An Overview of How the Schmitz Formula Applies to Nonmarital Claims to Real Estate in Minnesota Divorces
Marital and nonmarital property are divided between divorcing spouses according to different sets of rules in Minnesota. Some types of property can have both marital and nonmarital characteristics. Consider, for example, a piece of real estate that one spouse purchased prior to marriage. If it is purchased outright and remains in only one spouse’s name, that asset is likely a nonmarital assets. Alternatively, if that real estate is encumbered by a mortgage or some other lien that is paid off regularly over a period of time while the marriage remains intact, at least a portion of the value of that real estate may be treated as a marital asset. Since at least the 1980’s, Minnesota has applied the Schmitz formula to allocate the marital and nonmarital values of that asset.
The Schmitz formula is nothing more than a simplified model that establishes a spouse’s nonmarital interest in an asset that was subject to payments during a marriage. The formula first establishes a ratio of the equity that one spouse owned in the asset over its market value immediately prior to the marriage. If, for example, a spouse made a $20,000 deposit on a house that was valued at $100,000 prior to the marriage, the applicable Schmitz formula ratio is 0.2, and the nonmarital claim in that asset is 20% of its value.
If the value of the house appreciates over the course of the marriage such that its value at the time of a divorce is $200,000, the souse that originally purchased the house prior to the marriage can continue to claim a nonmarital interest of 20%, which in this case translates to a $40,000 nonmarital interest. Any remaining equity in the house is then deemed to be a marital claim that is divided in the Minnesota divorce’s property settlement.
Awareness of how the Schmitz formula works will allow spouses a better opportunity to plan and to understand their finances at the outset of a marriage. In particular, spouses should consider the following:
–Maintain all purchase records for assets that are brought into a marriage.
The Schmitz formula looks at equity and the value of asset prior to the marriage. Spouses that do not keep accurate records of asset purchases will need to re-create those values and purchase transactions in order to successfully apply the Schmitz formula and to protect their nonmarital claims. Re-creating transaction and purchase records many years after a transaction can be difficult or nearly impossible without actual records.
-Be wary of refinancings and second mortgages.
A spouse who refinances property that is brought into a marriage risks losing any nonmarital claim that he or she may have in that asset. New debts, particularly if those debts apply to the full value of an asset, can erase all nonmarital aspects of an asset.
-Capital improvements may erode a nonmarital interest.
The Schmitz formula’s simplicity makes no room for consideration of capital improvements made during the course of a marriage, regardless of how those improvements are financed. Improvements that increase the value of a real estate holding can erode the separate value of a spouse’s nonmarital claim. This does not mean that a spouse should avoid making capital improvements. Rather, that spouse may not be able to retain the full value of those improvements in the event of a later divorce.
The Schmitz formula is far from perfect and its critics argue that its limitations exceed its benefits. Nonetheless, until Minnesota divorce courts determine to refine the formula, it is the State’s law and it will apply to nonmarital claims in real estate and similar assets during the property settlement in a divorce. The attorneys at Gilbert Alden PLLC have experience in applying the Schmitz formula to protect their clients nonmarital claims in a divorce. Please contact us to schedule a consultation on how we can help you to protect your own claims if you are considering filing for divorce.