DEFERRED COMPENSATION - INCOME, ASSET OR BOTH?

 Very often, we deal with cases where our client or his/her has compensation from employment that is more than just salary plus bonus. Rather, with all of the financial services companies, pharmaceutical companies and other corporations in this area, we see all sorts of different compensation structures, including stock options, restricted stock, RSUs, REUs, etc.  Moreover, when the employee is in management or higher up in the company, the types of deferred compensation and/or equity plans can get even more complex.  Further, by its very nature, deferred compensation is not realized as income immediately, but usually over several years, typically 3 to 5 years.  Often it vests in two ways.  On way is serial vesting - 100 options are granted which vest over 5 years - 20 per year.  Sometime there is cliff vesting which means that the options all vest in year 5.  When an employee has been with a company for several years, then often start to have deferred compensation vesting each year and possibly available for income.

The question often arises as to whether these deferred compensation vehicles are income, assets or both,  While the answer is not simple, it is not as complex as many make it out to be..

Typically, deferred compensation that was granted prior to the date of the Complaint for Divorce is treated as an asset and is subject to equitable distribution.  If the deferred compensation is vested, meaning it can be immediately cashed in, then quite often it is equally divided (though again, New Jersey is an equitable distribution state not an equal division stated so it is not an automatic that these assets will be equally divided - sometimes it just seems that way.)

If the deferred compensation is not vested and requires continued, post-divorce Complaint service in order for vesting to occur, that is where things get more difficult.  I have seen some simplistically argued that anything granted before the Complaint gets equally divided no matter when it vests.  More recently, I have seen a greater use of some type of calculation (coverture fraction) used to recognize the post-complaint service of that spouse.  Many believe this to be the fairer way of equitably dividing deferred compensation.

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Sloppy Drafting of Marital Settlement Agreements Can Cause Great Harm - Usually to only one of the parties

In a perfect world, marital settlement agreements (MSAs a/k/a Property Settlement Agreements) are crystal clear and cover every possible contingency under the sun (I say this as when first drafting this post, I was being contacted frantically by a client regarding custody provisions in the event of school closure because of hurricane.)  That perfect world rarely exists for many reasons, including the main reason that most cases would never settle and/or the cost would be outlandish if every possible contingency is contemplated and negotiated.  That said, we do our best to address to the most germane and likely issues.

If the document cannot cover every possible thing under the sun, at least the final document should be clear and include the parties' actual meeting of the minds on the included issues.  Sadly, this does not always happen either.  Sometimes, the parties meeting of the minds is really not a meeting of the minds - that is, they each believe that the settlement is something else but the language of the agreement is vague or imprecise enough where they both think that they are right.  Some people actually do this on purpose to keep an argument on a "hot button" issue alive for the future.  Other times, it is simply inartful, to put it kindly, or down right bad drafting that causes future problems.

If a party can convince a court that the terms of the agreement represent a mutual mistake, perhaps there is some relief and the agreement can be re-formed.  That said, more often then not, one of the parties gets really hurt by virtue of the poor drafting. 

This appears to be what happened in the case of Rozier v. Byrd, an unreported (non-precedential) opinion released by the Appellate Division on October 26, 2012.  In this case, either someone was trying to be cute and the law of unintended consequences jumped up to bite him, or he was the apparent victim of a poorly drafted agreement.

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So you thought it was a good idea to stay in business with your ex-spouse

It seems to make sense that when parties who are business together get divorced, one party has to go.  The theory of "this town isn't big enough for the both of us" comes to mind.  In fact, as far back as 1978, the courts of New Jersey recognized this seemingly common sense fact in a case called Borodinsky.  In that case, the Court held:

It seems almost doctrinal that the elimination of the source of strife and friction is to be sought by the judge in devising the scheme of distribution, and the financial affairs of the parties should be separated as far as possible. If the parties cannot get along as husband and wife, it is not likely they will get along as business partners ...

There is no restriction on the court with regard to ordering distribution in kind of the eligible assets or awarding a monetary equivalent thereof. But, nonetheless, the judge should consider the former relationship of the parties and the fact that post-divorce peace is more conducive to the welfare of the parties.

But what if you agree to stay in business with your former spouse after the divorce?  What happens when things go bad?  Can you simply force a dissolution or buy out?

This was the issue in the case of Moriello v. Moriello, an unreported (non-precedential) case decided by the Appellate Division on July 17, 2012.

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ESTATE CAN ATTEMPT TO RECOVER FUNDS AGAINST DESIGNATED BENEFICIARY DUE TO WAIVER IN DIVORCE

As part of the give-and-take negotiation process involved with Marital Settlement Agreements, oftentimes one party will waive his or her right to the proceeds of the other party's retirement plan assets.  What happens, however, when the spouse retaining those assets dies before changing the former spouse as the retirement plan's designated beneficiary?  

While one might think that the assets then pass to the Estate of the deceased spouse, the answer is actually more complicated.  In 2009, the Supreme Court of the United States in a case known as Kennedy v. Plan Administrator for DuPont Savings & Investment Plan, 555 U.S. 285 (2009), definitively held that the retirement plan administrator must, in accordance with the detailed statutory provisions of the Employee Retirement Income Security Act ("ERISA") pay the asset proceeds to the designated beneficiary - in accordance with the plan documents.  Thus, even if the former spouse waived her rights to the retirement assets as part of the divorce decree, she could still stand to receive those benefits should she remain the designated beneficiary in the plan documents.  The Supreme Court even characterized the plan administrator as having done "its statutory ERISA duty by paying the benefits to [the ex-wife] in conformity with the plan documents."

In such a situation what is the estate to do?  Is it without remedy, no matter how unfair the outcome may seem?  Actually, the Supreme Court left the question open as to an Estate's avenue of remedy and, thankfully, the Third Circuit Court of Appeals recently addressed this issue of first impression in the precedential decision of Estate of William E. Kensinger, Jr. v. URL Pharma, Inc.; Adele Kensinger

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Madoff Mess Hits the Divorce Court - The End

The Simkin v. Blank case in New York has been a frequent topic on this blog.  It was game over for Mr. Simkin today when the NY Court of Appeals ruled that this Madoff victim could not revise his divorce deal.

 We first wrote when the case was filed.  In this case, in June 2006, the parties agreed to evenly split the $5.4 million in an account they had with Madoff Securities. As a result, the husband gave the wife $2.7 million in cash, and retained the account. As a result of the alleged Madoff Ponzi scheme that has essentially rendered the account worthless, the husband filed suit seeking the $2.7 million that he paid the wife. The husband alleges that because the account turned out to be valueless, the spirit of the agreement was broken.

We next wrote when the trial court first ruled, dismissing the matter.   I even participated in a podcast about this ruling. Acting New York State Supreme Court acting Justice Saralee Evans decided that the husband is stuck with his decision to keep the account instead of withdrawing his money before the December 2008 collapse of Bernard L. Madoff Investment Securities LLC. The Justice noted that while the husband claimed the Madoff account held no assets, he did not allege it had no value. Key to the decision was that in 2006 and "the several years after that plaintiff maintained this investment," the account "could have been redeemed for cash, presumably significantly in excess of its 2004 value." In addition, the Justice held that "An investor's ability to redeem an account for value, was the assumption on which the parties relied in dividing their property and in doing so they made no mistake."

The next installment was about the Appellate Division's decision which reversed the trial court decision and reinstated the Complaint.  The Appellate Court found that dismissal was improper and the husband had the right to try to pursue both the issues of mutual mistake (i.e. there never really was an account) and that the wife was unjustly enriched. In coming to its decision, the majority of the court held:

The dissent states: “[a]t the time of the agreement, Steven had an account in his name with [Madoff].” Untrue. Steven never had an account in his name with Madoff; on Madoff's own admission there were no accounts within which trades were made on behalf of investors.

The dissent then states, “Steven liquidated part of the account to fund his payments to Laura.” Untrue. In Madoff's Ponzi scheme what appeared to Steven and Laura to be a partial liquidation of an account was simply a payment to Steven that came from funds deposited by a more recent “investor” in what the “investor” believed was his own account.

The dissent further observes, “[Steven] did not liquidate the rest of the Madoff account ... and he continued to invest in it.” Untrue. There was no account which could be liquidated, as became apparent when Madoff received $7 billion worth of “liquidation” calls from investors in 2008. Nor was Steven “investing” in an account; his further contributions went directly to pay other “investors” in the scheme.

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WHAT DOES EQUITABLE DISTRIBUTION MEAN FOR A MEDICAL PRACTICE?

You work hard in high school, graduate top of your class in college, go on to graduate medical school, spend the longs hours and dedication needed to finish your residency, and finally after thousands of hours of studying, hundreds of tests and years of hard work - you are a doctor.  You start your own practice. You made it professionally. Personally, things are a bit different. You are facing a divorce. What does that mean for the medical practice you’ve worked so hard to establish?

Doctors may face unique issues during a divorce. Long term marriages may have seen years of what is considered relatively ‘average’ income (medical school and residency), followed by a dramatic or steady increase in salary (or a combination of both). It is no secret that self-employed doctors are usually not a typical W-2 employee. So what does this mean in the context of a divorce? What happens to the medical practice when the couple divorces?

Equitable distribution in New Jersey does not automatically mean half or 50% of a marital asset. Equitable distribution is not a simple mechanical division of assets accumulated and/or created during a marriage. The word 'equitable' itself implies the weighing of many considerations and circumstances that are presented in and unique to each case.  A judge would not be fulfilling his/her judicial obligation if he/she routinely or mechanically divided assets from a marriage equally.

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DIVORCING YOUR CREDIT REPORTS

Going through a divorce can be overwhelming – equitable distribution, visitation, alimony, child support, division of retirement accounts, where to live, re-entering the workforce.  All of these are important, long-lasting decisions.  But there is one thing that many people fail to consider during a divorce………..divorcing your credit reports.

 

Today, your credit report can have a significant impact on all aspects of your life - obtaining a credit card, getting qualified for a mortgage, car loans, a job, the interest rates you pay, car insurance, life insurance.  Not having good credit can cost you thousands of dollars.  That is why it is important to address your credit report, and the lines of credit that your spouse can access as early in the divorce process as possible.

 

The key to divorcing credit reports is understanding the difference in the way a court views debt versus the way credit companies view debt.  A court views debts as either marital debt or non-marital debt, and will divide it according to a variety of NJ statutory factors, which can be found hereCredit companies view debt as either being joint or individual.  With joint debt, both spouses signed for the credit and both spouses are responsible for the debt. With individual debt, only one spouse signed for the debt, hence only one spouse is responsible for it. 

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Want Your Day In Court? Think Twice.

Divorce filings seem to be at an all-time high and, to no surprise, the trial courts are feeling the pressure.  Documents filed with the court can get lost in the shuffle.  Although motions should be addressed within 24 days from the initial filing date, it can take months until the court actually makes a decision.  By then, the issues grow stale or even worse, they grow more complicated. Emotions blaze as time passes.  Many would argue that having your "day in court" is becoming somewhat of an illusion.   With this in mind, attorneys must be more creative and diligent in addressing issues in a case before they arise.  Leaving it to the court can make it worse, especially if the judge does not follow proper procedures in providing their decision and the judgment/order of the court.  If the court does it wrong, you may get your day in court - TWICE!

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Changes in the Value of a Business Post-Complaint

A few weeks ago, I posted a piece on this blog about the business valuation concept known as reasonable or replacement compensation.  After that post, I received an email from a well known business valuation expert, Sam Rosenfarb of Rosenfarb LLC, with an attachment containing an article that he wrote regarding the issue of the change of value of a business after the date of Complaint for Divorce.  That article along with the ever growing backlog in the family courts created by the budget crisis and other factors got me thinking more about this topic. In some counties, it may be more than three years to get a trial date at this time.

Why is this important?  In New Jersey, passive assets (e.g. real estate, bank accounts) are typically valued as of the date of distribution.  On the other hand, active assets, such as a business, where the value could be tied to the efforts of the business owner, are typically valued as of the date of the divorce Complaint.  As such, in your typical case, the increase or decrease in value post-complaint is not considered though there is an ability to raise the issue in extreme circumstances.

This issue was relevant in a case that both Sam and my prior firms were involved in where it took nearly a decade for the case to get to trial and where the business increased in value substantially over that time.  That case started before New Jersey implemented "Best Practices" wherein, systemically, the goal was to get all cases resolved in a year.  Even cases that were more complicated and which had business valuation issues, could usually get a trial date within 18 months.  As such, the days of the 4 year, 5 year or longer case, where changes in value would likely occur, became less the norm as they had been before "Best Practices."

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A Loan by any other name is a ....Gift.... to be shared

>Often times, when I meet with a new client, they will tell me that a parent, a sibling, great aunt, or good friend loaned the client and the spouse money that must be considered a debt to be repaid in equitable distribution. Many times, this was for a down payment for a house, or to get the couple through difficult financial period. The other party, just as often, takes the position that the “ loan” was really a gift. And so the games begin.

Generally, in the law, a gift has several elements. First the he donor must perform some act constituting the actual or symbolic delivery of the gift. Second, the donor must possess the intent to give. Third, the donee must accept the gift. There us also an additional element, which is the relinquishment by the donor "of ownership of the gift. A loan, on the other hand, is generally defined as The giving or granting of something, particularly a sum of money, to another, with the expectation that it will be repaid (typically with interest) or returned.

When comparing these in the context of a divorce, several questions come to mind. First, if the money was given when the parties purchased a home, was there a “gift letter.” This is very often required by the banks in order to make sure that the money is not a loan. If there is such a gift letter, this is often the end of the inquiry. On the other hand, if there are periodic payments to the person who gave the parties the money, then it may in fact be considered a loan for purposes of distribution. 

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Did a Property Transfer Occur? Husband Could not Rely on the Property Settlement Agreement to Compel the Sale of the Marital Home Because the Deed Controlled.

An interesting issue was recently considered by the Court in the case of Muller v. Muller. Specifically, the Appellate Division examined whether a husband could compel the sale of the marital home when he had conveyed his interest by way of deed about ten years earlier, but the parties’ Property Settlement Agreement (“PSA”) had provided for the husband’s continued ownership.

The parties in Muller were married for 17 years. When they divorced in 1990, they entered into a PSA, which, in part, provided as follows:

EQUITABLE DISTRIBUTION
A. Husband and Wife agree to divide equally the personalty . . . upon sale of the premises or child's emancipation, whichever shall first occur.
B. Upon execution of contract of sale of the above premises, Husband agrees to put his interest in the marital home in trust for Child.
. . . .

REAL ESTATE
A. Husband agrees to pay the mortgage payments [on the marital home] . . . until the time that child graduates from college, or reaches the age of 22, whichever shall first occur[.]

The husband paid the mortgage from the time of the divorce until around 1999 when he defaulted on the payments. The mortgagee instituted foreclosure proceedings in or around July of 2000. In order to avoid foreclosure, the wife borrowed about $60,000 and refinanced the property. The husband executed a deed and conveyed the wife his ownership interest in the property for consideration of $50,000. As a result, the wife exonerated him of the debt the he had incurred by defaulting on the mortgage payments. At the point, the child was 21 years old and had graduated from college.

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Reaonable Compensation/Replacement Compensation - What it Means to Business Valuation

In divorce cases, where one or both spouses own a business, the value of the business for equitable distribution purposes is often one of the more difficult issues to resolve in the case.  When these issues arise, the Court may appoint an expert. the parties can agree on a joint expert, or each party may retainer their own expert to value the business.   While there are many objective parts of a business valuation report, reasonable (a/k/a replacement) compensation is subjective.  Why is it important?  Because the higher the reasonable compensation, the lower the value of the business and vice versa.  As such, when there are partisan experts, it is not unusual for these subjective factors to favor the party that the expert is working for.

For divorce purposes,as well as many other situations where businesses are valued, they are valued based in whole or part on their income.  Reasonable compensation is a consideration in two valuation methods often seen in divorce cases - the excess earnings method and the capitalization of earnings method.  These methods involve examining earnings available to a potential hypothetical buyer after he or she receives a "reasonably compensation"  for running the business. Earnings available, beyond
"reasonable compensation" are a large factor in valuation. The higher this figure is, the more the business may be worth. In the excess earnings method, the difference between actual compensation and reasonable compensation is capitalized and for all intents are purposes represents the "intangible asset" known as good will of the business.

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RETIREMENT PLAN ASSETS TO FUND POST-DIVORCE OBLIGATIONS: STRATEGIES TO AVOID EARLY WITHDRAWAL PENALTIES

Fox Rothschild's New Jersey Family Law Legal Blog welcomes Noah B. Rosenfarb, CPA, an Accountant and Holistic Wealth Advisor with Freedom Divorce Advisors, a financial advising company designed to aid women in securing their financial future post-divorce, as a guest blogger. 

Noah's articles and insights are particularly relevant with the message and content of our firm's blog, and, having worked with him on several occasions, we know that he will provide invaluable insights to our readers.  With that being said, I provide below the text of an article Noah recently wrote about using retirement assets to satisfy financial obligations resulting from divorce, and tips to avoid early withdrawal penalties associated with doing so.

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BE CAREFUL WHAT YOU BARGAIN FOR WITHOUT THE ADVICE OF COUNSEL

It is common and often unfortunate that I meet with clients who decided, for whatever reason, that they would represent themselves during a divorce proceeding.  There are cases where that decision may be perfectly acceptable.  More often than not, the people I have met are coming to me because they are totally unsatisfied and/or unhappy with the deal they've made for themself and are looking to an attorney to get them a better deal.  Sometimes this is a possibility.  However, when the ink is dry on that formal agreement, it makes things more complicated.

Recently, the Appellate Division affirmed a lower court's decision regarding the enforceability and conscionability of an Agreement negotiated and reached by the parties and formalized by husband's attorney.  Wife chose to remain self represented during the negotiations and execution of the Agreement.

After husband made a post-divorce application in the trial court to enforce the Agreement, wife challenged its validity, claiming unconscionability, inequity, unfairness and that it was obtained through fraud.  The trial court conducted a two day hearing during which both parties and husband's attorney testified.  Thereafter, the trial court rejected wife's arguments that the Agreement was invalid, unfair, inequitable and procured through fraud.

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Husband's Sweat Equity Awards Him Greater Share of Marital Real Estate - Is a Slippery Slope Afoot?

In cases where a party owns a business, as justification for a disproportionate split of the business in equitable distribution, we often hear that the titled spouse has to be rewarded for their effort, ingenuity, ideas, etc. related to the business.  While arguably those things could be part of the analysis of the statutory factors, there really is not any law suggesting that this must be so.  In fact, the real justification that I can really get my arms around as to why a business would be disproportionately distributed is the fact that it is often pregnant with capital gains.  While the law is pretty clear that we cannot reduce the value because of hypothetical tax consequences, we can certainly look to same in the percentage distribution.  This makes sense because the failure to do so may actually give the non-titled spouse a greater percentage if taxes are ignored.

That said, I have heard this "sweat equity" argument over the years but have rarely seen a case where it was articulated.  That is until today when the Appellate Division released the unreported (non-precedential) opinion in Falkowski v. Falkowski.

In this case, the husband renovated two homes., purportedly without the assistance of the wife. The first was a premarital home which he renovated during the marriage.  The second, renovated after the parties' child was born and she left the workforce, was purportedly done on his days off (he worked full time as well.)  For the first house, the husband's "sweat equity" garnered him an additional 5% of the equity in the asset.  For the second home, the husband received 65% and the wife 35%.  In so ruling, the judge said:

[Husband] worked for five years to build that house into what it is, I gather, today. The testimony was pretty clear. Aside from the fact that [wife] had no say in it, and [husband] did all this with his friends, over five years he gutted everything to the frame. And he replaced everything. And he was fairly passionate when he testified about it too, all the work he did.

. . . . [I]t was a monumental amount of work. I was impressed with the fact that he
basically took the house down to its bare frame and bare rafters and built the entire
thing over. For those reasons I am not splitting this asset equally either. I
believe it's fairer to recognize that sweat equity and give him 65% of the net value and give [wife] 35% of the net value.

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What happens When the $1 million in Stock You Get in Equitable Distribution Turns out to Be Worth Nothing

What happens when an asset divided in equitable distribution really isn't worth what you think it was?  That was an issue in the Simkin case that I have blogged about in the past about involving the Madoff investment account.  I even participated in a pod cast on this case. It was also an issue in the Andrews v. Andrews case that was decided by the Appellate Division on July 15, 2011.

In that case, involving parties with a reported net worth of $19 million and a husband with a several million dollar a year income, the parties settled the case dividing their assets and as a result of the asset division, the husband had no direct alimony or child support obligation.  One of the assets that the wife was supposed to receive was approximately $1.1 million from the sale of stock in a private bank.  However, for whatever reason, the stock was never sold, the value of the shares because worthless and the wife never got her money.  It is no surprise that the parties wound up back in court. 

The trial judge found that there was mutual mistake made by the parties and re-formed their agreement by requiring the husband to pay the wife half of the value that the parties previously believed the stock to be worth, plus interest.  The husband, of course, appealed, arguing that he never guaranteed that the wife was going to get the amount that parties believed the stock to be valued at. 

The Appellate Division affirmed the decision.  Of note, in response to the husband's argument that wife waiting too long (more than one year) to raise the issue of mistake, the Appellate Division interestingly noted that the agreement regarding equitable distribution was a substitute for child support and alimony and as such, since child support cannot be waived, the waiver/delay argument must fail as to child support.  Similarly, alimony and child support are both subject to modification based upon changed circumstances.

In this case, the lesson, if any to be learned, is that distributions of property in lieu of support could possibly be modified after the support was prepaid.  However, if you want a chance at making the agreement enforceable, you have to make sure that the property actually gets distributed.

__________

Eric Solotoff is the editor of the New Jersey Family Legal Blog and the Co-Chair of the Family Law Practice Group of Fox Rothschild LLP. Certified by the Supreme Court of New Jersey as a Matrimonial Lawyer and a Fellow of the American Academy of Matrimonial Attorneys, Eric practices in Fox Rothschild's Roseland, New Jersey office though he practices throughout New Jersey. You can reach Eric at (973)994-7501, or esolotoff@foxrothschild.com.

Read Mark Ashton's New Post Entitled "The McCourt Divorce; Being Rich is Not What it Used to Be"

Mark Ashton, a partner in our Exton (Chester County), Pennsylvania office and former editor of our Pennsylvania Family Law Blog wrote a thought provoking post on that blog entitled The McCourt Divorce; Being Rich is Not What It Used to Be."

The McCourt divorce has been in the news for the last year over issues such as lavish spending and validity of a purported post nuptial agreement, that at best, had certain irregularities as to which version was actually the signed version as well as what the purpose of the agreement actually was.  Most recently, the case was in the news because of a reported settlement, a settlement which may now be scuttled because it was dependent on an infusion of cash from a new television rights deal with Fox that Major League Baseball has rejected for various reasons.

Mark, however, posits that  ownership of major league sport’s franchises has rarely been a boon to the owners over the short run, but that the benefit to professional team ownership )aside from the prestige of it) came not in the profits but in the gains. Mark noted that it was not uncommon for teams to lose money from year to year but that banks and other investors freely lent because it was prestigious to do so and because they had the security of knowing that almost no one who ever sold a team lost money. As the world of banking has changed, so too may the world of owning a professional sports franchise.

Read Mark Ashton's Interesting Post Entitled "Qualified Personal Residence Trusts: Are These Homes Subject to Claims In Equitable Distrubtion"

Mark Ashton, a partner in our Exton (Chester County, PA) office and former editor of our Pennsylvania Family Law Blog, wrote a very in depth and interesting post entitled "Qualified Personal Residence Trusts:  Are These Homes Subject to Claims in Equitable Distribution", on that blog.

Mark discusses how an estate planning tool called a Qualified Personal Residence Trust (QPRT) can be used to get appreciating residential property out of a person’s estate, and possibly, to avoid increase in value claims in equitable distribution in Pennsylvania.  The post does an excellent job explaining how this works.

In Pennsylvania, the passive increase in value on separate property (premarital, inherited, etc.) is subject to equitable distribution.  Mark talks about the possibility of using a QPRT to avoid these claims because the recipient never has a possessory interest in the trust assets.

These same concerns do not exist in New Jersey because passive appreciation on separate assets is not subject to equitable distribution as long as the asset is not put in joint names or otherwise commingled (active appreciation or increase in value due to the efforts of either or both of the spouses would be subject to equitable distribution). 

Other issues regarding the use of trusts and their impact on divorce have been previously reported on this blog.  In fact, the issue of trust income and whether a trust can be compelled to distribute income where the trust documents do not allow it, is before the New Jersey Supreme Court in Tannen v. Tannen.  Stay tuned for an update when that case is decided.

Is Keeping the House Really a Good Idea?

We are in the midst of the Spring real estate season and this is the time during a divorce when one spouse will inevitably want to list the marital home for sale. Often times, the parent likely to be the primary custodial parent will offer resistance with the best of intentions, because he or she wants to keep the house for the kids.

I am often approached by a client who tells me that they are willing to give up other assets in order to maintain the marital home. This may be for a variety of reasons, but most often because a parent wants to minimize the trauma of the divorce on the children and believes that remaining in the home that they have grown up in is the way to accomplish that.

 

But, at what cost? While minimizing transition for the kids is an admirable goal, I find that in many cases, the person who wants to stay in the house does not truly understand the expenses associated with keeping the house, both now and in the future. So I try to make sure, sometimes with the assistance of a financial adviser, that my client is making a decision that really makes financial sense.

 

In the vast majority of cases, the person who will keep the house has to refinance, or otherwise assume a mortgage in order to remove the other spouse from liability for the mortgage and note as well as any home equity lines of the property. This means they have to be able to qualify for the entire amount of debt on the home by themselves. Plus, they have to pay all of the costs associated with the financing such as closing costs and points on the mortgage. Finally, they will likely have to pay the other spouse one half of any equity in the home. This costs can be substantial.

 

When paying the other spouse their equity in the home, sometimes there are other assets with which to offset the issue of paying off the other spouse. However, this is not a step to take lightly. Often, I see litigants give up all of their other liquid assets in order to keep the house. The result can be that there are no savings in case of an emergency, or in the event of loss of employment, something that is a real threat in the present economy. Other times, litigants will trade off their share of their spouses retirement to keep the house. This is a dangerous move, particularly if the litigant has traditionally been the non working spouse throughout the marriage and does not have enough years to accumulate retirement funds after the marriage is over. As we know from the current real estate market, we can’t count on the value of property to go up or even remain the same.

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Supreme Court Says That Unless You Specifically Agree Otherwise, Date of Value for a House is the Date of Distribution

Last year, we published a post entitled He Who Hesitates (To Sell Former Marital Home) May Have Lost.  However, the Supreme Court disagreed in Sachau v. Sachau decided May 11, 2011.

In Sachau, the marital home was supposed to be sold on a triggering event, the emancipation of the youngest child, which in this case was in 1984.  The house wasn't sold then but in 1990, the wife began making inconsistent payments at inconsistent intervals to the husband through 2004 totalling almost $80000.  When the husband became unable to support himself, he filed a motion to compel the sale of the house in 2006.

Without getting into the legal steps it took to get to a hearing, the trial judge ultimately concluded that there was no agreement between the parties in respect of the valuation date and that the 1984 value of the home was $120,000 and that was the valued to be used.  As such, the husband's share was filed at  $144,915.62 (which included interest) and the wife's share was $417,472.64. The judge further determined that the wife would be credited for payments made. Moreover, the judge noted that the equities were in parity and that “the passage of time ha[d] not caused a change in position to the
detriment of [Barbara].” The husband appealed, and as noted in our prior post, the Appellate Division affirmed.

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THE TREATMENT OF MILITARY PENSIONS IN NEW JERSEY: THE APPELLATE DIVISION SPEAKS, IS THE COVERTURE FRACTION STILL VIABLE?

This blog post is written with input from Eliana T. Baer, who, along with Robert A. Epstein, was instrumental to the outcome of the below case. I thank them both for their extensive time and efforts, without which this result would not have been possible.

An important reported decision was decided by the Appellate Division concerning the distribution of post marital contribution of pensions and retirement plans. A copy of the case can be found here. While the case itself concerned a former service member’s military retirement pay, the matter has wide implications for all retirement plans which are not distributed at the time of divorce. This was a case which I had alluded to in a previous blog which can be found here, and in which we represented Thomas Barr, who had earned credits toward a military retirement during his marriage. In the case of Barr v. Barr, the parties were divorced after the husband, Thomas, had served eleven years of active duty in the Air Force. Thomas was not represented by counsel at the time of the divorce and his wife’s attorney prepared a property settlement agreement which provided that "The Wife will receive 50% of Husband's pension benefits attributable to his 11 years in the military service only. Such benefits are to be distributed when Husband commences receiving same." After the parties divorce, Thomas went on to enroll in the reserves and during that time, accumulated enough time to entitle him to military retirement pay.

When Thomas began receiving his retired pay, he calculated what he believed he owed his former wife, Judith, and made a deduction for taxes that he had to pay. This went on for a period of time, and the parties had a disagreement and Thomas ceased paying. When Judith made an application for enforcement, Thomas realized that the amount that he had been paying was what he believed to be the incorrect amount, and in his response to her motion, asked that the amount be adjusted. Specifically, he argued, in part, that because the formula used to calculate retired pay benefits considers a military member's rank pay at retirement as well years of service, it was possible to calculate the amount that was attributable to his rank at the time of the parties’ divorce, which would give meaning to the agreement of the parties that Judith would only be entitled to the portion attributable to his active duty. A service member receives points for each day of military service: one point for each day of active military service and two points for each day of reservist duty. Additional points accrue based on the completion of certain training, drills and funeral honors duty. The actual member's benefit is the product of the base pay for the rank achieved at retirement and two-and one-half percent of the points representing the years of service credited.

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Tax Treatment of Excessive Perks and Personal Expenses for Business Valuation Purposes

I recently blogged on the issue of how to treat unreported income, perks and other personal expenses paid through the business and the treatment of same for support purposes.  As noted in that post, the issue comes up both for support and business valuation purposes. 

In order to value a business, the experts come up with an income stream that gets capitalized.  That income stream is tax affected.  That is where the issue gets interesting.  More often than not, the experts tax affect the entire income, after adding back the perks, personal expenses, non-operating expenses, unreported income, etc. 

I have asked several of the forensic accountants why this is being done if this is note the economic reality for the business owner in that case.  More often than not, I have been told that you cannot assume that a buyer of the business would not declare all of the income and/or would improperly pay expenses through the business.  From a pure business valuation perspective, this seems correct and reasonable.

For purposes of equitable distribution, that remains questionable.  In the seminal case on business valuation in divorce in NJ, Brown v. Brown, discounts for lack of marketability and lack of control were not considered because the business was not really being sold.  Some have argued that Brown means a value to the holder standard is to be applied.  While I am not sure that that is the case, if discounts are not applied because there is no sale, then why are these excess perks and personal expenses tax affected when doing so artificially reduces the value of the business?  Put another way, if the business owner is not paying taxes on these things, why should there be this fictional tax be applied, which only serves to reduce value? At some point, I am sure this issue will be litigated further.  Until then, we will continue making the arguments on both sides.

In Business Valuation, Are Hypothetical Costs of Sale Considered to Reduce Value? Court in NJ vs. PA Disagree

While there are many similarities between the states when it comes to family law, there are also many differences.  That fact was recently highlighted in the context of business valuation, specifically, what things should be considered to arrive at a value for equitable distribution, in a post recently seen on our firm's Pennsylvania Family Law Blog.  Specifically,Aaron Weems is an attorney in our Warrington (Bucks County), Pennsylvania office and editor of the Pennsylvania Family Law Blog wrote an interesting post entitled "Superior Court Changes How Businesses are Valued."

In the Balicki case that Aaron discussed, at issue was the valuation of an insurance agency.  It was understood that the business would not be sold, therefore, in deciding the value of the business, the Master excluded expenses of sale, transfer, or liquidation which could include broker commissions, finders fees, attorney fees and accountant fees. The appellate court reversed finding that this was improper.  Moreover, the appellate court found error in the fact that the Master failed to take into consideration any taxes that may be associated with the sale or liquidation of a business.

 

Aaron noted that the appellate court held that Pennsylvania statutes 23 PACSA § 3502(a)(10.1) and (10.2) required that for the purposes of equitable distribution of marital property, the Court must consider the Federal, state and local tax ramifications even if they are not “immediate and certain”, and similarly, the sale, transfer, or liquidation of an asset need also not be “immediate and certain,” either.

 

The practical effect of this reducing these hypothetical expenses is that it reduces the marital estate, and therefore, the other spouses overall equitable distribution award. Would the same result be reached in New Jersey?

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Madoff Mess Hits the Divorce Courts Part II - The Appellate Court Speaks

Last year, I wrote a post on this blog about the Madoff Mess hitting the divorce Courts, the trial court's decision in that case and even a podcast that I had participated in about the decision.

In this case, in June 2006, the parties agreed to evenly split the $5.4 million in an account they had with Madoff Securities. As a result, the husband gave the wife $2.7 million in cash, and retained the account. As a result of the Madoff Ponzi scheme that has essentially rendered the account worthless, the husband has filed suit seeking the $2.7 million that he paid the wife. The husband (a prominent attorney with a large NY law firm) alleged that because the account turned out to be valueless, the spirit of the agreement was broken. The wife's position was the husband withdrew probably $3 million to pay the wife, so the asset did exist at the time of the settlement agreement.
 

Acting New York State Supreme Court acting Justice Saralee Evans decided that the husband is stuck with his decision to keep the account instead of withdrawing his money before the December 2008 collapse of Bernard L. Madoff Investment Securities LLC. The Justice noted that while the husband claimed the Madoff account held no assets, he did not allege it had no value. Key to the decision was that in 2006 and "the several years after that plaintiff maintained this investment," the account "could have been redeemed for cash, presumably significantly in excess of its 2004 value." In addition, the Justice held that "An investor's ability to redeem an account for value, was the assumption on which the parties relied in dividing their property and in doing so they made no mistake."The public policy of the finality of settlements was upheld.
 

At the time, I wondered about the ultimate fairness of this and said:

That said, if this case was in New Jersey, there may be the possibility of a recovery here. Though the general rule is that equitable distribution is not-modifiable, the issue may turn on whether there was $5.7 million in the account at the time of the divorce or whether that was simply an illusion created by Madoff's alleged fraud. If the account really had no value at that time, then the parties made a "mutual mistake". In that case, the settlement agreement could be re-formed to create an equitable result. If the money was actually in the account at that time, there could be a different result. One could argue that this really wasn't any different than any other investment that loses value - though that result seems harsh. However, assuming the husband had that money in your ordinary stock account, given the stock market over the last year and current financial crisis, it seems unlikely that his $5.4 million would still be $5.4 million. If there were just stock losses, it is highly unlikely that he would be entitled to any relief. Moreover, it is not unlikely that if the wife invested her $2.7 million in stock or real estate, that she has her full $2.7 million either.

Whether is is ultimately fair since the asset may not have really existed is another story. It is different than retaining a stock account and then the market goes up or down because in that instance, there really was an asset as opposed to a fictional asset. It is also different than holding on to a home whose value has decreased, as I have blogged on before.

It turned out, the Appellate Division in New York agreed with my logic and reversed the dismissal of the trial court matter and allowing the matter to be opened up.

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WHAT HAPPENS WHEN AN ORDER IS VIOLATED? CAN A COURT IMPOSE SANCTIONS?

Many divorces involve distribution of assets, including pensions.  To protect the non-titled party entitled to receive a share of the asset, i.e. pension, the court may mandate or the parties will negotiate security to ensure receipt of the value of the asset.  In a recent unpublished post judgment Appellate Division decision, Brown v. Brown, decided January 3, 2011, the court awarded the plaintiff-wife attorneys fees for enforcing defendant-husband's obligation under the Judgment of Divorce to obtain a life insurance policy that guarantees the wife's interest in defendant's pension payments.  But the Appellate court refused to uphold the trial court's Order, which imposed monetary sanctions against the husband for failing to obtain the requisite life insurance policy. 

Defendant-husband was required to obtain a life insurance policy and to select a payout option where the wife would receive monthly income if the husband were to predecease the wife.  However, the husband failed to obtain the requisite life insurance and attempted to select the pension benefit that would maximize his income during retirement but would preclude the wife from receiving any income should he predecease her.  Only through the diligence of the wife was it discovered that husband had attempted to select the incorrect payout option.  As a result, the wife filed two motions seeking to enforce her rights under the Judgment of Divorce.

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He Who Hesitates (To Sell A Former Marital Home) May Have Lost

 The last two weeks have seen significant activity in the area of former marital home sales. Two weeks ago, the New Jersey Supreme Court agreed to hear Sachau v. Sachau, a case in which the parties’ settlement agreement had anticipated that the marital home would be sold in or about 1984, after the youngest child graduated high school, and the proceeds divided equally subject to some adjustments. The husband, who was not living in the home never enforced his rights under the agreement until more than twenty years later. The trial court found that the former husband was entitled to one half of what the home would have been worth at the time it was to have been sold under the parties original agreement in 1984, plus interest. The Husband ‘s position is that he was entitled to one half the value at present. The Appellate Division affirmed and now the New Jersey Supreme Court will weigh in.

Just the other day, the Appellate Division considered a unpublished (non-precedential) case, McNeil v. McNeil,  in which  the parties entered into an agreement at their divorce in which the Husband was to purchase the Wife’s interest in the home for an amount certain ($150,000) within 90 days from the sate of the agreement. He failed to do so, and the ex-wife filed several actions to enforce her rights, which were granted. She first obtained an order from the court that compelled the house to be listed for sale and then subsequently, when the ex-husband refused to cooperate, the ex-wife was appointed attorney in fact to negotiate and close a contract for sale of the home. Additionally, she obtained an order which prevented the ex-husband from having any contact with the buyers and compelling him to vacate the property. Ultimately, the house was sold at a price ($287,000) almost a year and a half after the settlement agreement. The Husband then argued that the decrease in value of the home must be borne by both parties and that the ex-wife should not have received the $150,000 from the proceeds. The trial court enforced the parties’ agreement and the Appellate Division affirmed. Interestingly, in addition to the fact that the court enforced the clear terms of the agreement that the parties entered into, the court also noted that the ex-husband refused to cooperate and resisted the sale of the home while the real estate market was in a “free fall.”

 

In both of these cases, the failure of the parties to act in a timely manner significantly affected the proceeds that they were entitled to from the marital home.   The lesson to be learned is that when the agreement has a time limited, follow it, suffer the consequences.  Moreover, agreements should be clear regarding the parties intent.  If they intend to limit or fix what someone gets, and the agreement sufficiently says so, then that is what is likely to enforced.  We firmly doubt that the husband here would have been offering more to the wife if the house sold for more then expected.

DIVISION OF RETIREMENT ASSETS - WHAT IS FAIR AND EQUITABLE?

Throughout the course of this blog's existence in the family law blogosphere, we have cautioned and advised on the pitfalls of failing to timely divide retirement assets.  An entry addressing this issue dating back almost two years can be found here, only showing how this important issue is one that divorcing parties often do not consider, but are faced with after the divorce is finalized.  How about on the flip-side of the coin, so to speak?  For the party whose retirement asset is to be divided, what is "fair and equitable" for equitable distribution as to when the asset should be divided and at what value?

The Appellate Division recently addressed this issue in the matter of Ejiofor v. Ejiofor, where it reversed and remanded a trial court's decision for a determination of the current value of the husband's share of the wife's retirement accounts. 

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Read Interesting Post From our Pennsylvania Family Law Blog Entitled "Practical Tips for Dividing Personal Property"

There was recently an interesting post on the Pennsylvania Family Law Blog entitled "Practical Tips for Dividing Personal Property."  Click here to read that post.

The only people who dislike dividing personal property more than family law attorneys are family court judges. 

That said, the post gives excellent and comprehensive advice for dealing with this often emotional and sometimes difficult issue.

JUST ENOUGH ROPE - EX-HUSBAND'S ATTEMPT TO FURTHER DELAY PAYING EQUITABLE DISTRUBUTION IS DENIED

In an interesting unreported opinion in the case of Tiger v. Tiger released on April 21, 2010, the Appellate Division affirmed an Order enforcing a Property Settlement Agreement and post-judgment Consent Order and denying the husband's request for an ability to pay hearing regarding alimony and the remainder of his equitable distribution obligation.

After a 35 year marriage, the parties were divorced in 2005 and the husband was required to pay short term alimony and $150,000 in equitable distribution over 4 years.  The husband failed to pay his 2007 and 2008 obligations but never filed a motion seeking modification.  The wife, however, filed an enforcement motion in 2007 and the husband was ordered to pay the $40,000 owed.  The husband filed a motion for reconsideration wherein his alimony was reduced from $70,000 to $50,000 and he was granted more time to pay his equitable distribution payment.  He then failed to pay his 2008 equitable distribution payment and another enforcement motion ensued.  A plenary hearing was ordered as a result but the hearing never happened because the parties entered into a Consent Order wherein the husband agreed not to seek to modify the equitable distribution again and not to seek to modify the alimony before 1/1/10. Not surprisingly, he failed to comply and another enforcement motion was filed in late 2008. The husband used the economic situation in the real estate industry as a reason for his non-compliance.  The trial court denied his motion finding that the husband was a sophisticated business man who entered into the consent order will full knowledge of the economic situation in the real estate industry.  The appeal ensued.

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NY JUDGE ORDERS RETURN OF ENGAGEMENT RING TO FIANCE' THAT ALLEGEDLY CHEATED

In today's New York Post, there is an article by Kieran Crowley and Lorena Mongelli about a Long Island, New York law suit filed by a man to obtain the return of the engagement ring that he gave to his fiance', who had been his high school sweetheart.  Apparently, she refused to return the engagement ring and broke off the engagement after learning that he allegedly cheated on her.  She counterclaimed that she suffered from emotional distress as a result of his actions.

The judge ruled that state law allows a person to get back property that was given "in contemplation of marriage" if the marriage doesn't occur. The judge wrote that "Consequently,fault in the breakup of an engagement is irrelevant."

As noted by Apple Sulit-Peralejo in a blog post on this blog last October, the law in New Jersey regarding this issue is essentially the same.

SHORT SALE FOR CASH? AGGRESSIVE PLAN MAY HELP DIVORCING COUPLES

On April 5th, the struggling housing market will face a new ally in the form of a short sale program being aggressively pushed by the Obama Administration to help millions of home owners escape from mortgage debt by selling their homes for less than the balance of the mortgage while receiving an additional monetary payment to do so.  As the government's attempts to assist homeowners struggling to make their mortgage payments have only slightly helped according to a recent article in the New York Times, the new program will pay $1,500 to the short selling homeowners to "relocate."

The benefits of the plan are hoped to be widespread, as lenders will ideally receive more money than with a foreclosure, the borrowers will experience a softer hit to their credit - including the lender's assurance that they will not later be sued for an unpaid mortgage balance - and fewer homes will be empty on the foreclosure market.  To protect from cases of fraud, lenders will utilize real estate agents, who will determine a home's value and, by correlation, the minimum acceptable sale price.  Adding another layer to this new system, the agent's determined value will not even be shared with the home owner, but the lender is required to accept any offer equal to or higher to such value.  What happens when a home owner has multiple mortgages on a single property, however, remains unclear.

From a family law standpoint, this plan provides the sort of good news that divorcing spouses struggling with what to do with their "under water" marital residence are looking for.  Whether it actually fulfills that glimmer of promise, however, remains unclear.  In the down real estate market, how to equitably distribute the home has proven challenging.  Oftentimes, neither party can afford to continue residing in the marital home, refinancing is unavailable due to the negative equity, neither party wants to face the credit hit of a foreclosure, and there is no money to cover the shortfall debt that might result where the house is sold for a price lower than the outstanding mortgage.

Short sales with a guarantee that the lender will not come after the borrowers such as that in the President's plan are therefore a desirable way out.  Short sales generally tend to be a risky, slow moving process with no guarantees.  With the Obama Administration's new plan to boost the housing market, hopefully such situations will take a turn for the better.

Show me the Documents

A recent case was filed concerning a woman who entered into a Marital Settlement Agreement with her then husband in which the marital home was not to be sold immediately, but provided for how the proceeds would be distributed when it was. The Husband, however, was in poor health, and the agreement did not provide for the possible event of his death prior to sale of the home. In fact, the husband died prior to the sale of the house, but after the limited divorce that the couple had obtained .  His interest in the house went to his estate rather than to his former wife as she had anticipated. The former wife was then forced to purchase the half interest from the estate in order to retain the home, something that was not anticipated by her, and cost her a significant amount of money.

I am sure that the former wife assumed that the deed to her home contained a right of survivorship in the event of her former husband’s death. Instead,  the property was most likely titled in such a way that the parties owned the property as tenants by the entirety, which means that they owned as husband and wife, and upon the death of one spouse  title of the property would go to other, assuming they were still married. Upon the divorce of parties to a tenancy by the entirety,  however, the title changes to what is known as a tenancy in common, which means that they each had a one half interest in the property which would then go to their beneficiaries upon death unless there is a specified right of survivorship.

 

The moral of this story? Make sure your lawyer has a copy of your deed as well as any other important documents.   If you do not have one, make sure that a title search is conducted on the property.   It is critical that a lawyer understand how property is held between spouses and/or other co-owners. Many times, incorrect assumptions are made about these kinds of issues and the results can be expensive. My motto is, I can never have to much information from my client.

MADOFF MESS HITS DIVORCE COURT - PODCAST

In February 2009, I posted a blog entry entitled "The Madoff Mess Hits the DIvorce Court."  In this case, in June 2006, the parties agreed to evenly split the $5.4 million in an account they had with Madoff Securities. As a result, the husband gave the wife $2.7 million in cash, and retained the account. As a result of the Madoff Ponzi scheme that has essentially rendered the account worthless, the husband filed suit seeking the $2.7 million that he paid the wife. The husband (a prominent attorney with a large NY law firm) alleged that because the account turned out to be valueless, the spirit of the agreement was broken. The wife's position was that the husband withdrew probably $3 million to pay the wife, so the asset did exist at the time of the settlement agreement. In December 2009, I blogged on the decision  which was in the wife's favor, essentially because the husband could have redeemed the account for the agreed upon value from the time of the divorce up to the Madoff collapse. 

Based upon this blog entry, I was interviewed about this case by Mark S. Gottlieb, CPA for a podcast on his website.  Mark is a forensic accountant and business valuation expert with offices in Great Neck, New York, Stamford, Connecticut and Roseland, New Jersey.

To listen to the podcast, click here.

DIVORCE PLANNING COMES BACK TO BITE THIS HUSBAND

We have all heard stories about spouses hiding assets to keep them away from the other spouse during a divorce.  In fact, I am sure that many lawyers have even had clients ask how they can do it.  Hopefully, the lawyer told them the straight answer -don't do it - and if you do and get caught, it will be far worse for you. 

A litigant named Eric Barzda learned this the hard way as noted in the unreported decision (non precedential) Appellate Division decision released on March 3, 2010.

In this case, in 1996, Mr. Barzda was  was going through a divorce proceedings with his former wife.  While the divorce  was pending and even thereafter, he feared that his wife would assert a claim against property in Hightstown he acquired with his girlfriend, the defendant in this matter.  In order to  shield this property from a claim from his wife, he transferred his interest in the property to the girlfriend for $1.  However, he claimed that there was an oral agreement that he would be a silent partner.  He later filed for bankruptcy relief and did not list this property as owned by him in the bankruptcy - obtaining a discharge in what was deemed a no asset case.

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Collapse of an Employer

 

So, either your spouse’s employer or your employer suddenly tanks, collapses, goes out of business. What then?

The first point is that you should have kept complete records and be sure that all designations were current. What kind of records?

         (1) Salary and compensation, in the form of contracts, letters of employment, personnel manuals, payroll records (periodic payroll slips);

         (2) Medical insurance, in the form of policies, COBRA requirements for assumption of insurance on an individual basis, declaration pages, documentation as to covered persons, coverages, carrier contact information;

          (3) Life insurance, in the form of policies, declaration pages, documentation as to beneficiary designations;

         (4) Retirement benefits, in the form of plans, summaries of plans, periodic statements, beneficiary designations; QDRO requirements;

          (5) Documentation as to other benefits such as cafeteria plans, sick leave, vacation leave, company vehicles, computers and other property, etc.

The economic problems of sudden unemployment on a family can be bad enough but the unknown and usually unforeseen "hidden" effects can be devastating. For instance, what happens to 401(k) plans and pensions. How is your ability to COBRA insurance affected? What are the time requirements for acting so as not to be denied benefits and assets? What is the effect of not having correct and complete beneficiary designations on life insurance and retirement assets?

So, whether you are in the middle of a divorce, or contemplating one, or just happily married, the lessons to be learned are these:

         (A) Make sure that you know as much as you can about all aspects of employment, and that you fully understand all of those aspects;

         (B) Make sure that you have complete documentation to backup your knowledge and for proof purposes later on;

         (C) Make sure that all designations are complete and current;

         (D) Plan ahead -- make sure that you know NOW what to do about COBRA, retirement benefits, etc., should the unthinkable happen.

EQUITABLE DISTRIBUTION OF THE MARITAL HOME - MANY WAYS TO SKIN THE CAT

In September of 2008, I posted a blog entry on The Value of Real Estate - Problems in this Ever Changing Market.  In that post, given the decline in the real estate market, it was posited that retaining the marital home may not be the best financial strategy.  Unfortunately, little has changed in the real estate market since that time to change conclusions of that post.

That said, in many cases, the marital home remains the single largest asset to divide in divorce.  Moreover, with the continuing troubles in the economy, it may represent the only way for either or both of the parties to wind up with liquid funds after the divorce.  Now if the home is going to be sold, or one party is going to buy out the other, then there usually is little dispute other than logistics of sales price, how soon to reduce the price, how to handle repairs until sale, etc. 

The problem arises if one party wants to defer distribution to allow the child(ren) to finish high school, etc.  There is a question of fairness to the other spouse whose equitable distribution is tied up as may be their ability to buy a house of their own both (1) because they don't have the money for a down payment until they get their share of the house or (2) they are still on the mortgage of the marital home.  Further, due to the decline in the real estate market, parties are now also agreeing to defer the distribution for some period of time in hopes that the market will rebound, as opposed to selling now.

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EVEN CELEBRITIES HAVE PROBLEMS DIVIDING THEIR PERSONAL PROPERTY IN DIVORCE

In today's New York Daily News, there was an article that actress Kate Walsh and her husband are going to flip a coin to determine who gets to pick first and then they will alternate picks as they divide their personal property in divorce.

You don't have to be a celebrity to follow the alternate selection method.  In fact it is very common when people cannot mutually agree upon a distribution of their furniture, furnishings and personal property.  Another method sometimes used is that one spouse makes two ostensibly equal lists of the personal property and the other spouse gets to choose which list they want.  There are obviously many other ways to accomplish this as well.  There are no absolute rules, other than perhaps, the custodial parent will get the children's furniture. 

Perhaps the only other absolute rule is that judges (and attorneys) hate getting involved in this type of dispute. 

Of course, that is not to say that there cannot be disputes about valuable items like furs, jewelry, art, antiques, collections, etc.  That, however, is very different than ordinary furnishings and household items that tend to have little value once you bring them home.

So if you are divorcing and cannot agree on the distribution of the furniture, etc., you too can act like a celebrity, flip and coin and alternate picking until it is all gone.

EQUITABLE DISTRIBUTION - IT DEPENDS

There is no such thing as a normal or typical divorce, every case is different. Sometimes a case I expect to be difficult ends up being easy, while other straightforward cases can sometimes become quite challenging. Equitable distribution is no exception. Different clients have different assets (and debts) to divide – homes, retirement accounts, IRAs, 401(k), Keogh plans, businesses, vacation homes, time shares, art, jewelry, yachts, trusts, and the list can go on and on.   The starting premise is that assets that were owned prior to the marriage are not subject to equitable distribution. However, if that asset is commingled with marital assets it can lose that identity and be subject to equitable distribution. Obviously, this standard can create disagreements with both parties attempting to exclude their assets, but include their former spouse’s assets. 

Recently in an unpublished Appellate Division decision, Mekhail v. Mekhail, App. Div. decided February 2, 2010, the Appellate Decision reviewed a judgment involving equitable distribution and alimony issued following a trial. In Mekhail, plaintiff-wife sued defendant-husband for divorce on October 9, 2007.  The case was tried and judgment was entered on November 21, 2008.  Defendant appealed, arguing that the trial judge erred by: (1) failing to make adequate findings of fact respecting alimony; (2) arbitrarily awarding plaintiff 25% of defendant's retirement account; and (3) directing that each party remain responsible for their own credit card debt.  At trial, plaintiff sought to exclude an IRA account with a $15,000 balance, a retirement account with an $18,000 balance, and a Vanguard account with a $36,000 balance. Plaintiff alleged that these accounts were premarital and not subject to equitable distribution. Meanwhile, defendant had a 401(k) account with a $50,000 balance. Because sufficient evidence was presented to the trial court about the plaintiff’s accounts being premarital, they were not subject to equitable distribution. Yet, the trial judge ordered defendant to give 25% of his 401(k) to plaintiff as part of equitable distribution. Of their joint assets, defendant received about $137,500 and plaintiff received about $112,000.  Given the facts, the Appellate Division did not find the trial judge decision arbitrary and affirmed the decision and equitable distribution. 

 

 Mekhail is an excellent example of how various assets can be subject (or not be subject) to equitable distribution. That is why when people ask about equitable distribution, the only thing I can really say is – “it depends.”

Please, Please, Please, get a Lawyer

When lawyers say you should never represent yourself, even in so called, “simple” cases,  they are often accused of being greedy, driving up fees, and unwilling to acknowledge that there are smart people out there that are capable of working out the terms of a settlement.  I have recently been involved in a case which has been really bothering me. It is the perfect example of an intelligent, thoughtful, detailed oriented individual who believed he knew what he was agreeing to twenty three years ago when he was divorced and now finds himself in a position where a trial court has interpreted his divorce settlement agreement far differently than he did back then.

 In my case, my client did not have an attorney at the time that he was divorced .  He and his wife were able to reach an amicable agreement as to the terms of their divorce and she hired a layer to draft the agreement and put the divorce through.  When they got the issue of my client’s retirement benefits, he agreed to language which he thought would limit his ex-wife’s share of his retirement. Unfortunately, he did not have his own counsel to inform him of what is often referred to the “marital foundation” theory, which essentially means that as a result of the foundation that is built in the early part of employment ( which usually occurs during the marriage), a former spouse will be entitled to the benefit of  some post marital efforts.

 

Usually, a former spouse’s entitlement to a retiree’s pension is calculated by use of what is known as a “coverture” fraction. In its simplest form, the coverture fraction is one in which the numerator is the number of years or months that the employee worked during the marriage and the denominator is the total number of months or years worked. That fraction is then multiplied by the percentage of which the former spouse is entitled ( usually 50%). The resulting number is the actual percentage of the pension payment that the former spouse will receive.  This fraction is used for several reasons. First, as I have previously stated, the theory is that during the marriage, a foundation is built which allows the working spouse to advance in later years. Second is the reality that this is a mathematical way to segregate out the marital portion. It is not, however, a perfect science given the way that the majority of pensions are calculated.  The end result is often that the former spouse shares to some extent in a pension benefit that is calculated based upon a higher salary which was earned after the divorce.

 

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WHICH ASSETS ARE EXEMPT FROM EQUITABLE DISTRIBUTION

Whether an asset is exempt is a common issue that arises in divorce case.  The general rule is that an asset acquired prior to the marriage which is not commingled is exempt from equitable distribution.  In addition, an asset that is received via inheritance and/or third party gift is also exempt as long as it is not commingled.  Commingling is essentially putting an asset into joint names or depositing it into a joint account.  Changing something from someones own name into joint names is deemed as making a gift to the marriage.

Also, the law is clear that the person who seeks to have an asset deemed exempt has the burden of proving that the asset is exempt.

Because an engagement ring is a premarital gift, albeit a conditional gift, from one spouse to to the other, it is exempt from equitable distribution.  If the ring is replaced and/or enhanced during the marriage, while the original stone, if it exists, remains exempt, the new ring is not exempt.  In fact, any gifts between spouses during the marriage are not exempt and are subject to equitable distribution on divorce.  As such, some times we are required to have jewelry, furs, and other expensive presents appraised to determine their value for equitable distribution purposes.  Sometimes this task is made a little easier because parties have appraisals for insurance purposes which is why we often ask for the homeowners insurance policy riders.

The premarital portion of retirement assets, i.e. IRAs, 401ks, pensions, are typically exempt. For defined contributions plans (ie. the accounts with cash balances), the trouble may be finding or obtaining the documents to establish the premarital values.  That said, even though the premarital values are often commingled with contributions made during the marriage, the premarital portions are typically exempt.  Contrast that with a regular premarital bank account where deposits are made during the marriage using marital income.  Many would argue that this account has lost it's exempt status.  Is that fair?  What is the real difference?  Perhaps the difference is that though money will usually go in and out of a bank account, there usually is not the same type of two way activity as to retirement accounts.

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SUPREME COURT AFFIRMS KAY DECISION - ESTATE OF LITIGANT WHO DIES DURING DIVORCE CAN MAKE EQUITABLE CLAIMS

Previously, I blogged on the Appellate Division's reported (precedential) decision in Kay v. Kay.  The New Jersey Supreme Court granted Certification and the decision was rendered on January 6, 2010.  In a per curiam decision (i.e. no one specific Supreme Court Justice authored the opinion), the Appellate Division decision was affirmed for substantially the reasons set forth in Judge Grall's appellate opinion.

To reiterate what this case is about, the Appellate Division held that when the estate of a spouse who died while an action for divorce is pending presents a claim for equitable relief related to marital property, the court may not refuse to consider the equities arising from the facts of that case solely on the ground that the estate may not assert equitable claims against the marital estate sounding in constructive trust, resulting trust, quasicontract or unjust enrichment. In that case, the husband died basically penniless and the wife had assets in excess of $650,000 at the time.

The Appellate Division and now Supreme Court held that when the estate of a spouse who died while an action for divorce is pending presents a claim for equitable relief related to marital property, the court may not refuse to consider the equities arising from the facts of that case solely on the ground that the estate may not assert equitable claims against the marital estate sounding in constructive trust, resulting trust, quasicontract or unjust enrichment. This case rejects the holding in Krudzlo v. Krudzlo, a reported trial court opinion from 1990.

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SUPREME COURT DECISION IN KAY V. KAY EXPECTED TO BE RELEASED ON 1/6/10

Previously, I blogged on the Appellate Division's reported (precedential) decision in Kay v. Kay.  The New Jersey Supreme Court granted Certification and the New Jersey Judiciary web site advises that the decision will be released on January 6, 2010.  

To reiterate what this case is about, the Appellate Division held that when the estate of a spouse who died while an action for divorce is pending presents a claim for equitable relief related to marital property, the court may not refuse to consider the equities arising from the facts of that case solely on the ground that the estate may not assert equitable claims against the marital estate sounding in constructive trust, resulting trust, quasicontract or unjust enrichment. In that case, the husband died basically penniless and the wife had assets in excess of $650,000 at the time.
 

Check back soon for a post on the Supreme Court's decision.

ATTEMPT TO OPEN EQUITABLE DISTRIBUTION OF MADOFF ACCOUNT DENIED

In February, I wrote a blog entitled Madoff Mess Hits Divorce Court..  In this case, in June 2006, the parties agreed to evenly split the $5.4 million in an account they had with Madoff Securities. As a result, the husband gave the wife $2.7 million in cash, and retained the account. As a result of the Madoff Ponzi scheme that has essentially rendered the account worthless, the husband has filed suit seeking the $2.7 million that he paid the wife. The husband (a prominent attorney with a large NY law firm) alleged that because the account turned out to be valueless, the spirit of the agreement was broken.  The wife's position was the husband withdrew probably $3 million to pay the wife, so the asset did exist at the time of the settlement agreement.

The decision was reported last week and the husband lost.  Acting New York State Supreme Court acting Justice Saralee Evans decided that the husband is stuck with his decision to keep the account instead of withdrawing his money before the December 2008 collapse of Bernard L. Madoff Investment Securities LLC.  The Justice noted that while the husband claimed the Madoff account held no assets, he did not allege it had no value.  Key to the decision was that in 2006 and "the several years after that plaintiff maintained this investment," the account "could have been redeemed for cash, presumably significantly in excess of its 2004 value." In addition, the Justice held that "An investor's ability to redeem an account for value, was the assumption on which the parties relied in dividing their property and in doing so they made no mistake."

The public policy of the finality of settlements was upheld.  Whether is is ultimately fair since the asset may not have really existed is another story.  It is different than retaining a stock account and then the market goes up or down because in that instance, there really was an asset as opposed to a fictional asset.  It is also different than holding on to a home whose value has decreased, as I have blogged on before.  

Agreement for Cutoff Date in Lieu of Filing for Divorce

As is widely known, the filing date of the complaint for divorce which actually leads to a divorce is the “cutoff date” for equitable distribution, that is, assets acquired up to that date are generally subject to equitable distribution, and assets acquired after that date are generally not. This is a general rule and cannot be taken as a total brightline test since there are no notable exceptions. Among these are: (1) assets acquired by way of gift or inheritance or intestate succession (death without a will) not from a spouse; (2) assets acquired with other assets which were either from a third party as in the first example of acquired by one party prior to the marriage. An exception to the cutoff date would be an asset acquired by one party after the cutoff date but with assets which were subject to equitable distribution. Again, these are general rules and there are always exceptions or other fact situations which render a general rule inapplicable. Obviously, it is best to consult qualified counsel since each circumstance is fact-sensitive, and the result usually turns on very specific development of the facts.

One exception to the timing of “cutoff date” rule is advantageous to the parties. Say that (for one reason or another) the parties are cooperative and want to attempt to negotiate an agreement before filing for divorce. Their hope is that they can amicable provide the other, through counsel, with sufficient documentary information upon which to adequately understand their financial circumstances and based on that understanding, negotiate an agreement, in which case, they can then file for divorce and obtain an uncontested termination of their marriage within a few weeks. Using this methodology, they can avoid certain judicial systemic entanglements.

 

 

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FREE DIVORCE SEMINARS????

Driving around town this weekend, I saw many lawn signs, like those you would see for a political candidate, advertising a "Free Divorce Seminar." The old adage, "you get what you paid for" comes to mind. 

While I am aware of the phenomena of these "seminars" over the last several years, putting aside potential conflict of interest issues that could perhaps be created, is this the type of thing that one contemplating a divorce should be attending?  Or rather, should a person schedule an honest to goodness divorce consultation with an attorney to which they have been referred or otherwise have researched? 

There is no privacy or anonymity at the seminar - you may see neighbors, parents of your children's classmates, etc.  There is no confidentiality or privilege at a seminar.  You have these things at an initial consultation. 

You cannot ask confidential questions at a seminar; maybe you cannot ask questions at all (and the smart attorney probably would not take questions for risk of prematurely creating an attorney client relationship.)  You cannot show the attorney any pertinent document for the same reason.  And how can you develop a rapport with a speaker at a seminar?  The seminar can never be tailored to your special circumstances because one size never fits all. At a seminar, you cannot really probe the presenter's experience, depth of staff and other resources of the firm, ability to commit to your case, etc. 

At the end of the day, a one-on-one consultation, even if you have to pay for it, will be far more worthwhile to protect your dignity and get the attention and information you deserve.

DIVIDE THOSE RETIREMENT ASSETS

Most people are overwhelmed during the process of a divorce.  Stress and emotions run high, there are the added time constraints of the court and the daunting tasks of discovery, court mandated appearances and either a trial or coming to a final resolution.  When the judge signs off on the final judgment of divorce a great weight can be lifted and its easy to feel that the process is over.

Oftentimes, this is not the case.  What has been referred to as 'loose ends' can easily be overlooked and forgotten.  A perfect example is the finalization and submission of Qualified Domestic Relations Order ("QDRO") to plan administrators for the division of qualified and some times non-qualified retirement plans and benefits.  I have previously blogged on this issue.  To read those entries, click here and here.

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THE COMMINGLING OF SEPARATE ASSETS WITH MARITAL PROPERTY IN EQUITABLE DISTRIBUTION

New Jersey's Equitable Distribution Statute guides courts to consider several factors in deciding how to distribute property upon the dissolution of a marriage.  For instance, courts consider, among other factors, the duration of the marriage; the income or property brought to the marriage by each party; the economic circumstances of each party at the time the property division becomes effective; and the contribution of each party to the acquisition/dissipation/preservation/depreciation or appreciation in the value of the marital property, as well as contributions of one party as a homemaker.  Many people believe that all assets are to be split "down the middle" or equally, when, in reality, the analysis is more complex and an unequal distribution may be permitted under a given set of facts and circumstances.

Pursuant to these factors and numerous New Jersey cases on equitable distribution, a variety of assets exist that are generally exempt from equitable distribution including, but not limited to, an inheritance or pre-marital assets. Generally speaking, however, separate assets can effectively transform into marital property subject to distribution when such property is commingled or mixed with marital assets.  For instance, if a spouse receives an inheritance and then deposits it into a joint bank account with marital monies, then the inheritance has arguably commingled with the other joint account monies and is now subject to distribution. That said, just because it is commingled does not automatically mean that it should be equally divided upon a divorce.

The Appellate Division's recent decision in Speck-Bartynski v. Bartynski touched upon this issue.  There, the Wife appealed from that portion of a Final Judgment of Divorce equitably distributing investment accounts containing $1.5 million in commingled funds obtained from the Husband's inheritance with 1/3 going to the Wife and 2/3 to the Husband.  The inheritance was $2.5 million and approximately $2.186 million was commingled with marital funds, including, but not limited to, investment accounts to which both parties had access. 

While most of the other assets involving the use and/or investment of the commingled funds were equally divided, the trial court implemented the disproportionate split as to the investment accounts because the Husband had attempted to limit the Wife's access to the accounts by requiring two signatures.  In affirming the trial court's decision, the Appellate Division noted that the trial court properly considered the equitable distribution statutory factors, especially as to the Husband's sole contribution - through the inheritance - to acquiring the investment accounts at issue; the Husband's desire to preserve the inheritance for his children and grandchildren; and the restrictions he placed on the Wife's use of the money.

A spouse with separate property, such as the inheritance in this case, must therefore be cautious as to where the money is going to be deposited, how it is going to be used, and who is going to have access.  Otherwise, commingling of such funds can ultimately render it marital property subject to equitable distribution.

READ MARK ASHTON'S EXCELLENT POST ENTITLED "REAL ESTATE AS AN INVESTMENT"

Mark Ashton, a partner in our Exton, Pennsylvania office, and the editor of the firm's Pennsylvania Family Law blog, wrote an excellent post on that blog entitled, "Real Estate as an Investment". To read the post, click here.

Mark touches on whether the home is a good investment given the current financial times.  This post is reminiscent of a post that I did about a year ago on whether it is prudent to retain the marital home in equitable distribution in this declining economy.  To see that post, click here. While another year has passed, the song appears to remain the same and Mark's post has interesting recent data on this issue.

DOG CUSTODY - CONTINUED

Earlier this year, I blogged on the Houseman v. Dare case decided by the Appellate Division in a reported (precedential) opinion that held that  the special subjective worth of a pet to a party must be considered . Similarly, there were allegations there there was a specific agreement that one party would keep the dog, which was breached by the other party and Appellate Division remanded, as well, to consider whether there was an agreement. 

To see the prior post, click here.  To see the full text of the Appellate Division's decision, click here.

During the remand that was recently decided, the trial court,  in a somewhat Solomonic fashion, decided that the dog was to spend equal time with each party.  This seems to ignore the contract aspect of the case.  If more facts come out about this, we will update this post accordingly.

Per news reports, the trial judge stated that this was not a "custody arrangement" because, dogs are not children and do not get the same consideration. Despite the Appellate Division ruling, the judge reiterated that the dog was really no more than property.

CAN THE ESTATE OF SPOUSE WHO DIES DURING A DIVORCE SEEK EQUITABLE DISTRIBUTION: KAY CASE BEFORE THE NJ SUPREME COURT

Previously, I blogged on the Appellate Division's reported (precedential) decision in Kay v. Kay.  To view my prior post, click here.  The New Jersey Supreme Court granted Certification and will be hearing arguments on this case during this term. 

To reiterate what this case is about, the Appellate Division held that when the estate of a spouse who died while an action for divorce is pending presents a claim for equitable relief related to marital property, the court may not refuse to consider the equities arising from the facts of that case solely on the ground that the estate may not assert equitable claims against the marital estate sounding in constructive trust, resulting trust, quasicontract or unjust enrichment. In that case, the husband died basically penniless and the wife had assets in excess of $650,000 at the time. 

As the family court is a court of equity, it will be interesting to see how this will come down.  When this decision comes down, we will post again about the final result.

 

DIVORCE FOR THE WELL-TO-DO

As seen in Affluent Magazine.

Divorce for those of substantial wealth relative to those of limited wealth is an oxymoron – aspects of divorce between the two classifications are both similar and yet quite different. In final analysis, it is a question of degree – that is, the number of zeros behind the dollar signs. This summary discussion will deal with certain procedures and aspects of divorce which are similar to both. The distinctions lie in the availability and desirability of various procedural vehicles to the two groups.

Privacy and Confidentiality

Nearest to the hearts of you -- the rich and famous (next to, of course, your money) -- is privacy and confidentiality. None of you in your right mind wants to spread your dirty laundry in public – least of all those of you blessed with substantial wealth. With divorces of such persons being instant grist for media dissemination, generally, it is better for all concerned (especially their children on a whole host of levels) to have disposition of your matter not a matter of public spectacle. All too often, the perceived lesser-advantaged spouse may play the publicity card (or threaten to do so) in order to opt out a financial advantage – or in simple parlance – vie for “hush” money. Perception by the lesser-advantaged spouse that the financially-advantaged spouse will deal with her or him fairly (whatever that may mean) will usually go a long way toward negotiations where calmer minds prevail. Another method of seeking to assure a divorce far from the public eye is for a pre-marital agreement to address issues of confidentiality and mediation and/or arbitration out of the public limelight.

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FINDING CASH POST-DIVORCE IN A BAD ECONOMY

It would be an understatement to say that these are trying financial times.  Real estate values are done, retirement assets are down, stock accounts are down, many people have lost jobs and many other feel lucky to still have their job, albeit earning less than they once did. 

In the past, the proceeds of the sale of of the marital home was a solution to many post-divorce cash flow issues, including down payments for new homes, getting a new car and paying the lawyers and experts in a case.  With the decline in property values, many people are facing situations with negative equity or much less equity to divide. 

What I learned in the last few years, and what I have found that many attorney and many accountants do not know is that a spouse receiving a share of the other spouses retirement account in divorce (IRAs and 401ks) can avoid the early withdrawal penalty if they take with withdrawal "incident to a divorce."  Many people think  and I used to be one of them, that if you liquidated retirements assets, you had to pay the 10% penalty. 

However, provisions of Internal Revenue Code sections 72, 401 & 408 (as well as the Treasury Regulations), allow a person to avoid the penalty if the take the cash at the time of the transfer.  If the transfer is in to an IRA account and then they try to get the cash, there will be penalty.  The tax in either instance still has to be paid. 

I suggest that parties can be creative with this to get money out for both of them, if they are cooperative, transfer the money to the non-tiled spouse which will then be divided, and they agree on a fair division of the taxes. 

In any event, if the rainy day is at the end of the divorce, retirement assets to be transferred incident to a divorce could mean money for that rainy day.

APPELLATE DIVISION ISSUES INTERESTING OPINION ON JURISDICTIONAL ISSUES

A basic question that people often ask at the outset of a divorce is, does the Court have the ability, or jurisdiction, to hear their case, especially when one spouse lives in a state other than New Jersey?

New Jersey statutory law seems clear, but the outcomes of a jurisdictional question over whether the Court can hear the cause of action for divorce are often based on highly fact-specific scenarios. N.J.S.A. 2A:34-10 states, in relevant part to this blog entry, that a New Jersey Court may have jurisdiction over a divorce when either party to the marriage has “become, and for at least 1 year next preceding the commencement of the action has continued to be, a bona fide resident” of New Jersey. As noted by the Appellate Division in the recently decided Boghosian v. Boghosian, an intricate and interesting unreported (not precedential) opinion decided on August 17, 2009, New Jersey Courts interpreting the language of this law have concluded that “bona fide resident” is the equivalent of “domiciliary” and that either party must actually be domiciled in this State. 

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RETIREMENT FUNDS AS A SOURCE OF INCOME

 We have all heard how the current economy has been taking its toll on the economics of divorce. Where home equity and stock accounts was once a source income, I have had many clients look to their retirements as a resource for liquid income post divorce.  Many times, the issue of access to retirement funds comes up in the negotiation of a divorce settlement. As an example, if the marital home has fallen in value, a spouse may seek to liquidate a retirement account in order to have enough for a down payment for a new house post divorce.

 

In the case of a 401(k) or IRA, this may be a realistic source of funds as long as the consequences of taking an early withdrawal, including penalties are taken into consideration. However, many people are under the mistaken impression that as long as you are willing to pay the penalty, the money can be taken out by a former spouse at any time. Such is not necessarily the case.

Many, if not most traditional pension plans provide that there can be no withdrawal until the stated retirement age in the pension plan itself. So, even if you know that you will have funds at retirement age, you may not be able to spend them until a time in the future. Others provide that a former spouse cannot receive the benefit until the time the time that your former spouse begins to receive benefits, or at least becomes entitled to benefits.

 

Seem obvious? Well, in recent weeks I have had no less than three clients who I did not represent in the divorce or the negotiation of the settlement agreement who thought that they would be able to access funds immediately, and in one case, negotiated a lower amount based upon that assumption. Lesson to be learned? Find out about the rules of your soon to be ex’s retirement and your rights as a former spouse at the beginning of the divorce process. This can easily be done by an attorney through the use of a subpoena. Find out now what your rights are and when those rights come into being to access the money post divorce so you can make an informed decision in the negotiation process.    If the early liquidation of the asset is likely, make it a part of the negotiations. And don’t forget the costs associated with the early withdrawal of any account. A $100,000 401(k) is not really worth $100,000 after consideration of taxes and penalties.

More on the Division of Pensions

I have previously written articles and blogged on the issue of how a former spouse’s portion of a pension is calculated, and in particular, how a military retirement differs from other, civilian retirement vehicles.

Most defined benefit plans are divided based upon a “coverture fraction” which takes into account the number of years during employment that the working spouse is married. This has always been the best available way to calculate the former spouse’s share. However, while most pensions are (as a general rule) calculated based upon an average of the worker’s last three years of salary. A military retirement is calculated with far more specificity, utilizing a “points” based system, which take into account factors such as rank, days if service and whether a member was an active duty member or a reservist ( or a combination thereof). It may be therefore, possible to more accurately calculate a former spouse’s entitlement to the military employee’s retirement. Indeed, several states have adopted a view which calculates the amount using a “points based system.”

Recently, the New Jersey Appellate Division decided the case of Leins v. Leins, which acknowledges that there are differences in members who are retiring from active duty and those who are retiring from reservist duty, as the Defense Finance and Accounting Service calculates those retirements differently.

 

The calculation of a former spouse’s entitlement to a defined benefit plan is often, but not always, a simple calculation. It is critical to make sure that, while a divorce action is pending, all plan documents are obtained and reviewed in order to protect both the pensioned and non-pensioned spouse, and to avoid litigation later.

Tax Issues can Have Serious Consequences for Settlements

The disposition of the marital home is oftentimes the most pressing financial issue in a divorce case. The current real estate market brings tax issues to the forefront which must be given consideration. When negotiating a settlement, (or preparing for trial) it is important to understand the tax consequences of the disposition of property. Too often, parties simply think they are just going to divide assets at the value that they have today on a statement rather than understanding the tax affected value. One area that has to be carefully considered is the marital home.

As a general rule, when you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes. However, in the 5 years prior to the sale of the house, you need to have lived in the house for at least 24 months in that 5-year period. In other words, the home must have been your principal residence.

 

In a matrimonial action, and in particular, in a long marriage where the parties have owned a house for many years, this rule can have a profound affect on a party who has not been living in the house while the action has been pending. Add to this a real estate market that us sluggish and in which houses are taking years to sell, a settlement that says the parties shall “sell the house and divide the proceeds equally”, can really result in an unequal amount to the parties after taxes if one parties pays a substantial capital gains tax and the other, who has been living in the house pending sale, does not. SO, if you are going to let one parent stay in the house for the next six years until junior finishes high school and the real estate market hopefully bounces back, make sure you have considered the possible tax consequences.

 

Capital gains of course, are not limited to houses. The same concern exists for investments and any other assets that have increased in value. So if Jane is going to get the AT&T stock that was a wedding gift 25 years ago and worth $100,000 today and John is going to get the money market account with $100,000, it’s really not an equal distribution of assets, because Jane is getting an asset that is going to be taxed. 

 

The above examples are meant to stress the importance of understanding the effect that taxes can have on a distribution of assets and the importance of getting sound advise from your attorney and accountant or other tax professional prior to signing any agreement.  

COURT'S CAN'T "SPLIT THE BABY" WHEN IN COMES TO DUELING APPRAISALS

If you have never been through the process of a divorce yourself you may not know how, at the end of the day, things are actually decided. For example, how do attorneys or the court calculate how much of a spouse's pension or 401(k) gets divided?  How do attorneys or the court calculate the value of real property? Experts are obtained to appraise assets in order to obtain values.  Often parties each get their own experts and their are dueling appraisals.  If the parties cannot agree on a value, a court will have to hear testimony from both experts and make the call.

That was an issue that was recently addressed in the published Appellate Division decision of Pansini Custom Design Associates, LLC and Roger Parkin Joint Venture v. City of Ocean City and Patrick Newton and Saving Our Station Coalition, A-2003-07T1, decided May 14, 2009.

Many people who go through the process of divorce own real property.  If parties are unable to reach an agreement as to the value of real property owned so as to determine how much each may be entitled to, how does the issue get resolved?  Typically, the parties may either retain a joint real estate appraiser or each obtain their own real estate appraiser who will create an appraisal.  In the latter scenario, the result may be competing real estate appraisals and values.  If no resolution is reached among the parties and the issue is left to a court to decide in a trial, the importance and validity of these real estate appraisals will be tested.

There are experts available on nearly every topic if you look hard enough.  In family law, real estate experts abound.  Many attorneys have their "go to" experts or others who may solicit them for business.  No matter what, whatever expert is involved in your matter should be selected with thought and consideration to the specific facts of your case and the ultimate goals of the clients they work for.

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THE MEANING OF EQUITABLE DISTRIBUTION - WHAT IS EXEMPT AND HOW DO YOU PROVE IT

People sometimes assume that “equitable distribution” automatically means a 50/50 division of assets. However, a court cannot simply view a list of assets and make the automatic determination that the list should be divided 50/50 between the parties. The guiding case in New Jersey to help determine who gets what or how much in equitable distribution is Painter v. Painter, 65 NJ 196 (1974).  Another frequent question is what happens to assets that one party brought in to a marriage? Also, what happens to assets gifted to one party during the marriage by family members or third parties other than their spouse?

Recently, the Appellate Division issued an unpublished decision which addressed equitable distribution of a marital home and vacation home to parties who had been married twenty years. In the matter of Miller v. Miller, A-2506-07T1, Decided April 28, 2009, defendant-husband appealed from a Judgment of Divorce where the trial judge granted the plaintiff-wife an interest in both the marital home and vacation home that defendant alleged was not subject to equitable distribution as it was alleged to be an immune asset owned by him prior to the marriage.

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READ MARK ASHTON'S EXCELLENT NEW BLOG ENTRY ENTITLED "STOCK OPTION DEVELOPMENTS"

Mark Ashton, a partner in our Exton, Pennsylvania office, and the editor of the firm's Pennsylvania Family Law blog, wrote an excellent post on that blog entitled "Stock Option Developments."  To read the post, click here.

Stock options have become a large part of executive compensation over the last few decades.  Moreover, they have become common additional/incentive compensation even for non executives who work for large public companies.  We have had to deal with the issue of options both in terms of the division of them in equitable distribution and as a component of income for determining alimony and child support.

Mark's post raises interesting food for thought regarding the issue of the re-casting and/or re-pricing of options, post-complaint. 

Stay tuned for updates as the law develops regarding this topic.

READ MARK ASHTON'S EXECELLENT POST ENTITLED "A REMINDER THAT THE WORLD OF BANKRUPTCY HAS CHANGED"

Mark Ashton, a partner in our Exton, Pennsylvania office, and the editor of the firm's Pennsylvania Family Law blog, wrote an excellent post on that blog entitled "A Reminder That the World of Bankruptcy Has Changed.   To see the full post, click here.

The post reminds us how the 2005 changes to the bankruptcy code affects divorce settlements.  Specifically, divorce settlements are no longer dischargeable in bankruptcy.  Under the prior Act, payments in the nature of support were non-dischargeable but equitable distribution could be dischargeable.  The court would apply a balancing test as to the debtor and former spouse.  That balancing test is now gone.

Very often we still see clauses in property settlement agreements proclaiming that the obligations are not dischargeable in bankruptcy or "are in the nature of support."  Those clauses do not seem necessary anymore. 

Given the current economy, this issue could be one we see a lot.  That said, bankruptcy does not seem like it will provide relief to former spouses.

APPELLATE DIVISION SAYS- MORE INFORMATION NEEDED TO DETERMINE DIVISION OF DEBT

In the recent unpublished Appellate Division matter of McDermott v. McDermott, A-0631-07T1, Decided February 20, 2009, the Appellate Division remanded the matter to the trial court for further proceedings on the amount of loans taken during the marriage from plaintiff's family and the distribution of responsibility for repayment of those loans.

The parties were married for nearly 30 years.  Plaintiff/husband was an attorney with a solo practice and defendant worked at his office for many years, helping to raise their five children and eventually finding employment outside the home with a local school district.  During the marriage, the parties primarily relied upon the income earned from plaintiff's law practice.  This income fluctuated throughout the years, in part due to the economy and in part due to plaintiffs bouts of depression.

During the 15 day trial in this matter, testimony was offered that during the course of the marriage, plaintiff made some unilateral decisions with regards to the parties' finances, including taking loans from his family and purchasing property without notifying defendant, who only found out during trial.  Defendant claimed that she only knew of very few of the loans given by plaintiff's family, however evidence submitted at trial indicated otherwise.  Plaintiff's sister offered credible testimony that the total amount of loans given was $283, 398.50 of which only $6,300 was repaid. 

After the trial, the trial judge issued a written decision, which in part, obligated defendant to repay plaintiff's sister the amount of $57,165.31 as her share of loans made to the marital partnership; valued plaintiff's law practice at $100,000 of which defendant was entitled to half; compelled plaintiff to pay $2,000 per month in limited duration alimony for a period of 6 years; and ordered plaintiff to pay $49,000 of the $80,202.70 counsel fees incurred by defendant in the divorce litigation.

 

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APPELLATE DIVISION DENIES EX-WIFE'S CLAIM REGARDING BUY-OUT VALUE OF MARITAL HOME

Recently, in the unreported decision of Pacifico v. Pacifico, the Appellate Division reversed a trial court’s ruling establishing that an ex-wife provided sufficient proof to overcome a presumption established by the New Jersey Supreme Court that “current market value as of the time of the triggering event” should govern the value to which the ex-wife could exercise her option to purchase her ex-husband’s one-half interest in the marital home. 

The parties executed a Property Settlement Agreement in December 1996, which was incorporated into the final judgment of divorce. The PSA provided that the marital residence was to be sold upon the youngest child reaching age 19 and that, at that time, the ex-wife had the first option (and then the ex-husband) to buy-out the former spouse’s interest in the home. If neither party wanted to exercise said option, it was to be sold. Once the youngest child turned 19, the ex-husband filed an application to compel the listing and sale of the property. The ex-wife then filed a cross-motion to buy out the ex-husband’s interest at the value determined by a broker’s market analysis in 1996 – long before the ex-wife application. 

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What Now? How do I afford to Move on After Divorce?

 We all hear that in bad economies, divorce filings traditionally decrease.   There are many reasons for this, many of which are a subject for another day. Yet a prevalent concern that many of my potential clients express is the fear of the next step financially. Starting over is difficult and indeed overwhelming in the most amicable divorce where the parties both have substantial income. When the money is tight, is adds an additional layer of stress.  Some people mistakenly believe that they simply cannot afford to divorce their spouse.

One of my first questions to a new client is to find out if they have an accountant and financial planner of their own that they trust. If they do not, having them find one is near the top of my “to do” list for that client.   This is because, in most cases, there will be an equitable distribution of assets that have to be invested, whether it be a new home, a new IRA, or a new investment account. My client has to plan for his or her future early on and this may mean very different planning that occurred during the marriage. Even when there is a distribution of debt, there must be consideration of how to best pay that debT. Is a home equity loan appropriate? Should the debt be paid from assets that may not have as much capital gains given the current economic state? What are the tax consequences? These are all issues that need to be discussed with the client and financial specialists.

 

Another concern for many clients is purchasing a new home. For some, it may be the first time they are purchasing a home. Clients are concerned about obtaining a mortgage in these difficult economic times. It seems as if forces are colliding against some clients. For instance, we have all heard that banks are only lending to people with excellent credit scores. Yet during a divorce, many people experience financial stress and their credit rating suffers, often because of the other spouse. So what to do? First, many people do not realize that there are banks that are lending and there are mortgage brokers who cater to people who find themselves in a divorce. Also, rates are down and there are incentives for first time homebuyers. Clients already have most of their financial information ready as a result of the divorce. There are people and banks out there. It is just a bit tougher to find them in these times.

 

At the end of the day, my client has to make the decision that is best for his or her situation.  But I have to make sure that the client has to tools to make the right decision. 

GET YOUR QDRO'S DONE CONTINUED...

Several months ago, I posted a blog entry regarding the need to get Qualified Domestic Relations Orders (QDRO) done as shortly after or even before a divorce is finalized.  To read that entry, click here

Most recently, the US Supreme Court issued a decision, which only serves to strengthen the message of that blog.  In the recently reported matter of Kennedy v. Plan Administrator for Dupont Savings and Investment Plan, et al., decided January 26, 2009, the Supreme Court found that where an employee failed to change the beneficiary of their employer related retirement plan, i.e. 401(k), pension, etc. subsequent to the entry of a Final Judgment of Divorce, despite the clear terms of a Judgment of Divorce or Agreement between the parties, the Plan Administrator must divide the retirement asset in accord with the Plan documents, i.e. to whom the plan participant designated.

In this matter, the parties had been divorced for several years.  In their Agreement, the former Mrs. Kennedy waived her interest in Mr. Kennedy's Savings and Investment Plan.  After the divorce was finalized, Mr. Kennedy failed to change the beneficiary designation of this Plan to someone other than his former spouse.  Upon his death, his Plan benefits were paid to Mrs. Kennedy.  His estate requested that the funds be distributed to them but the Plan administrator, relying on Mr. Kennedy's designation form and the Plan documents, would not do so.

The matter was litigated up to the Supreme Court who found that Mrs. Kennedy did not waive or assign her interest in the Plan despite the terms of the parties Agreement.  The Court also found that Dupont's plan administrator acted correctly by enforcing a QDRO but also enforcing the plan documents. 

While it is important to make sure that QDRO's are completed either before or shortly after a divorce is finalized,  if there are retirement assets to divide and those assets fall under ERISA and require a QDRO, it is equally important to ensure that employee's participating in ERISA governed plans, by virtue of their employment, take whatever steps necessary to change their plan beneficiaries to avoid situations like the one above.

MADOFF MESS HITS DIVORCE COURT

All over the papers this week is the story of post-judgment litigation in New York.  In this case, in June 2006, the parties agreed to evenly split the $5.4 million in an account they had with Madoff Securities.  As a result, the husband gave the wife  $2.7 million in cash, and retained the account.

As a result of the alleged Madoff Ponzi scheme that has essentially rendered the account worthless, the husband has filed suit seeking the $2.7 million that he paid the wife. The husband alleges ta ht because the account turned out to be valueless, the lawsuit said, the spirit of the agreement was broken.

That said, if this case was in New Jersey, there may be the possibility of a recovery here.  Though the general rule is that equitable distribution is not-modifiable, the issue may turn on whether there was $5.7 million in the account at the time of the divorce or whether that was simply an illusion created by Madoff's alleged fraud.  If the account really had no value at that time, then the parties made a "mutual mistake".  In that case, the settlement agreement could be re-formed to create an equitable result.  If the money was actually in the account at that time, there could be a different result.  One could argue that this really wasn't any different than any other investment that loses value - though that result seems harsh.  However, assuming the husband had that money in your ordinary stock account, given the stock market over the last year and current financial  crisis, it seems unlikely that his $5.4 million would still be $5.4 million.  If there were just stock losses, it is highly unlikely that he would be entitled to any relief.  Moreover, it is not unlikely that if the wife invested her $2.7 million in stock or real estate, that she has her full $2.7 million either. 

We await the result of the suit and will post another blog entry when there is a resolution.

APPELLATE DIVISION HOLDS THAT THE ESTATE OF A SPOUSE WHO DIED DURING PENDING DIVORCE IS NOT BARRED FROM SEEKING EQUITABLE RELIEF

On January 28, 2009, the Appellate Division issued a reported (precedential) opinion in Kay v. Kay that held that when the estate of a spouse who died while an action for divorce is pending presents a claim for equitable relief related to marital property, the court may not refuse to consider the equities arising from the facts of that case solely on the ground that the estate may not assert equitable claims against the marital estate sounding in constructive trust, resulting trust, quasicontract or unjust enrichment.  This case rejects the holding in Krudzlo v. Krudzlo, a reported trial court opinion from 1990.  To read the full opinion, click here.

The basic rule is that a divorce case abates and no equitable distribution can be had when a spouse dies during the pendency of divorce.  However, there is a Supreme Court case called Carr v. Carr that created equitable remedies for a surviving spouse that would otherwise get nothing where the assets were all held by the other spouse and the rights to equitable distribution and an elective share are unavailable under the law.  This case provided a remedy for what was called the "black hole."

The Krudzlo case held that the estate of a dying spouse could not assert claims for equitable relief against a surviving spouse.

In Kay, there husband died.  At the the time of his death, he had limited assets in his name, insufficient even to pay his legal fees and burial expenses.  On the other hand, it was asserted that the wife had more than $650,000 in assets.  It was also asserted that the wife dissipated marital assets, diverting them to her own name and her daughter.

Given that the court's seek fairness and equity, the Appellate Division held that it was inappropriate to have a blanket rule preventing the estate from making equitable claims.  The Court did not decide the underlying merits of the claim, however. The estate will have the ability to make a claim to prevent the unjust enrichment of the surviving spouse.

Don't do it!! The Comparison Pitfall

My clients often ask “will I get the same thing that my neighbor received in his divorce” or “why can’t my ex share in transportation-- my cousin has to share with her ex” or “my friend earns so much more than me and his support is much lower than mine”. I always tell my clients that as a rule, don’t compare your situation with the situation of someone else. 

While the same laws concerning family law actions are applied to each case, each case is different and therefore, the outcomes are different. It is true that many cases have similar factual patterns but most of the time they are not exactly the same. Using one of the examples above, while someone may be earning more but paying less in support than another litigant, it could be that the ex-spouse of the litigant had other available resources generating income like an inheritance or the ex-spouse could have received more of the family assets as a trade-off for less support. While it is very tempting to compare your situation with that of another person, keep in mind that more likely than not, you are not getting the full story from that person. Also, sometimes misery loves company and it could be that the only part of the story you are getting is what the other person painfully remembers the most.

Also important to note is that in New Jersey, the statutory factors for an award of support or for a custody determination are numerous. The Courts apply each factor to the given situation and then completes a balancing of all of the factors prior to rendering a determination. It is in this application of the facts that results in different determinations among cases. Moreover, litigants should also recognize that Judges are vested with a certain level of discretion in weighing the factors which is yet another reason why the outcome of cases differ. 

Notably, if one was to review a significant amount of family law decisions published by the Court concerning the same exact issue (child support, alimony, custody, etc.), it is very unlikely that a person would find a decision with the same exact fact pattern as their given situation. 

In short, save yourself some frustration and make it a rule not to compare your family situation with that of someone else during a litigation and focus on your facts with your attorney.   After all, as I tell my clients, it is your facts that we will be presenting to the Court and not the facts of your neighbor, cousin or friend.

EDITOR'S NOTE:  i once had a client who used to say that no one could believe how much temporary support he was paying and that it was the most anyone ever heard of.  My answer was, "Do they make a million dollars a year like you? No.  Do they make a half a million a year?  No  Do they make $250,000 per year?  No.  The moral is that he was talking to people whose finances had no similarity to his and reacting to their shock.   That goes exactly to Apple's point - while friends and relatives are good for support and a shoulder to lean/cry on, they are not usually a good source of legal advice or information.           ERIC S. SOLOTOFF

APPELLATE DIVISION EQUALIZES SOCIAL SECURITY AS ALIMONY

The Appellate Division issued an interesting unreported (non-precedential) opinion on November 20, 2008 in the case of Freda v. Freda wherein the Court found that it was error for the trial court to not equalize the parties' Social Security benefits.

In this case, both parties were in their 70s and had been married for more than 50 years.  Their means were limited and this was not an alimony case, as they are typically before the Courts.  The wife, however, requested that their Social Security benefits be equalized so that post divorce they both had the same amount of money (the wife's Social Security benefit was $797 and the husband's was $1,400).

Typically, after 10 years of marriage, at a legally appropriate age to collect, a spouse is able to collect based upon their earning record or their spouse's, whichever is higher.  It is my understanding generally that when you collect on a spouse's record, a recipient gets half of what the spouse's entitled would be (this does not reduce the spouse's entitled, however.)

The Appellate Division stated  "We find the trial court's decision unreasonable under the
circumstances of this case where, after fifty years of marriage, the parties should share equally in their joint income as well as their assets."  As a result, the husband was ordered to pay the wife $300 per month as alimony

To view the full case, click here.

The wife's request in this case was one that is seldom seen in these cases and I have heard arguments that such a claim could be preempted by Federal law.  That said, if the amount of/right to receive Social Security is based upon earnings during a marriage, then like a pension, or for that matter any other asset acquired during the marriage, why should it not be divided too?  Perhaps that the answer is that this is not an asset, but rather a right, but that said, the arguments are analogous.  This is definitely food for thought in cases involving long term marriages.

Read Mark Ashton's Excellent Blog Entry Entitiled "Do I Need A Business Appraiser? And Just What is a Forensic Accountant?"

Mark Ashton, a partner in our Exton (Chester County), Pennsylvania office and the editor of our Pennsylvania Family Law Blog, wrote an excellent post entitled "Do I Need A Business Appraiser? And Just What is a Forensic Accountant?" on that blog.

To read the complete post, click here.

EDITORS NOTE:  Forensic accountants are also used in matrimonial cases to reconstruct income, prepare lifestyle analyses (how the people spent their money), to trace income to make sure it is all accounted for, to trace premarital assets to establish exemption or partial exemption, to value stock options and other compensation and for other similar tasks.  In complex cases, forensic accountants, the divorce attorneys and of course, the client, work together as a team.  The key is to select the right expert and there are many excellent ones that we work with.  - Eric Solotoff

Read Mark Ashton's Interesting Blog Entry Entitiled "Owner Know Thy Business"

Mark Ashton, a partner in our Exton (Chester County), Pennsylvania office and the editor of our Pennsylvania Family Law Blog, wrote an interesting post entitled "The Owner Know Thy Business" on that blog.

To read the complete post, click here.
 

EDITORS NOTE:  Mark's post leads to a discussion of several interesting issues that are frequently encountered in matrimonial cases.  It is not unusual in cases where one or both parties are self employed that there is either unreported income and/or personal expenses being paid through he business.  In those cases, the tax returns are obviously unreliable for support purposes and you have to get the business books and records, credit card records and other documents to determine the business owner's actual income/cash flow.  I say cash flow because that person is not paying taxes on the expenses being paid through he business and the expenses are not added to that person's income.  In some cases, though there are some personal expenses that are paid through the business, that is neither unusual nor problematic from an income tax perspective.  A perfect example is the deduction of automobile expenses.  While this is acceptable, within limits, per the IRS, those expenses have to be added back to income per the Child Support Guidelines.  In fact, all personal expenses are supposed to be added back.  I have been involved in other cases where the husband was declaring just enough income to pay the mortgage, taxes and utilities on the parties' $2 million dollar house and there was no other declared income apparent to pay their other expenses which amounted to a few hundred thousand per year.  In that case, we had to use a forensic accountant to reconstruct the income through the parties' budget because, there were, surprise, sparse records. 

An interesting question, and unanswered question,  is how these non-taxed expenses should be treated for support purposes.  If some declares $100,000 in taxable income and has another $100,000 in non-taxable perks, what is the income number for support purposes.  $200,000 doesn't seem right because only half is taxed.  A normal, taxpaying citizen may have to earn $240,000 or more to have the same net after tax spending power.

A bigger issue to address which deserves its own separate blog entry is what to do when the case has these issues because of a NJ case called Sheridan v. Sheridan.  The rule as per Sheridan is that when a judge hears evidence of unreported income, they are duty bound to refer the matter to the IRS.  As Mark suggests, filing amended tax returns makes the most sense when confronted with this issue - as long as it doesn't happen too late - as was the case in the example in Mark's post.                        -Eric Solotoff

THE VALUE OF REAL ESTATE - PROBLEMS IN THIS EVER CHANGING MARKET

I just finished a day of trial yesterday taken up be competing real estate experts regarding the value of the marital home.  It was certainly a reminder of the problems with the values of real estate in a rapidly changing market.

We first have to start with the basic premise of using the appropriate valuation date.  The case law is clear that a marital home is valued as of the date of the trial.

That caused some interesting issues in this case. The Complaint for Divorce in this matter was filed in September 2006.  The original appraisal of the home was done in April 2007.  While the market had already started to decline, both experts testified yesterday that their profession was resisting making adjustments for time (that is, if the comparable sales they were using were months prior, they were not adjusting for the decline in the market between the time of the sale of the comparable and the home they were appraisal), prior to early 2008.

Because this case is in a county that is hard to get trial time, the trial had been adjourned several times.  The original appraiser, who was a joint appraiser, updated his report in January 2008 and it should come as no surprise the the value had decreased.  It should also come as no surprise that the person that wanted to be bought out of the house objected and got his own appraisal.  This appraisal was in April 2008 and used comparables from the last quarter of 2007.  No adjustments for time were made.  The original appraiser updated his report for trial in September 2008.  Given what is going on with the real estate market, it is no surprise that the value has gone down again.

In fact, the appraiser believes that at this point, values are going down at a rate of 1/2% to 1% per month.  He also anticipates this to continue.

This case illustrates several areas for concern:

1) Best practices, which is court policy that dictates the time line of cases, will inevitably force appraisals to be done several months before the trial date.  In this market, is that not forcing the parties to get at least one more appraisal given the time delay between the end of discovery and the end of a trial? 

2)  In the event that there is a trial, some times it takes many months to get a decision.  Assuming you have a fresh appraisal report as of the trial date, in this market, if there is a several month delay, is the value as of the trial date a fair assessment of value for equitable distribution?

3)  Does it make sense in this market for one party to keep the house and either buy out the other spouses interest from the equity or offset the other side's share of the equity against other non-real estate assets?  With the prognostications regarding the continued decline in the market, would it not be most fair to sell the house so that the pain is shared equally and then divide the rest of the assets, in-kind?  I suppose it depends on how long the person getting the house plans to stay there.  If it is a long time, maybe it makes sense to keep the house.  If it is a short time, probably not so much. 

The equitable distribution statute requires a court to look at the income producing aspect of the assets received in equitable distribution.  While you don't see this done too often, how should a court look at an asset that is expected to continue to decrease in value for the foreseeable future. 

What this all means is that we need to think our prior thinking about what to do with the marital home in this declining economy.

 

See Mark Ashton's Excellent Post Entitled "Advice for Troubled Times in the Market"

Mark Ashton, a partner in our Exton (Chester County), Pennsylvania office and the editor of our Pennsylvania Family Law Blog, wrote a terrific post entitled "Advice for Troubled TImes in the Market" on that blog. 

To read the entirety of Mark's post, click here.

 

See Mark Ashton's Excellent Blog Entry on the Valuation of Personal Property

Mark Ashton, a partner in our Exton (Chester County), Pennsylvania office and the editor of our Pennsylvania Family Law Blog, wrote a terrific post of the valuation of personal property on that blog. 

To read the entirety of Mark's post, click here.

In New Jersey, and probably elsewhere, the last things that judge's really want to get involved in is the division of personal property.  In most cases, the time spent wont justify it.  Some of the ways that personal property issues are resolved are as follows:

1) the alternate selection method (i.e. each party alternates picking until there is nothing left)

2) one party makes two supposedly equal lists and the other party gets to choose the list they want.

I have also heard of cases where, for a particular item or items, the parties had an auction between themselves on the item (particularly when the cannot agree upon a value.)

The bottom line is that these issues are best resolved between the parties, acting reasonably and rationally. 

SEPARATE PROPERTY - PROVE IT OR LOSE IT

One of the things that we were reminded of  from the McGreevey divorce is that if a party claims that an asset is exempt from equitable distribution, they have the burden of proving the exemption.  In McGreevey, the wife shared in what the husband alleged were the proceeds of the sale of his premarital condo because he failed to prove the exemption at trial.

I just recently completed a trial, representing the wife, where we had several claims of exemption because personal property, cash and stock were either gifted premaritally or during the marriage.  In addition, there were certain inheritances during the marriage. 

The law in NJ is pretty clear all property acquired during the marriage by way of gift, devise or intestate succession is exempt from equitable distribution other than interspousal gifts which are subject to equitable distribution.  Similarly, if an asset is premarital, then by definition, it is not "acquired during the marriage" and thus exempt.

The problem arises when exempt funds are commingled with non-exempt funds.  To prove exemption, this requires the daunting task of tracing all of the funds into (and perhaps out of) the account during the relevant period of time.  Even if you can trace the funds, there are judges who believe that once an account is commingled, it should be evenly divided. 

One would think that personal property should be easier.  Usually, but not in my most recent trial, there is little dispute as to whether an asset is premarital or not.  Usually, but not in my most recent trial, there is little dispute that a birthday present or other gift to one party during the marriage was a gift to that person, as opposed to a gift to the whole family.

During my trial, the position taken at some point, perhaps after a comment made by the judge, was that since the collection was displayed in the marital home, it became a marital asset.  Of course, if the exemption of an engagement ring which is not a marital asset and often kept in the marital home is clear - then why would any other gifted piece of personal property by different.  In fact, I asked the husband on cross examination whether his daughter had collectibles - he answered yes.  I asked then whether they were displayed in the marital home and again he answered yes.  I then asked him if he was making a claim to these assets as marital and he said no. 

While clearly the game was exposed by that point, the fact remains that if you want to make sure that at item is exempt, keep it separate and try to keep records.  The burden is on you. 

The McGreevey Divorce - The Decision is In

Previously, I blogged about the trial in the McGreevey divorce.  In that entry, I wondered whether it was the desire for retribution that was driving the case and whether the legal and expert fees exceeded the matters at issue.  To see my prior post, click here.

The decision of the Court was released yesterday and unfortunately I was right.  As for the one party playing the victim throughout and until the end, that was evidenced by Ms. Matos McGreevey's statement released even before the decision was released. 

As to the decision, it was decidedly in favor of Mr. McGreevey on the major issues raised by his wife.  Whether the issues raised were ever real and bona fide issues, that is another story.  In any event, the trial judge was clearly frustrated with the parties and it showed in her decision.  To read the decision click here.

Some of the highlights of the decision and Judgment of Divorce are as follows:

-There is no obligation to pay alimony.  In fact, the Judge found that to the extent that there was a need for alimony, it was caused by the legal fee debt associated with the case.

-Mr. McGreevey's income for support purposes was $175,000 - approximately $25,000 more than his employability expert opined and significantly more than he claimed he could earn as a seminary student. Child support was based upon that income and his wife's former income (she was laid off just prior to the end of the trial.) The Child Support Guidelines were used and then enhanced slightly due in large part to the fact that Mr. McGreevey was being supported by his partner.  He did not get a credit for the support for his other child because he was not currently paying it.


-The wife's claim for celebrity goodwill did not fly nor did her claim that marital lifestyle should be fixed based upon the lifestyle provided by the State of New Jersey to the Governor and First Lady.

-Each side had to pay their own legal fees. 

-The wife's fees total fees were more than $525,000   after receiving a courtesy discount of approximately $125,000.  Only $50,500 had been paid to date.  Mr. McGreevey's fees totaled $498,000 and he had paid only approximately $170,000. 

Given the costs and the results, could it have possibly been all worth it?  Based upon the Court's decision, it seems unlikely.  That is, unless there was a desire to drag the other through the mud and exact vengeance in a public arena.  If that was the victory sought and received by either or both of the parties, then the system failed.

READ NATALIE FAMOUS' POST ON WHO GETS THE FAMILY PHOTOS

Natalie Famous, an associate in our Bucks County, Pennsylvania office, wrote a terrific post on who gets the family photos  on the Pennsylvania Family Law Blog.

To see the post, click here. To view the Pennsylvania Family Law Blog, click here or at the link to the right of the page.

As to personal property issues in general, aside from avoiding the fight about these issues, if that is not possible, make sure that everyone knows exactly what is being divided.  We have a case where despite the fact that most everyone would think that the use of terms such as "bedroom set", "dining room set" and "living room set" meant simply the furniture in those rooms, a party is taking the position that  those definitions include all the sheets and bedding, all of the floor coverings, all of the wall coverings, all of the serving pieces, etc. in the dining room furniture, and worse.  There have been numerous motions where the husband continued to complain that he did not get his belongings.  Only after his greater inquiry, including his deposition, did we learn what he meant.  While I have my own beliefs as to whether the way the husband is litigating is a tactic to upset the wife and run up her fees, the better practice would have been (this was done by the firm that previously represented my client)  to specifically list each piece of furniture so such discrepancies never come up. 

Pet Peeve - People Who Use Custody and Parenting Time Issues as Bargaining Chip for Financial Issues

One of my pet peeves is litigants and lawyers that use custody and parenting time issues as a bargaining chip to get better a better financial settlement.  I have several matters ongoing now where that is occurring.

In a recent case, both in negotiations between the parties directly, and in negotiations with opposing counsel, we were told that the proposed resolution of a hotly contested parenting time issue for far less than had been demanded was fine but only as part of a global settlement including the finances.  Put another way, they were only going to resolve visitation if my client made financial concessions.  The bad faith of the tactic was evident.

In fact,  in New Jersey, there is really little interplay between the parenting time and the finances other than some child support adjustments made for the number of overnight visits.  This does not even really come into play in high income cases that exceed the Child Support Guidelines.  That said, since parenting time and custody issues are based upon the best interests of the children, most would agree that you should not negotiate these issues based upon money.  However, it comes up all to frequently, often to the detriment of the children and at a great financial and emotional cost to the parties. 

The system in New Jersey is set up to try to smoke out and resolve these bogus parenting and custody issues early in the case.  At the outset of a case, the parties are required to attend a Parent Education program given by each county.  After that, the parties are required to go to mandatory custody and parenting time mediation, usually with Court staff, unless there is a domestic violence restraining order in effect.  Only then, do you get into custody and parenting evaluations with experts, etc.  Also, this is all completed at the outset of the process, long before discovery is over, and often before it is even started in earnest.

A familiar scenario of the bad faith custody dispute that I have seen a fair amount as of late is as follows:  one parent is the traditional stay at home parent - the other is the Type A executive type that leaves the home at 6 a.m. and doesn't return home until 7 p.m.  Sometimes, that person travels substantially for business as well.  The stay at home parent has been responsible for all medical and dental visits, haircuts, play dates, teacher conferences, etc. The divorce starts and the  parent that works out of the home demands either custody or a 50-50 parenting arrangement. 

In these cases, absent mental health issues or other extraneous circumstances, the demand is one that is typically made either because there are control issues or as a bargaining chip.  That is not to say that there are not times where this parent should not get custody, because there are and I have gotten custody for these types of parents. 

That said, when these issues are made for bargaining, if the matter does not settle in mediation, the next step is custody evaluations by a forensic psychologist. If the parties cannot agree on a joint expert or the Court does not appoint one expert, there can be two experts.  The children are now made part of the process and have to meet with the expert several times.  Their teachers may be contacted.  Their doctors and therapists may be contacted.  The parties' therapists may be contacted.  Other collateral sources may be contacted (neighbors, coaches, family members, etc.)  The price to pay on the family, aside from the legal and expert fees, is high - especially when the issue is for bargaining only.

Don't get me wrong.  I understand that there are good faith custody and parenting disputes that require this process.  While the toll is still the same, that may be unavoidable.  However, if the issue is not a "real" one, I would hope that people would not use it improperly as a bargaining chip.  The collateral damage may be great.

CAN YOU JUST GIVE ME A NUMBER?!?

Previously I blogged about the fact that cases have a life of their own and will only settle when both parties are ready.  As I was trying to settle a case today that is scheduled to start trial in Morris County next week, I was reminded of a related issue.

In this case, we have had a hard time getting the other side to negotiate.  They have taken a position that we don't think is reasonable nor supported by the facts or the law.  That said, we have made proposals to try to resolve the case.  In fact, at each time we have been required to negotiate (at the Early Settlement Panel, mandatory economic mediation (several sessions) and at an Intensive Settlement Conference), we have made proposals.  In some ways, it was against my normal practice to not bid against myself, but the client wanted to at least try to stir some movement. 

At each point, rather than provide a counter proposal, the other side has tried to wow us with, to put it nicely, "fuzzy math" in order to justify why they are right and we are wrong.  They have never, however, moved off of their proposal on support in any significant way. 

I finally had to tell the opposing counsel to just give me a number without the explanation or argument because I wasn't going to buy their theory, ever, and the theory didn't make a difference if the number was acceptable.

In fact, this is not unusual when trying to settle matters.  That is, sometimes the theories and explanations will bog things down.  The bottom line is that if  the parties agree on the number or a certain resolution of a non-financial issue, in many instances, it matters not at all how or why you got to that number.  In fact, the explanation may just start the argument again. 

Sometimes, it is more important to just give a number than explain how you got there.  If the number is fair and within the realm of reason, and the parties can live with it, it is sometimes better to be settled then win the debate which may only prove more costly.

UNREIMBURSED MEDICAL EXPENSES ARE DEEMED CHILD SUPPORT -THE REQUIRMENT FOR PAYMENT CAN'T BE WAIVED BY LACK OF PROSECUTION

On March 27, 2008, the Appellate Division released the decision in Gotlib v. Gotlib.  This is a reported decision which means that it is precedential and must be followed by courts in the future. 

In this case, the plaintiff/ex-wife filed a motion seeking enforcement as to unreimbursed medical expenses and the payment of college expenses. She also sought to invalidate defendant/ex-husband's transfer to a third part for his share of the marital residence.

As to the issue of medical expenses, the parties were required per their Judgment of Divorce to equally share in these costs.  The plaintiff sought more than $23,000 in medical expense arrears, going back to 1996.  These expenses included those that were already awarded to her in 1997 when she was required to file an enforcement motion.  Though she was successful in the motion, the defendant never paid.  The defendant argued that plaintiff waived her right to enforce the Judgment's clear provisions requiring each party to pay one-half of the children's un-reimbursed medical expenses because she did not consult with him before the children visited certain physicians, and did not bill him on a monthly basis, as required by the Judgment.

The Appellate Division disagreed holding that a parent's obligation to pay un-reimbursed medical expenses should be deemed by a court reviewing a motion to enforce litigant's rights as an essential benefit to the parties' children. In this light, the right to receive these payments belong to the children, and is therefore is not subject to waiver by a custodial parent. That said, the non-custodial parent retains the right to question the reasonableness of any individual medical expense.

The Appellate Division made some interesting comments as to how parents should ideally act after a divorce:

"A parent from whom financial contribution is sought nevertheless retains the right to challenge the reasonableness of the medical expenses. Cooperation, discussion and consultation should be the guiding principles in any decision involving the welfare of the parties' children. In deciding what type of medical treatment is required, the need for the parties to behave and act like parents is paramount. This may require them to subordinate their adversarial interests as litigants in favor of their children's welfare."

They also set forth factors that should be considered when assessing medical expenses, as follows:

"Some of the relevant questions to be addressed when considering the reasonableness of a reimbursement request are: (1) was the treatment medically necessary; (2) was the medical treatment in response to an unforeseen emergency requiring immediate action; (3) did the treatment involve elective or cosmetic medical services, and if so, was it in the best interest of the child involved to undergo such treatment; and (4) in cases of elective or cosmetic medical treatment, was the decision economically sound, given the parties' financial resources. This list is by no means an exhaustive recitation of the issues to be considered in every case. These cases are, by necessity, factually sensitive. A proper resolution requires careful attention to the salient facts."

As to the college issue, the Appellate Division reversed the finding that the parties should equally share the costs remanded the matter to the trial court  to make factual findings, after conducting a plenary hearing, guided by the factors outlined in Gac v. Gac and Newburgh v. Arrigo. The reason for this was that the Judgment was silent as to how the parties would divide higher education expenses, however, in arriving at his decision, "the motion judge did not address the Newburgh and statutory factors reflected in N.J.S.A. 2A:34-23(a) ,,, The court simply appears to have divided the expenses equally."  In addition, the Court was concerned because the plaintiff also did not seek contribution from defendant until long after the expenses had been incurred, "thereby excluding him from the decision making process of whether his son should attend Curry College or whether his daughter should attend Ba'er Miriam Yeshiva, both private schools. (citations omitted).  Participation by both parents is an essential factor under Gac, expressly required by the JOD, and should have "weigh[ed] heavily against the grant of a future application. (citations omitted)."   

In Gac, a father was not required to pay for college because of similar reasons as in the case above.  This seemingly creates a contradiction in how medical expenses and college expenses are treated.  Seemingly, reimbursement for medical expenses cannot be waived for lack of prosecution of the arrears.  On the other hand, contribution for college costs can seemingly be waived if a parent waits until after college is completed to seek reimbursement.  The distinction, at least in this case, is that apparently, at least as to the medical expenses, the defendant was given the explanation of the medical expenses and the proofs near the time they were incurred and/or the defendant had knowledge of them - even if exact compliance with the Judgment was not made by the plaintiff. 

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IS UNIFORMITY IN BUSINESS VALUATIONS UPON US? - THE NEW AICPA BUSINESS VALUATION STANDARDS

            On June 21, 2007, the American Institute of Certified Public Accountants, “AICPA”, released the Statement on Standards for Valuation Services No. 1 (SSVS No. 1) – Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset (“Standards”). These standards are effective for all valuation engagements accepted on or after January 1, 2008. The purpose of these Standards is to improve the consistency and quality of practice among CPAs that perform valuation services. The Standards were developed because Congress, government agencies and regulators have recently focused their attention on valuation issues, as well as the increasing demand for valuation services over the past 20 years. 

            The Standards specify two types of engagements: valuation engagements and calculation engagements. Valuation engagements would typically be the one required in a divorce matter.

            In determining whether the valuation engagement can reasonably be expected to be completed with professional competence, the standards require that the valuation analyst consider, at a minimum, the following: (a) the subject entity and its industry; (b) the subject interest; (c) the valuation date; (d) the scope of the valuation engagement (including the purpose of the engagement, any assumptions or limiting conditions that are expected to apply to the valuation, the applicable standard of value (i.e. fair market value or fair value) and premise of value (i.e. going concern), the type of report to be issued, the intended use and users and the restrictions on the use of the report); and (e) any governmental regulations or other professional standards that apply to the entity to be valued or to the valuation engagement.

            Additionally, in understanding the nature and the risks of the valuation services to be provided, the standards require that the expert should consider: (a) the proposed terms of the engagement; (b) the identity of the client; (c) the nature of the ownership interest, including control and marketability issues; (d) the procedural requirements of the valuation and whether they will be limited by either the client or circumstances beyond the client’s control; (e) the use and limitations of the report and the conclusion or calculated value; and (f) any obligation to update the valuation.

           

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Get Your QDROS Done

In the unreported Appellate Dvision matter of Panza v. Panza, the Court reversed the trial court and remanded the matter back to determine how the litigant should be compensated for the delay in the division of an asset subject to equitable distribution.  The distribution was delayed because of the husband's failure to get a QDRO finalized.

Plaintiff appealed an order denying his motion for reconsideration of a previously entered order, which modified the parties property settlement agreement (“Agreement”), specifically altering equitable distribution of his Exxon Mobil savings plan. The parties had agreed that plaintiff’s Exxon Mobil savings plan would be divided equally for the coverture period, which they defined as the date of the marriage to the date the complaint for divorce was filed. The Agreement was incorporated in the judgment of divorce. 

Two years after the judgment of divorce, defendant moved to compel completion of the Qualified Domestic Relations Order (“QDRO”). Shortly, thereafter defendant moved to change the date of the coverture period from the date the complaint was filed to the date the judgment of divorce was entered, which would substantially alter her share of the plan proceeds. Plaintiff cross-moved to enforce the original Agreement. Although the parties requested oral argument, the trial judge decided the motion on the papers, and without explanation, changed the coverture period from the date the complaint was filed to the date the judgment of divorce was entered. In the same order, the judge denied defendant’s request that the Marx calculation be used to divide the savings plan. (Marx v. Marx, 265 N.J. Super. 418 (Ch. Div. 1993), applies to defined benefit plans, not savings plans.)

The delay in defendant receiving her share of the savings plan was the result of Exxon’s failure to provide the necessary documents to the forensic account. “Defendant should be compensated for the delay, but the compensation should be in the form of interest earned on her share during the period of delay pursuant to the parties’ Agreement, not by altering that Agreement. Dworkin v. Dworkin, 217 N.J. Super. 518, 523 (App. Div. 1987).”

lawlibrary.rutgers.edu/decisions/appellate/a1842-06.opn.html

Hidden/Forgotten Assets

 At the beginning of a matter, often at an initial consultation, we will ask a client to provide us with a list of all of their asset.  While someone may not know all of the details, they will typically know the major assets such as real estate, bank accounts, brokerage accounts, retirement assets, automobiles, antiques, art and jewelry. 

That said, there are other assets that some people overlook or do not even realize are assets.  The following are some of those things which may be assets or otherwise have value that will be subject to equitable distribution:

  • Frequent flyer mileage
  • Security deposits (e.g., utilities, car lease)
  • Timeshare property 
  • Business AAA accounts or business distributions of cash/property 
  • Memberships (e.g., country club) 
  • Bond or deposit for country club 
  • Unused vacation, sick leave
  • Patents, copyrights, royalties 
  • Income tax refunds
  • Income tax capital loss carry-forwards
  • Income tax charitable contribution carry-forwards
  • Marketable govt licenses (radio licenses, commercial fishing quotas)
  • Special retirement benefits (“golden parachutes”) 
  • Retirement - life insurance benefits 
  • Retirement - medical benefits 
  • Retirement - survivor benefits 
  • Hobby or other collections
  • Contract rights from marital employment (e.g., insurance renewal payments for agent)
  • Affiliation “rewards” programs (e.g., points or discounts for credit card use)
  • Entertainment tickets, season ticket options
  • Business vehicle for personal use
  • Prepaid rent, leases, subscriptions
  • Burial plots
  • Life insurance cash surrender value (or perhaps death benefit if insured is elderly)
  • Tort, worker’s comp claims
  • Stock options, restricted shares (vested or unvested)
  • Hangar lease (for aircraft)
  • Hotel or credit card points
  • Cash
  • Small business retained earnings
  • US Savings Bonds, other securities
  • “Hidden value” items - rare items of personal property (e.g., antiques), rare pets, collectibles
  • Options to purchase property
  • Unpaid commissions on deals set to close
  • Referral fees (e.g., for personal injury lawyers)
  • Security or performance bonds posted
  • Car insurance prepaid
  • Taxes prepaid
  • Zero coupon bonds
  • Assets held by others on spouse’s behalf
  • loans receivable

The goal of equitable distribution is to effectuate a fair distribution of assets - all assets, not just those commonly thought of.  For these less than apparent assets, people must give some thought to their lifestyle and financial history so that they do not share in an asset that may have value.  That is not to say that each of the above has distributable value in every case nor will it be worth it fight over something that has nominal value.  However, you want to make sure that you identify all of the assets so that neither party gets an improper windfall because the other person did not know that an asset could/should be divided.

Click here for a printable copy of this checklist.