Today we pick up on the topic of division of property in Nebraska divorce. The legal standard for property division is equitable division, meaning if the parties cannot come to an agreement about how to divide their marital property, the judge must make a division based on reasonableness and fairness under the circumstances.
But, before the judge gets to that point, they must classify all property as either marital or nonmarital, also called separate. Broadly and with narrow exception, all property acquired during the marriage by either party or together is marital – unless it is separate. Separate property is owned by one spouse before marriage or received by gift or inheritance as an individual.
States like Nebraska that divide property into marital and nonmarital and then split the marital, leaving the nonmarital for the individual owners, are called dual classification jurisdictions.
That may sound easy enough, but it gets complicated. What happens when during the marriage, nonmarital property generates income or appreciates in value?
Nebraska Supreme Court holding in Stephens v. Stephens
The Nebraska Supreme Court decided an important case on these topics in 2017 called Stephens v. Stephens, involving a nonmarital business the husband established before marriage with a business partner. The issue was whether appreciation in value of the business was marital or nonmarital.
The court, changing previous case law, held that “appreciation or income of a nonmarital asset during the marriage is marital insofar as it was caused by the efforts of either spouse or both spouses.” Appreciation, meaning an increase in value, that grows because of spousal effort is called active appreciation.
If active spousal contributions do not cause the appreciation, it is called passive appreciation. The court said that if one spouse claims appreciation is active because of spousal effort so that it should be marital, the other spouse, usually the one owning the asset separately has the burden of showing instead that the appreciation was passive and therefore not marital. This is fairer because they have access to better evidence about their own asset.
Further, Nebraska courts are to presume appreciation or income from a nonmarital asset to be marital, unless the spouse challenging this classification can prove it is nonmarital.
To show appreciation was passive, the Supreme Court explained that the party must show that the “direct or indirect efforts” of neither one of the spouses caused it – that it was caused by “separate contributions and nonmarital forces.”
In the Stephens case, the husband actively contributed to the increase in value as founder and president who worked full time for the company for all of the marriage of 25 years. “First-tier management” are responsible for increasing value through their contributions. Sometimes, even just a manager’s presence may be enough to drive appreciation because of the goodwill they generate for the company.
Same analysis when a nonmarital asset generates income during marriage
The Supreme Court also said that income from a nonmarital asset should be subject to the same active-passive test as appreciation. Such income might be rental income from a nonmarital building, for example. The court explained that both income and appreciation are ways the “property generates value,” but one is added value and the other a new asset.
Finally, the Stephens court left open the possibility that in a unique or extreme case, a Nebraska court might be allowed to consider nonmarital property when designing an equitable division of the marital estate, but that it would be “an extraordinary recourse.”