Alabama Property Distribution Laws

In Alabama, the property and debt issues are typically settle between the parties by a signed Marital Settlement Agreement or if the parties cannot agree, the property is divided by the Circuit Court within the Judgment of Divorce. Alabama Property Distribution Law requires an “equitable distribution” of marital property. This system attempts to divide the property, assets and debts between the spouses in a fair and equitable way. This does not mean equal. The trial court will divide the marital property based upon the particular facts and circumstances of each case.

In dividing the property, the court first categorizes property as marital or separate assets, then assigns a monetary value for each piece of property, and finally distributes the property between the spouses.

Alabama Marital Property v. Separate Property: Typically, anything acquired from the date of the marriage through the date of separation is considered a marital asset and will be included in the “marital estate”. Separate property can include property each spouse had before the marriage or acquired during the marriage by gift or inheritance. In order to establish that something is separate property, it must have stayed within the exclusive ownership and control of the spouse claiming the separate property. If such property has been combined with joint property for the benefit of both spouses, it may be included as a marital asset.

What is Property? In Alabama, property, for the purposes of divorce and equitable distribution, can be more than just what a couple owns. In addition to the obvious things like houses, automobiles, jewelry, clothes and bank accounts, property also includes pensions and retirement accounts, investments, cash value of life insurance policies, family owned businesses, tax refunds, tax credits, trademarks, etc.

• The length of the marriage
• Any prior marriage of either party
• The age, health, station, income, vocational skills, employability, estates, liabilities and needs of each party
• The contribution by one party to the education, training or increased earning power of the other party
• The opportunity of the parties to acquire future income and assets
• Sources of income, including medical, retirement, insurance or other benefits
• The services of each party as a parent, wage earner or homemaker
• The value of the property set apart to each party
• The standard of living the parties established during the marriage
• The tax consequences of the distribution
• With whom the children will reside the majority of the time

The Family Home:  In Alabama, the equity in the marital home is often one of the biggest assets to divide between the parties. This equity is established by determining what the current market value of the home is at the time of separation. A paid real estate appraisal can be done, or a real estate agent can prepare a market analysis for free. Once the parties have agreed to a current market value, any debts associated with the property are deducted (mortgage, taxes, home equity loans, etc) from the market value to arrive at the equity to be divided.

Three basic options exist with regard to how to divide this equity:

• The parties may sell the home and divide the proceeds (after paying off the mortgage and the costs of the sale such as real estate brokers, taxes, and attorneys fees);
• One of the parties may refinance the home and “buy out” the other party, paying the other party their share of the equity, or relinquishing their share of another asset (perhaps a retirement account or pension) of similar value in exchange for that spouse’s share of equity; or
• One party (usually the custodial parent) may remain in the home with the exclusive “use and possession” for a certain period of time (for example, until the youngest child graduates from high school), then either buy out the other spouse or sell the home and divide the proceeds. This option is more complicated due to issues such as who pays for repairs, valuation of the proceeds based upon the value at the time of divorce or at the time of sale, and the remaining financial liability of the spouse who leaves, but is still liable for the mortgage.

Family Owned Businesses or Self-Employed Spouses: In Alabama, if one or both of the parties owns a business, or part of a business, this is a marital asset to be divided. The spouse who actually runs the business will generally be awarded the business, while the other spouse receives other assets in exchange.

Valuation of a business can be complicated. A closely held business does not have a readily ascertained value, as a business on the stock exchange would. If the business is large enough, it may be worthwhile to hire experts such as accountants and business consultants to evaluate the business. If the business is smaller or does not have any significant positive value, it may not be worth the expense to pinpoint a value.

In assessing the value of a business it is helpful to consider financial statements of the business (identifying the business’s assets, liabilities, income and expenses), tax returns and checking account records, loan applications made by the business, any recent offers to buy the business, and any purchase prices of similar businesses of a similar size.

Pensions and Retirement Accounts: In Alabama, the court may include the retirement benefits and plans earned by both spouses as marital assets available for division. Retirement benefits vary greatly but can generally be divided into two groups:

• Defined Contribution Plans: A defined amount of money belonging to the employee in which the employee and/or the employer makes defined contributions. The balance of the plan is constantly changing, but its value is definable at any given point. 401(k)’s, 403(b)’s and profit sharing plans fall into this category.
• Defined Benefit Plans: An undefined retirement benefit where an employer makes a promise to pay a benefit to an employer sometime in the future, based upon some type of formula. This formula is usually based on the employee’s salary near the end of his or her career and the number of years the employee worked for the employer before retirement. Defined benefit plans are much more complicated to value and often require the professional evaluation of an actuary to determine exact values.

• The spouse owning the benefits must be vested in them or be receiving them on the date the divorce is filed;
• The parties must have been married for ten years, during which the benefits were being accumulated;
• Any retirement benefits earned prior to the marriage must be excluded;
• The total benefit extended to the non-covered spouse must not exceed half the benefit to be considered;
• The payout to the non-covered spouse may not begin until the covered spouse begins receiving benefits or reaches age 65 whichever comes first.

Qualified Domestic Relations Order (QDRO): In Alabama, if spouses agree to or are awarded a share in each other’s retirement or pension plan, a Qualified Domestic Relations Order must be completed. A QDRO (“qua’ dro”) is a written set of instructions that explains to a plan administrator that two parties are dividing pension benefits due to equitable distribution. The instructions set forth a method for the plan administrator to determine how much of the benefits are to be paid to each party, when such benefits can be paid, how such benefits should be paid, etc.

The division of retirement and pension benefits can be complicated and result in a myriad of tax consequences. Consultation with a tax attorney or accountant is recommended when determining whether and how to divide such benefits.

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