When a couple divorces, all of the property and assets in the marriage get divided between the couple. If any of the property is considered separate property by Pennsylvania law, that property generally does not get divided. However, in certain Pennsylvania counties, such as Bucks County, when dividing a couple’s assets, a doctrine called the "vanishing credit" is applied to determine whether pre-marital property will get divided. Though not set by statute, this legal doctrine can be applied where there is no clear tracing of nonmarital funds being kept separate from the marital estate for the duration of the marriage.
What is the Vanishing Credit?
The vanishing credit doctrine is a means of calculating the amount of credit for contribution of separate property to the marital estate for purposes of equitable distribution. Put another way, the vanishing credit doctrine calculates the amount a spouse receives for the pre-marital property owned by the other spouse prior to marriage. In Bucks County, non-marital, or “separate” assets and funds slowly become marital assets over the course of the marriage at a rate of 5% per year. Thus, even when there is separate property, the property can become marital property over time.
As we discussed in previous articles, all Bucks County divorce cases involving division of property are first heard in a Master Hearing before a Master. The Master may apply the vanishing credit when assessing separate and marital assets for purposes of equitable distribution.
Let’s examine how this doctrine works in the following example. Prior to marriage, husband has $100,000 in his savings account. Husband uses $50,000 from his savings to put a down payment on the couple’s new home that they purchase immediately after marriage in both the husband and wife’s names. After 10 years, the couple decides to divorce. Husband wants the full value of his contribution to the home, i.e., $50,000, and argues that his contribution is not subject to equitable contribution because it was a separate asset. Wife argues that the value of the down payment was contributed to the marriage, hence a marital asset and subject to equitable distribution.
If the Master finds it appropriate to ally the vanishing credit, the $50,000 husband paid for the house would likely be considered 100% marital since he intentionally converted it by placing the house in both names. Additionally, his $50,000 remaining in the savings account would be reduced by 50% (5% for 10 years), i.e., $25,000. Therefore, the amount that is subject to equitable distribution would be $75,000. The remaining $25,000 would be considered separate property and not subject to equitable distribution.
In some instances, separate property and assets do become 100% marital property. Using the same example above, let’s say the couple decides to divorce more than 20 years later. The amount of money the husband contributed for the down payment of the house becomes a marital asset and the savings account are then 100% marital and no longer separate. It can also become 100% marital property if the party intentionally converts it to marital property by putting it into both parties names (such as the down payment on the house above).
Help for Parties Going Through Divorce in Doylestown and Newtown, Bucks County
Equitable distribution is very complex, and there are exceptions to the vanishing credit. Therefore, it is best to talk to one of our Bucks County divorce lawyers if you are facing divorce.