The “Source Of Funds Theory” And Asset Distribution During A Maryland Divorce

In Maryland, one of the foremost components of a divorce settlement is the equitable distribution of the marital estate. Under Maryland law, all property that belongs to the marital estate must be distributed equitably to both parties pursuant to a divorce. However, determining whether or not an asset belongs to the marital estate can be complicated. What if, for example, a husband pays for a piece of property before getting married? The husband begins developing the land and building a home on it before the marriage begins. However, during the marriage, marital funds are used to pay for the mortgage on the property. Does the property belong to the marital estate or the husband? Under Maryland law, the answer is both.

In 1978, the Maryland legislature passed the Marital Property Act and in 1982, the Maryland Supreme Court traced the history of the act to determine its legislative intent. In its ruling, the Maryland Supreme Court determined that under the Marital Property Act, the right method for determining whether or not an asset belonged to the marital estate was to follow the “source of funds” theory.

What is the source of funds theory?

Under the source of funds theory, a determination as to whether or not an asset belongs to an individual spouse or the marital estate depends on “the source of the contributions as payments are made, rather than the time at which legal or equitable title to or possession of the property is obtained.”

A recent divorce case illustrates this concept in application under the law. In the case, the wife-to-be closed on a home in Maryland. Although she was engaged to be married, the home was titled in her name alone. However, the source of the downpayment on the home came from a savings account that the couple held together. Further, the couple opened a joint checking account together. Both spouses made deposits into the checking account and those funds were used to pay off the mortgage.

After a decade of marriage, the couple separated. During the divorce proceedings, the court determined that the husband was entitled to a monetary award equal to one-half of the equity of the residence. The wife appealed arguing that the trial court wrongfully awarded the husband a monetary award based on equity in a home that she owned separately. The wife contended that the house was non-marital property because she held the title in her name. This argument may have worked under the old system, but under the source of funds theory, the court ruled that the home belonged (at least in part) to the marriage since it was paid for with marital funds.

Talk to a Maryland Family Law Attorney Today 

Schlaich & Thompson, Chartered represent the interests of Maryland residents who are pursuing a divorce. Call our Bel Air family lawyers today to schedule an appointment, and we can begin discussing key elements of your divorce such as equitable distribution, alimony, child custody, and child support.