I have a family member who is separated. Before the separation, this person purchased a house with the deed only in her name and the deed of trust in both names. How will the courts view this property for equitable distribution? My family member thinks that since the property is only in her name that the other party has no rights under equitable distribution. Can you explain the difference between Deed and Deed of Trust?
This is a very interesting and quite technical question. So, thank you for writing. I’ll start first with the definitions of deed and deed of trust.
A deed is the ownership or title documents; by analogy, your car title is a title document for a car like a deed is the title document to your home. Thus, the deed states who owns the home, and generally on the deed the owner is referred to as the grantee. This ownership document (deed) is registered at the Register of Deeds.
A deed of trust is the security for the debt or Promissory Note. When you buy a home or get an equity line on your home, you sign a Promissory Note to the lender. At the time of borrowing, you also sign a document called a deed of trust as security (a lien); if you do not pay the Promissory Note, the signatures on the deed of trust allow the lender to foreclose on the home and take the home away from you. If you examine the deed of trust, you will notice that the lender is the beneficiary of the deed of trust, and that there is a trustee. It is the trustee that forecloses if the Note is not paid. When the Note is completely paid, the lender is required to cancel the deed of trust on the public record at the Register of Deeds. We are one of about twenty states that use the “deed of trust” system. The majority of states use a “mortgage” system.
Because spouses have marital rights in a home, both spouses must sign the deed of trust generally, so that in the event of failure to pay the Promissory Note, the lender can foreclose or take the property away. Otherwise, even if only one spouse owned the property and that same spouse was the only person on the Promissory Note, the lender would not be able to foreclose because of the marital rights under state law of the other spouse. Therefore, it is customary for both spouses to sign the deed of trust, which is also recorded at the Register of Deeds.
Now, let’s address your particular question concerning equitable distribution. Equitable Distribution classifies property as marital, separate and divisible. In your situation, the house was purchased after marriage and before separation. Marital property, simply stated, is property acquired between the date of marriage and the date of separation, and not acquired as a result of an inheritance, family gift or is not separate or divisible property. Thus, we have to ask the questions of where the down payment came from and where are the payments for the Promissory Note coming from. If the down payment and the Note payments are coming from some source, such as an inheritance or property owned before marriage, there is an argument that the property is separate property. Otherwise, the home you described is classic marital property to be divided in the equitable distribution or property division in the case.
However, this is not the end of the story even if there is some separate property involved. Since there is a deed of trust, there is debt. It is highly likely that this debt was paid, probably monthly, during the marriage. Those debt payments were made up of interest and principal. To the extent the debt was reduced during the marriage out of earnings made during the marriage, that debt reduction amount can be divided in equitable distribution. For example, if the debt went from $100,000 to $76,000, there would be $24,000 of marital property to divide at equitable distribution.
Further, even if separate, did the home appreciate during the marriage? If so, the $24,000 would also be entitled to appreciation proportionate to the overall appreciation of the home.
There may also be other factors to consider, such as the following: Were there improvements or renovations during the marriage? Does the non-owner spouse need the home because of custody of the children? Does the non-owner need possession as part of an alimony claim? Consider all of these and good luck to your relative.
Thanks for the question. If you have more facts on the source of the down payment and the monthly payments, please feel free to write again.
This blog is revised from a previous Ask Carolyn in The Rhino Times.