnership Property".
Marital Separate Property: This property is owned by one or both of the spouses at the time of divorce and can be described as follows.
A. All property that was excluded from the marital partnership by an agreement in conformity with the Hawaii Uniform Premarital Agreement Act.
B. All property that was excluded from the marital partnership by a valid contract, such as a post-nuptial agreement.
C. All property that...
1. Was acquired by the spouse-owner during the marriage by gift or inheritance,
2. Was expressly classified by the donee/heir-spouse-owner as his or her separate property; AND
3. After acquisition, was maintained by itself and/or sources other than one or both of the spouses and funded by sources other than marital partnership income or property.
Marital Partnership Property: All property that is not Marital Separate Property.
These classifications are important to understand because they are the starting point in determining what property is available to be divided between the spouses. Marital Partnership Property is the property is available to be divided and distributed between the spouses at the discretion of the court.
On the other hand, Marital Separate Property cannot be distributed to the non-owner spouse or used to "offset" any award of Marital Partnership Property to the other spouse. It has, in effect, been excluded from the marital partnership. However, the court may take into consideration the amount of Marital Separate Property each spouse has and "alter" the final distribution of the Marital Partnership Property based on the "respective separate conditions of the spouses." This is within the court's discretion and equitable powers.
For soon-to-be wed or married couples, understanding how property is classified in divorce proceedings highlights the importance of having a premarital agreement or post-nuptial agreement so that Marital Separate Property is clearly defined.
For gifts and inheritances to be classified as Marital Separate Property all the above-mentioned conditions must be met. If a spouse does not expressly state the gift or inheritance is separate property or uses marital assets or efforts to maintain the gift or inheritance, that gift or inheritance will be likely be classified as Marital Partnership Property and divided accordingly.
HB 2623 amends Hawaii Revised Statutes Section 509-2 and extends Tenancy by the Entirety Creditor Protection to Trusts in Hawaii
Among the many bills that were considered and passed in the 2012 Hawaii legislative session was a law that would allow spouses and reciprocal beneficiaries (RBs) to place real property in a trust AND be extended the creditor protection afforded by holding property as tenants by the entirety. Thus, spouses and RBs may preserve their creditor protection while taking advantage of the benefits of placing their real property into a trust.
For those unfamiliar with the concept of tenancy by the entirety, it is a form of concurrent property ownership. The other types are tenants in common and joint tenancy. Tenancy by the entirety is a form of ownership that is available only to spouses or reciprocal beneficiaries. The main benefit of holding property as tenants by the entirety is that a creditor of an individual spouse or RB cannot attach and sell the real property interest of the debtor spouse. However, this creditor protection is not available against a couple's joint creditors.
In the 2012 legislative session, HB 2623 added a few new subsections to Hawaii Revised Statutes Section 509-2. Prior to this bill passing and being signed into law, two people who held real property as tenants by the entirety and wanted to create separate trusts would need to break the tenancy by the entirety ownership and convey their interests into their respective trusts as tenants in common, thereby losing the creditor protection. However, HB 2623 now states that real property held by spouses or RBs in equal shares as tenants in common in their respective trusts shall be treated as if the real property (or its proceeds) are held as tenants by the entirety.
These new additions to Hawaii Revised Statutes Section 509-2 states that this creditor protection shall continue even after first of the couple passes away. This is also true if a court in any proper jurisdiction holds a trust to be invalid while the couple is still alive. Of course, if spouses divorce or reciprocal beneficiaries terminate their legal relationship, the tenancy by the entirety is severed and the real property will be held as tenants in common.
To gain the creditor protection for real property held in trust, certain requirements must be met and specific language needs to be inserted into the conveyance deed. In general, holding real property in tenancy by the entirety is preferable, but of course, it depends on the situation and as well as future considerations. Consult with an attorney to explore whether this extension of tenancy by the entirety for Hawaii trusts is right for you.
Samuel K.L. Suen is an attorney based in Honolulu, Hawaii specializing in estate planning, probate, conservatorship and guardianship matters.
DISCLAIMER: All content and information is provided by The Law Office of Samuel K.L. Suen, LLLC and is for general informational and discussion purposes only and does not constitute legal advice. Transmission of this information is not intended to create, and receipt does not constitute, a formation of an attorney-client relationship. The information presented at this site is believed to be accurate when made, but may not be complete, is not updated, reviewed or revised on a regular basis. No representations or warranties whatsoever, express or implied, are given as to the accuracy, applicability or validity of the information contained herein. The information may be modified or rendered incorrect by future legislative or judicial developments and may not be applicable to any individual reader's facts and circumstances. You should not act or rely on this information without consulting with a licensed attorney.
To ensure compliance with requirements imposed by the IRS, please note that any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained herein.
Copyright © 2019 Law Office of Samuel K.L. Suen, A Limited Liability Law Company. All Rights Reserved.