Economic Issues in Divorce

PropertyMaintenance (Alimony)

Child Support

Property at Dissolution

ClassificationValuationDivision

1. Characterization Who owns the property?

An Individual?

The Marriage?

Two Property Schemes

Common Law

Community Property

Community Property Systems

Husband WifeThe Marital Community

Community Property Keys: Three title possibilities Governs property ownership

and control during marriage, at death and at dissolution

Includes all property acquired during marriage except gift inheritance & bequest

Common Law Property Systems

Husband Wife

Joint Title

Common Law Property Keys Creates Two Title Possibilities Governs property ownership

during the marriage and at death Has been abandoned as a

method of characterizing property at dissolution in all states

Modern Common Law Property Systems at Dissolution

Husband WifeMarital Property

Factors in Classification

When acquiredHow acquired

All Property

Marriage

Divorce

Earned

GivenMarital Property

Acquired During the Marriage

Marriage

Divorce

Earned

Given

Marital Property

Acquired During MarriageExcept Gift, Devise, Inherit.

Marriage

Divorce

Marital Property

Given

Earned

Excluded by Agreement

Missouri’s Property System: Mo. Rev. Stat. §452.330 Deferred Community Property: Marital

Property is all property acquired during the marriage except:

Gift, bequest or inheritance Exchanged for separate property Acquired after legal separation Excluded by valid agreement OR Increase in value of separate property

unless there is a marital contribution

2. Valuation

When to value?How to value?

3. Division

Equal divisionor

Equitable division

Equitable Distribution Factors Contribution Economic need Custody of children/ family home Need for rehabilitation Conduct of Parties

Discretion & Property

Of these three issues, which one allows the

most discretion?

Find the Discretion

Character Value Division

Find the Discretion

Character Value Division

Missouri’s Property System

Deferred Community PropertyBut Presumption of Marital

Property

When does marriage begin?

The engagement ring (Brown v. Thomas)

The home purchased in contemplation of marriage

The joint money market account during cohabitation

When does marriage end?

Separate & Petition? Decree?Apart?

DISCRETION?

General principles Marriage is an economic

partnership Property division is to be used

to address post-divorce economic circumstances

Property division should sever economic ties of the couple

IMPORTANT MO. RULES Presume all property is marital Earnings during marriage are marital Separate property stays separate Passive increased value of separate property is

separate Active increased value of separate property

(due to spousal contributions) is marital Income from separate property is marital Character of property is determined by

character of acquiring funds: If “acquired” with both separate and marital funds, source of funds calculation is used to determine proportions.

Some easy calls… Earnings Savings &

Investments Real & Personal

Property purchased with marital funds

REGARDLESS OF TITLE

Marital Property

REMEMBER… in common law states DURING MARRIAGE, OUTSIDE OF MARRIAGE, and AT DEATH

Common law property system determines who owns property

THERE IS NO MARITAL PROPERTY IN THESE SETTINGS.

Kirchberg v. Feenstra Case involves control of jointly owned

property DURING the marriage. Mo. resolves this by declaring joint

management but does not require joint decision-making; one party may make decisions subject to the consent, agreement or acquiescence of the other spouse

BUT….

AT DIVORCE

Imported “community property” notions apply to the determine who owns property.

PROPERTY CAN BE SEPARATE, MARITAL, OR SOME OF EACH.

Identify the state’s approach to defining marital property

Remember there are 3 methods….

All Property (Ks.)

Marriage

Divorce

Earned

GivenMarital Property

Acquired During the Marriage

Marriage

Divorce

Earned

Given

Marital Property

Acquired During MarriageExcept Gift/Inherit (Mo.)

Marriage

Divorce

Marital Property

Given

Earned

Excluded by Agreement

Missouri Statutes:Marital Property Presumption

Property acquired during marriage is presumed to be marital

Houses and such

Problem E, p. 446 On date of marriage John owns a

home valued at $30,000 and subject to a $20,000 mortgage. What is John’s nonmarital interest or equitable position in the home?

John’s equitable position on date of marriage is 1/3 or 33 1/3 percent.

Problem One FMV of home before marriage =

$30,000 Equity in home (paid $10,000 so

equity = 10,000/30,000 So, John’s non-marital interest is

331/3% of the home

Adding on: After John married, he and Pam add a

bedroom using $10,000 in marital funds.

At the time the room is added, it increases the market value of the home from $30,000 to $40,000.

How does this affect John’s nonmarital or equitable interest in the property?

Recalculating the value

The room addition reduces John’s equitable interest in the home from 33 1/3% to

25%. ($10,000 is 25% of $40,000).

New

Effect of inflation?

Years later John and Pam divorce. The home is valued at $100,000 and has a $10,000 mortgage.

John retains his nonmarital interest in the home, which is what? $10,000 or 25%?

The theory:

The present value of John’s nonmarital interest is the proportion his net equity at the time of improvement ($10,000 (25%)) bore to the aggregate of the value of the property on the date of the improvement ($40,000).

John’s Non-marital share

25% x 100,000 (All nonmarital) $25,000 is set aside for John as his

separate property. Remainder of the house’s equity = $75,000 - $10,000 mtg.= $65,000 This equity will be subject to

equitable distribution between the spouses as marital property.

What about the debt?

Should each have to share in payment of existing mortgage or should they each share in proportion to their interest?

Transmutation Changing separate

property to marital property

Critical proof INTENT

What’s Mine is Ours.

How to Prove Intent?

Puts title in name of H&W?

Uses marital funds to pay off mortgage?

Treats house as family home?

Transmutation

Suppose John mortgages house in order to pay for room addition, and changes the title to “H&W, husband & wife.”

Does John still retain separate interest in the property?

Title: Will joint title transmute character of property?

Can property be separate if jointly titled?

Can separately titled property be marital?

Commingling

Will commingling separate and marital property change the character of the property?

452.330.4 - commingling in and of itself insufficient

Family Farms

Cases involving family farms are less likely to result in transmutation

Why?

Ongoing Acquisition

How do we determine title to property that is

purchased over a period of time?

Schmitz v. Schmitz. Where nonmarital down payment

was made on real estate, contributing spouse shares proportionately in increased value of the asset.

Approaches: Inception of title rule Source of funds rule

Source of funds Start with presumption Marital funds becomes marital property

What about separate funds of non-titled spouse?

Marital source of “funds” Marital funds used to purchase

property. Marital funds used to improve

separate property. Marital efforts used to improve

separate property.

Exchanges of separate property If separate property changes form

(e.g., money becomes house; stock splits) it remains separate.

Marital contributions must be used to reduce a debt or enhance the value of an asset in order to create marital lien.

Income & Inflation Income from separate property is marital (Missouri rule)

Increase in the value of separate property is separate

The Fixer-Upper H’s House at marriage

(paid $50,000) Loan to put on roof

($8,000) W’s work on interior

($?) House’s value at

divorce ($90,000)

How much, if any, is marital? Has the property transmuted? What are the marital source of

funds/efforts? Were those funds/efforts used to to reduce a debt or enhance value of asset?

What percentage of the increase in value is due to marital funds and efforts?

The Marital Share

NMC/TC X EQUITY = SEP. PROP.

MC/TC X EQUITY = MARITAL PROP.

Marital Efforts as Funds contribution of substantial services, directly correlated to increase in

value, amount of increase in value, services were during marriage, and value of services, lack of compensation or

inadequate compensation.

Proving causation in increased value

Is going to the office party a contribution?

Hosting the office party?

Staying home with the kids so wage-earning spouse can go to the party?

See: http://www.madkane.com/officeparty.html

House example: Marital contribution: $8,000 loan

plus value of interior decorating ($2,000)

Non-marital contribution: $50,000 Total contribution: $60,000 Equity: $90,000

Calculations

Non marital is 5/6 x 90,000 = 75,000

Marital is 1/6 x 90,000 = 15,000

Of Earnings and Income

Income from Earnings Earnings from labor during the

marriage are marital property. Other Human Capital is not marital

property. (e.g., earning capacity, professional degrees) (but see the O’Brien case)

Vacation & Severance Pay Is it earned from labor during the

marriage? If not, what does it represent? When does one earn the right?

Human Capital - General rule:

Human capital not reduced to earnings

is not considered marital property

Future Payments When the payment is earned is the

key issue, not when it will be paid If the right to the payment is clear

and its present value can be determined, include it as marital property

In re Marriage of Estes Attorney husband’s contingent fee

cases were marital property and fees were to be awarded upon receipt based on the percentage of hours worked during the marriage.

Human capital

earning capacityprofessional licenses

business goodwill

O’Brien v. O’Brien Medical license of husband

acquired during marriage is marital property and can be equitably distributed upon divorce.

New York is unique in this approach – why? How else can law protect the contributing spouse?

Arguments

Who decides? Is it property? Can it be valued? How should it be valued?

Alternatives to Protect Supporting Spouse

Separate claim for restitution

Factor in considering division of other property

Factor in granting maintenance

In re Studyvin“It is not necessary to

hamstring our trial courts by confining them to a marital property theory or a lump sum maintenance theory, or any other particular approach.”

Benefits Compensating Loss

Insurance, Personal Injury, Disability, etc.

Insurance Payments Mechanistic approach: timing of

the award Source of contribution: character

of funds used to purchase policy (reimbursement or recharacterization?)

Analytic: character of asset intended to replace.

Lopiano v. Lopiano a) separate property of injured

spouse b) look at purpose of

compensation– pain and suffering personal, lost wages marital (Missouri’s approach)

c) marital property

Insurance Interest Property insurance Disability insurance Life insurance

Characterization Questions What does the payment represent

– what is is “replacing”? How is the right to payment

earned? Does the payment represent a form of compensation?

What are the source of funds used to gain the right?

Business Interests: General Rule

Business acquired during marriage is marital property.

Goodwill is a component.

Wood & Nardini Wood: Husband’s separate medical

practice increased in value during the marriage

Nardini: valuing a closely held corporation

Determining spousal contributions

Valuing a Business

Inventory, receivables, etc.

Goodwill (but what is enterprise goodwill and what is personal goodwill?)

Professional Practices Should goodwill

in professional practices be recognized as marital property?

How to value?

Concerns: Difficult to distinguish goodwill from

personal professional reputation Value may be based in part on future

(non-marital) income Professional spouse must give up

tangible assets in exchange for intangible he/she retains

Double dipping Valuation is difficult: capitalization

formulas? FMV/ Buy-sell agreement?

Approaches to Bznz Goodwill

^______________^_________________^ Prof. GW GW marital GW Is separate only if sep.

marital WI/Tex from reputation. even MO/ NE solo pr OR/NJ

Marital efforts used to increase the value Were services substantial? Is there a direct correlation between

services and increase in value? How much is increase? Were services performed during

marriage? What was value of services, was there

compensation?

Retained earnings as marital

If owner‑spouse: took no or very little salaryhad the power to influence compensation paid and owner‑spouse received inadequate compensation.

Pensions Clearly compensation, but

difficulties lie in valuing, apportioning & dividing

Pensions General rule: treat as deferred

compensation and characterize according to the source of funds earning the right

“Stages” of Pension Benefits

Current cash value or right to withdraw contributions

Not Vested

Not Mature

Vested but

Not Mature

Vested &

Mature

Vocabulary of PensionsDefined Benefit or Defined

Contribution

Relative value or Relative timeERISAQDRO

Early in the career divorces

Current cash value or right to withdraw contributions

Not Vested

Not Mature

Vested but

Not Mature

Vested &

Mature

The New Career Divorce Contingencies in

a non-vested pension

Pay now or pay later?

Discount for contingencies?

Mid-career divorces

Current cash value or right to withdraw contributions

Not Vested

Not Mature

Vested but

Not Mature

Vested &

Mature

The Mid-career divorce Difficulties in

valuation, especially in defined benefit plans

Project work life Project payment Apportion marital /

non-marital

Apportionment Relative value or relative time Defined benefit plans make

apportionment difficult

Paying pensions Make H pay now, even if doesn’t

retire now Make W wait until H retires Bifurcate the pension Order H to buy out W’s interest Trade off property

QDRO Covers ERISA pensions Makes ex-spouse the “alternate

beneficiary” Directs Administrator to make direct

payments to ex-spouse Cannot alter terms of plan Can take 10 years before normal

retirement date but must assume any penalties

End-of-career divorce

Current cash value or right to withdraw contributions

Not Vested

Not Mature

Vested but

Not Mature

Vested &

Mature

Some difficulties if employee wishes to delay retirement

QDROs solve most of these problems

Question: is the pension also post-divorce income?

End of Career Divorce

Special Forms of Pensions Teacher Retirement Funds Military Pensions Medical Benefits Social Security

Exam Questions Increase in value of bank account

Sources of deposits: Interest income Income from rental property Income from labor Social security Pension payments

Characterize: Bank account in H’s name, opened prior

to marriage but into which some marital funds have been deposited.

Interest on the bank account Rental income from H’s separate

duplex, managed by W during marriage for no compensation.

Profit H generated by buying, restoring, and selling automobiles during marriage.

Payments from H’s pension plan, which vested and matured prior to marriage.

Dividing the Marital Estate

Characterization Valuation Division

What is Separate Property?

Which property is clearly separate?

What arguments did you have about characterization?

Did you divide separate property?

Valuation Which was the

most difficult asset to value?

How did you arrive at values?

Dividing the Property Could you agree? What made it

difficult? How do you think

it would have been different had I assigned clients as well?

Division Methods

EqualEquitable (Single-factor)Equitable (Multi-factor)

Equal Division (Cream v. Cream)

Clear but inflexible Must use

maintenance to balance inequalities

Need to ignore contributions

Increases stakes of characterization

Mine

Yours

Division based on Contribution Saff v. Saff What is a contribution? How do you value it? Note the relationship to the

inception of title approach to characterization.

Equitable Division Issues Burden of proof? List of factors

exclusive? List of factors

weighted? Basic principles?

Critical factors Length of Marriage Contribution Need Custody of minor children Economic misconduct

Which factors most influenced your division?

Division methods Need not be in-kind Can create liens and contingent

interests (especially family home) Can order lump-sum payments to

equalize, even if not liquid assets available.

Some Methods of Division Arbitration or mediation In-kind Trade off Piece of cake One values; other chooses Appraisal and turn taking Sale Auction or sealed bid

Dividing debts Courts will apportion debts, but

this can’t affect third party creditors rights

Use indemnification agreements to protect rights

Same factors used to apportion debts as to divide property