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Often times, the issue of whether pre-marital, gifted or inherited assets are separate property will arise in divorce actions. While the spouse claiming that it is separate property will argue that there is no issue since the asset is only in his/her name, the analysis simply does not end there.

The most common example that may arise in a divorce action is where a non-owner spouse argues that the marital home that was either acquired before the marriage or inherited or gifted to the other spouse during the marriage, is now subject to equitable distribution.

Generally, assets which are acquired prior to the marriage, or assets which were gifted to one spouse or inherited by one spouse during the marriage, are considered separate property. However, there are exceptions to this general rule.

Typically, issues arise where the value of the separate asset has increased over time. In order to evaluate whether the asset has maintained its separate character, a determination of whether the asset’s appreciation was “active” or “passive” must be made.

Passive assets are generally those assets whose appreciation is based solely on market conditions. On the other hand, active assets are those which appreciate due to the contributions or efforts of one party.

Passive assets which were acquired prior to the marriage or by gift or inheritance during the marriage are not subject to equitable distribution in a divorce action.

The analysis of pre-marital active assets or active assets that were acquired by gift or inheritance is not that simple. If the asset’s appreciation was brought about solely by the efforts of the owner spouse, it is not subject to distribution. On the other hand, where the asset appreciates, in whole or in part, due to the efforts of the non-owner spouse, the appreciation is subject to distribution. Common examples of the active asset whose appreciation is subject to distribution are where the non-owner spouse pays down the mortgage or the non-owner spouse contributes in some way to renovations to the house which increase its value.

Further, separate property can be “transmuted” into marital property, which will be subject to equitable distribution in the event of a divorce. If the spouse owning the asset represents to the non-owing spouse that the separate asset will be shared or takes some action to share the asset, such as depositing separate funds into a jointly owned account, the separate asset may then become marital property.

Therefore, it is important for parties intending to keep separate property separate, to be aware of the various factors which can affect the asset’s ownership in the event of a divorce.