Are pre-marital assets treated differently to marital assets during property settlement?
In brief — How pre-marital assets are treated
A pre-marital asset will be considered to be a contribution of the person who bought that asset into the marriage.
Dividing the assets after separation
After separation, the parties to a relationship are entitled to seek a division of assets of the relationship. The assets of the relationship include all assets held jointly or individually, whether they are acquired prior, during or after the relationship. It does not matter which partner paid for the asset or from where they obtained the funds.
When considering the division of assets of a relationship, a court is required to undertake the four steps set out below.
Determining the asset pool
The court determines the asset pool by taking the value of all of the assets of the parties held jointly and individually and deducting the value of the liabilities of the parties. There is sometimes an argument about whether certain liabilities should be included, but on the whole, all liabilities are included. It is the net value (assets minus liabilities) which is said to make up the property pool for division.
Determining the contribution of both parties
When considering the division of assets, the court considers the contribution of both parties. It takes into account such considerations as who was the primary caregiver of the children, who was the primary financial provider, did one party renovate the property, who did the greater share of the cooking, cleaning, gardening and so forth. The court also takes into account any indirect financial contributions through gifts or inheritances from family or friends.
Factors affecting each of the parties in the future
The court considers factors that will affect each party in the future, for example, the future earning capacity of each party, the health of the parties, the age of the parties and any future caring responsibilities either party may have.
Fair and equitable orders
The court will consider the effect of the proposed orders on both parties. The court will take into account the length of the marriage and all of the factors outlined above to determine whether the proposed orders are fair, taking into account all of the circumstances of the relationship.
Pre-marital assets and the erosion principle
A pre-marital asset will be considered to be a contribution of the person who bought that asset into the marriage. There is a principle in law known as the erosion principle, which means that over time the value of the initial contribution reduces and the contribution of the other person increases.
This is particularly the case if the person who did not bring the asset into the relationship contributes directly to the asset in question. This means that a contribution of a pre-marital asset in a short marriage will have more influence than in a long marriage. Naturally this will depend on the dollar value of the asset at the commencement of the marriage, for example, the contribution of a property with an equity of $1,000,000 at the commencement of the marriage will be considered a greater contribution than a property with an equity of $40,000.
It is also relevant to consider whether a pre-marital asset has had little or no call on the joint assets of the marriage. For example, if the property was producing a positive income (no marital funds used to top up the mortgage) from rental income, this asset may be considered as a major contribution of one party alone.
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