Whether an asset is exempt is a common issue that arises in divorce case.  The general rule is that an asset acquired prior to the marriage which is not commingled is exempt from equitable distribution.  In addition, an asset that is received via inheritance and/or third party gift is also exempt as long as it is not commingled.  Commingling is essentially putting an asset into joint names or depositing it into a joint account.  Changing something from someones own name into joint names is deemed as making a gift to the marriage.

Also, the law is clear that the person who seeks to have an asset deemed exempt has the burden of proving that the asset is exempt.

Because an engagement ring is a premarital gift, albeit a conditional gift, from one spouse to to the other, it is exempt from equitable distribution.  If the ring is replaced and/or enhanced during the marriage, while the original stone, if it exists, remains exempt, the new ring is not exempt.  In fact, any gifts between spouses during the marriage are not exempt and are subject to equitable distribution on divorce.  As such, some times we are required to have jewelry, furs, and other expensive presents appraised to determine their value for equitable distribution purposes.  Sometimes this task is made a little easier because parties have appraisals for insurance purposes which is why we often ask for the homeowners insurance policy riders.

The premarital portion of retirement assets, i.e. IRAs, 401ks, pensions, are typically exempt. For defined contributions plans (ie. the accounts with cash balances), the trouble may be finding or obtaining the documents to establish the premarital values.  That said, even though the premarital values are often commingled with contributions made during the marriage, the premarital portions are typically exempt.  Contrast that with a regular premarital bank account where deposits are made during the marriage using marital income.  Many would argue that this account has lost it’s exempt status.  Is that fair?  What is the real difference?  Perhaps the difference is that though money will usually go in and out of a bank account, there usually is not the same type of two way activity as to retirement accounts.

Similarly, marital homes owned by one party and never put into joint names often do not receive the treatment that the law would require.  Specifically, there is case law that says that only the principal pay down of the mortgage during the marriage plus the active appreciation (i.e. if the value of the home has been enhanced by capital improvements) is subject to equitable distribution.  That said, I have seen people argue judges state that because it is the marital home, somehow there should be some greater distribution, even if it is not 50-50. 

Note that aside from the retirement assets scenario described above, there is another exception to the commingling rule.  That is, there is a reported decision that says that when someone has temporarily parked an otherwise exempt asset in a joint account only to move it out to an individual account shortly thereafter, the asset will remain exempt.  I had a case where there husband lost his brother at an early age and he received the proceeds of his brother’s life insurance.  Because he was so distraught about the loss, his wife took the insurance check and opened a new, joint account with it.  No other money ever went into or out of the account.  After a trial, the court found that the account was the husband’s exempt property despite being in joint names for about 2 years or so.

To other notes on exemption.  First, even though an exempt asset was converted to a joint asset, that does not mean that it has to be divided equally.  New Jersey remains an equitable distribution state and assets that a party brought into the marriage and source of acquisition of the assets are two factors that must be considered. Second, the better practice to protect premarital assets is to have a prenuptial agreement.  Prenups can be used to preserve premarital assets, even if they are commingled, if the agreement says so.