Protecting What He Built: Donald’s Fight for Fair Recognition

A Narrative Story of White v. White, 521 N.W.2d 874 (Minn. Ct. App. 1994)

Donald White* stared at the divorce papers, his heart sinking as he read Sandra’s demands. After six years of marriage, she wanted half of everything—including the retirement accounts he had been building for over twenty years before they even met. The accounts from his work at United Theological Seminary represented decades of careful planning and sacrifice, yet Sandra claimed she deserved an equal share of all the growth that had occurred during their marriage.

Donald felt overwhelmed by the complexity of dividing assets he had worked so hard to build. His TIAA/CREF retirement plan had grown significantly during their marriage, but much of that growth came from investments he had made long before Sandra entered his life. The thought of losing half of what he had earned through years of dedication and planning filled him with anxiety about his financial future.

The situation became even more stressful when Sandra challenged the court’s initial property settlements. After spending an entire day negotiating agreements with their attorneys, Sandra agreed to the terms in court. Donald felt relieved that they had finally reached a resolution. However, two weeks later, Sandra sent a letter to the judge asking to set aside everything they had agreed upon. Donald watched in frustration as their carefully negotiated settlements were thrown into question, forcing them back into costly legal proceedings.

When the case went to the Court of Appeals, Donald felt cautiously hopeful. He had maintained detailed records showing exactly how much his retirement accounts had grown from his pre-marriage contributions versus the contributions made during their marriage. The evidence clearly demonstrated that a significant portion of the account growth came from his decades of prior investment, not from any efforts during their brief marriage.

The Court of Appeals recognized the fairness of Donald’s position. They understood that while Sandra deserved a share of the marital contributions and growth, she was not entitled to the appreciation that resulted from Donald’s pre-marriage investments. The court distinguished between active contributions made during marriage and passive growth from earlier investments, protecting Donald’s pre-marital financial foundation.

Donald felt a profound sense of validation when the court upheld the trial court’s decision. The ruling gave him confidence that his years of careful financial planning would be respected and protected. He could move forward knowing that his retirement security remained intact, while still ensuring Sandra received her fair share of what they had built together during their marriage.

*This story is based on the true facts of the appellate court’s decision, but the personal experiences and emotions described are a fictional representation to bring the case to life.

Question: If my property that I owned before marriage goes up in value during the marriage, does my spouse get part of that increase?

Answer: Whether your spouse gets part of the increased value depends on what caused the increase. If the increase happened because of work or effort during the marriage, your spouse may get part of it, but if it increased just because of market conditions or inflation, it usually stays yours.

While proving a nonmarital claim based on premarital property, or property acquired by a gift or inheritance, is primarily a matter of meeting the burden of proof, courts have had difficulty applying subpart (c) of the statutory nonmarital property definition. The apparently clear language of the statute providing that property is nonmarital if it is “acquired in exchange for [nonmarital property] or is the increase in value of [nonmarital] property” has been § 518.003, subd. 3b. The continued efforts of appellate courts to redefine what constitutes nonmarital property have made it difficult to predict how property will be treated in the future. Although the Minnesota Supreme Court has attempted to establish examples and define marital and nonmarital increases in value of nonmarital property, see Nardini v. Nardini, 414 N.W.2d 184 (Minn. 1987), as the supreme court moved away from the clear and simple statutory definition, lower courts have found it difficult to identify clear standards to apply in varying fact situations.

Question: What’s the difference between income from my premarital property and the property going up in value?

Answer: Courts treat income (like interest, dividends, or rent) from your premarital property as marital property that gets divided but increases in the property’s value might stay yours if no marital effort was involved.

The courts’ first move away from the simple statutory definition of “increase in value” of nonmarital property was to distinguish concepts of income from nonmarital property with appreciation of nonmarital property. In Moore v. Moore, 391 N.W.2d 42 (Minn. Ct. App. 1986), the court of appeals held that interest income from a nonmarital savings account was marital. Later, in Nardini, the Minnesota Supreme Court focused on a note to the original draft of section 307 of the Uniform Marriage and Divorce Act, which parsed “increase in value” from the income nonmarital property produced. Nardini, 414 N.W.2d at 193. Although the Nardini reference was in dictum, the court of appeals later held interest earned during a marriage on a premarital certificate of deposit constitutes “income” to be divided as a marital asset. Swick v. Swick, 467 N.W.2d 328, 331–32 (Minn. Ct. App. 1991). Reinvested dividends from nonmarital stock have also been held to be marital property. Prahl v. Prahl, 627 N.W.2d 698, 706 (Minn. Ct. App. 2001); see also Wiegers v. Wiegers, 467 N.W.2d 342, 344 (Minn. Ct. App. 1991) (determining interest earned from nonmarital certificates of deposit are marital property); Zander v. Zander, 720 N.W.2d 360, 369 (Minn. Ct. App. 2006) (determining monthly per capita payments to a member of the Mdewakanton Sioux Tribe are “income” and therefore create marital property); Campion v. Campion, 385 N.W.2d 1, 4–5 (Minn. Ct. App. 1986) (determin- ing rental income earned from nonmarital apartment building is marital); Pearson v. Pearson, 363 N.W.2d 337, 339 (Minn. Ct. App. 1985) (determining rental income received from nonmarital farmland is marital property).subject to creative and unexpected interpretations and extrapolations by Minnesota appellate courts. Minn. Stat. Based on the above-cited case law, it is well established that income from nonmarital property is marital. Of course, this begs the question: What is income? This question was answered by the Minnesota Supreme Court in Gottsacker v. Gottsacker, 664 N.W.2d 848 (Minn. 2003). Relying on the statutory definition of income then in existence, the Gottsacker court defined income as “any form of periodic payment to an individual.” Gottsacker, 664 N.W.2d at 855; Minn. Stat. § 518.54, subd. 6 (2002).

Question: What is the present legal definition of income?

Answer: The law changed after the Gottsacker case, removing the old definition of income, but courts still use similar rules to decide what counts as income in divorce cases.

Given that the definitions of marital and nonmarital property were embodied in former Minnesota Statutes section 518.54, combined with the fact the commissioners had noted “income” was not intended to be a part of “increase in value” as referenced in that definitional section, it was logical for the Minnesota Supreme Court to rely on the simple statutory definition of income. However, the definitional section was later amended to exclude the former definition of “income.” See Minn. Stat. § 518.003. There is currently a definition of “gross income,” which “means the gross income of the parent calculated under section 518A.29.” Minn. Stat. § 518A.26, subd. 8. While subdivision 1 of that section states the definitions shall apply to chapters 518A and 518, the actual definition specifically identifies the divorcing party as a “parent.” The Minnesota Supreme Court resolved this issue in Lee v. Lee, 775 N.W.2d 631, 635 n.5 (Minn. 2009), when it determined the statutory definition of “gross income” under section 518A.29 applies to chapter 518.

Question: What happens to pension benefits I earned before marriage if I receive payments during the marriage?

Answer: Even if you earned the pension before marriage, the actual payments you receive during marriage are treated as marital income that gets divided.

This holding was applied in Dreger v. Dreger, No. A17-1430, 2018 WL 3097678 (Minn. Ct. App. June 25, 2018), when it held that premarital PERA pension benefits in payout during the marriage were “marital income.” Although it could reasonably be argued such benefits were acquired “in exchange for” premarital contributions the husband had made to PERA, and would thus remain nonmarital under the express terms of Minnesota Statutes section 518.003, subdivision 3b, the court instead focused on the fact that the payments to the husband were “periodic payments to an individual” under Minnesota Statutes section 518A.29 and as “income,” the payments were marital. Nowhere in the opinion is there any discussion of the fact that the distinction between income and appreciation cannot be found in Minnesota statutes.

Question: How have courts changed their approach to deciding when property value increases become marital property?

Answer: Courts used to focus on whether spouses put “marital effort” into the property, but then started using “active appreciation” rules, which made it easier for increases to become marital property.

Perhaps the best example of the evolution of case law regarding increase in value of nonmarital property has been the drift from the concept of “marital effort” to “active appreciation” when analyzing factors that may create marital property from the increase in value of nonmarital property. The Minnesota Supreme Court in Nardini focused on marital efforts when it held: [T]he increase in the value of nonmarital property attributable to the efforts of one or both spouses during their marriage, like the increase resulting from the application of marital funds, is marital property. Conversely, an increase in the value of nonmarital property attributable to inflation or to market forces or conditions retains its nonmarital character. Nardini, 414 N.W.2d at 192.

Question: Has the term “active appreciation” always been the standard?

Answer: No, the Minnesota Supreme Court originally rejected using “active appreciation” terminology and wanted to stick closer to the actual language in the law.

In fact, the Nardini court explicitly declined to adopt the “active appreciation” terminology. Writing about such treatment in other jurisdictions, the Nardini court concluded: The McLeod court, as do many commentators, called the increase in value attributable to the efforts of the spouses “active appreciation” and the increase in value attributable to inflation and general economics and market conditions as “passive appreciation.” We prefer to adhere as closely as possible to the statutory language. Id. at 192 n.6.

Question: Did “active appreciation” start with courts examining marital & non-marital property?

Answer: Lower courts began using “active appreciation” language in their decisions even when the cases weren’t really about property appreciation, gradually making this terminology more common.

Despite this direction from the Minnesota Supreme Court, the court of appeals in Swick v. Swick, 467 N.W.2d 328, 331 (Minn. Ct. App. 1991) discusses distinguishing the increase in value of nonmarital property based on whether that increase was the result of “active” or “passive” appreciation. The Swick court chose to include that discussion in its opinion despite the fact that the issue in Swick was whether income from nonmarital property was marital. Swick, 467 N.W.2d at 331. The case had nothing to do with appreciation.

Question: What is passive appreciation?

Answer: Passive appreciation happens when there’s no marital effort or business decisions made during the marriage that affected the property’s value.

The Minnesota court of appeals discussed active and passive appreciation in White v. White, 521 N.W.2d 874 (Minn. Ct. App. 1994). In White, “passive” appreciation was equated with the lack of any marital effort or marital “entrepreneurial decisions.” White, 521 N.W.2d at 879. After White, it was possible to argue any act whatsoever created “active appreciation,” without regard for consideration of whether or not there was any actual marital effort expended.

Question: Is there clear directive for courts to use the “active appreciation” terminology?

Answer: Yes, the Minnesota Supreme Court officially adopted the “active appreciation” terminology in the 2003 Gottsacker case, even though they had previously rejected it.

The Minnesota Supreme Court followed by expressly adopting the active/passive terminology in Gottsacker v. Gottsacker, 664 N.W.2d 848 (Minn. 2003). Without any discussion, the supreme court asserted, “[w]e have divided the last of these nonmarital classifications—an increase in the value of nonmarital property—into active and passive appreciation.” Gottsacker, 664 N.W.2d at 853 (citing Nardini, 414 N.W.2d at 193). Notwithstanding the Gottsacker court’s miscitation of Nardini, “active appreciation” had effectively supplanted “marital effort” as the test by which courts would determine whether an increase in value of nonmarital property became marital property. This occurred without any meaningful discussion addressing how the concepts of “active appreciation” and “marital effort” might actually be significantly different (i.e., active appreciation may only require an act, rather than any real effort).

Question: Can a decision not to act with my premarital property count as “active appreciation”?

Answer: Yes, some courts have said that even deciding not to do something with your property (like choosing to keep reinvesting dividends) can count as an active decision that makes appreciation marital.

The concept of “active appreciation” was also expanded to include situations in which there was no act. In Prahl v. Prahl, 627 N.W.2d 698, 706 (Minn. Ct. App. 2001), the Minnesota Court of Appeals determined, “respon- dent’s decision to continue reinvesting the dividends during the marriage was an active investment decision, even though it was a decision to refrain from acting.” As in Swick, the court in Prahl included this language despite the fact the case actually turned on the fact that the dividends in question were income, which is marital property regardless of investment decisions (or the lack thereof). See also Nardini v. Nardini, 414 N.W.2d 184 (Minn. 1987); Moore v. Moore, 391 N.W.2d 42 (Minn. Ct. App. 1986); Swick, 467 N.W.2d at 331–32. Nevertheless, the language of Prahl implies that the mere ability to control nonmarital property means its appreciation becomes marital.

Question: Does having control over my premarital property automatically make its appreciation marital property?

Answer: No. One court said yes – that just being able to control your premarital investments or withdraw money could make any increases in value become marital property. Then the Minnesota Supreme Court reversed that decision and said the control test was wrong, going back to the original rule that only actual marital effort matters.

That implication became explicit in the Minnesota Court of Appeals’ decision in Baker v. Baker, 733 N.W.2d 815 (Minn. Ct. App. 2007), rev’d, Baker v. Baker, 753 N.W.2d 644 (Minn. 2008). Reflecting the shift from the concept of marital effort, the court of appeals in Baker defined nonmarital property as “property acquired by either spouse before marriage and any increase in the value thereof … provided such an increase is the result of passive appreciation.” Baker, 733 N.W.2d at 819 (citations omitted). The court went further to define passive appreciation as that which occurs when “no investment decisions are made, and neither [spouse] may withdraw the funds or otherwise control the investments….” Id. (quoting Prahl, 627 N.W.2d at 706). Making the statutory definition meaningless, the court of appeals in Baker went on to conclude that “the ability to control investments or withdraw funds can defeat a claim that the increases in value of premarital funds were the result of passive appreciation.” Id. at 821. Of course, this decision flew in the face of the statute, which defined nonmarital property as property received “in exchange for” nonmarital property. Minn. Stat. § 518.003, subd. 3b(c).

The Minnesota Supreme Court reversed the court of appeals’ decision in Baker and brought this issue full circle, holding: [W]e conclude that central to the classification of appreciation of nonmarital property as marital or nonmarital is the principle that effort expended to generate property during the marriage—that is, “marital effort”—should benefit both parties rather than one of the parties to the exclusion of the other. In all of the cases where we have held appreciation of nonmarital property to be marital, significant effort that otherwise could have been devoted to the generation of marital property was diverted and applied toward nonmarital property instead. Baker, 753 N.W.2d at 651.

Question: What is the current test for whether appreciation of my premarital property becomes marital?

Answer: The current test focuses on whether actual marital effort – either financial or non-financial work by you or your spouse during the marriage – caused the property to increase in value.

The Minnesota Supreme Court in Baker explicitly repudiated the notion, generated by the court of appeals’ decisions in Prahl and Baker, that control over nonmarital property could render its appreciation marital. The supreme court concluded: [T]he court of appeals’ control test all but eviscerates the statutory intent to protect the nonmarital character of increases in the value of nonmarital property. Many traditionally nonmarital assets are within a spouse’s control…. Therefore, we reaffirm Nardini and hold that the single test for whether appreciation in the value of nonmarital property is marital or nonmarital is the extent to which marital effort—the financial or nonfinancial efforts of one or both spouses during the marriage—generated the increase. Id. at 651–52.

Question: Will this marital effort test apply to other types of property like real estate and businesses?

Answer: The Supreme Court’s decision provides a clearer approach for the future, but it’s still unclear exactly how courts will apply this test to different types of property like real estate and businesses.

This broad and sweeping reaffirmation of Nardini provides some significant degree of promise for a more coherent approach to increases in value of nonmarital property in the future. It is yet to be determined how this approach will be applied in the future to increases in value of other nonmarital assets such as real estate and businesses.