Economic Issues in Divorce Property Maintenance (Alimony) Child Support.
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Transcript of Economic Issues in Divorce Property Maintenance (Alimony) Child Support.
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