The phrase source of funds describes a principle applied when an asset is acquired, paid for or improved with funds that are both marital and separate.

Courts in equitable distribution jurisdictions apply a rule that states that the source of funds determines the character of an asset -- either marital or separate. A home acquired with marital funds is marital; a motorcycle acquired with separate funds is separate. This is easy to apply when the value of an asset does not change between the date of acquisition and the date of valuation for divorce.

The value of assets frequently changes between the date of acquisition and the date of valuation. Very frequently, for example, houses appreciate dramatically during the ownership of a divorcing couple. In this cases, the courts consider "any increase caused by marital efforts" to be martial. These marital efforts are, for example, improvements to the marital home, such as adding a bathroom or an addition, and they are active.

When the increases are passive -- that is appreciation of the asset as a result of market forces -- "the marital and separate estates share the increase in proportion to the marital and separate contributions."

In applying the source of funds rule, the courts generally consider the value added, not the amount spent.

See also Active and Passive Appreciation; Commingling.

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