Posted on January 19, 2010 by Eric S. Solotoff

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.

Similarly, marital homes owned by one party and never put into joint names often do not receive the treatment that the law would require.  Specifically, there is case law that says that only the principal pay down of the mortgage during the marriage plus the active appreciation (i.e. if the value of the home has been enhanced by capital improvements) is subject to equitable distribution.  That said, I have seen people argue judges state that because it is the marital home, somehow there should be some greater distribution, even if it is not 50-50. 

Note that aside from the retirement assets scenario described above, there is another exception to the commingling rule.  That is, there is a reported decision that says that when someone has temporarily parked an otherwise exempt asset in a joint account only to move it out to an individual account shortly thereafter, the asset will remain exempt.  I had a case where there husband lost his brother at an early age and he received the proceeds of his brother's life insurance.  Because he was so distraught about the loss, his wife took the insurance check and opened a new, joint account with it.  No other money ever went into or out of the account.  After a trial, the court found that the account was the husband's exempt property despite being in joint names for about 2 years or so.

To other notes on exemption.  First, even though an exempt asset was converted to a joint asset, that does not mean that it has to be divided equally.  New Jersey remains an equitable distribution state and assets that a party brought into the marriage and source of acquisition of the assets are two factors that must be considered. Second, the better practice to protect premarital assets is to have a prenuptial agreement.  Prenups can be used to preserve premarital assets, even if they are commingled, if the agreement says so.
Tags: , , , , , , , , , , , , , ,
Posted on August 2, 2009 by Robert A. Epstein

WHAT ROLE DOES AN INHERITANCE PLAY IN DETERMINING ALIMONY?

While an inheritance is generally not subject to equitable distribution in New Jersey, the income or interest received from an inheritance can be used to determine an appropriate level of alimony.  Thus, for instance, the income a spouse receives from an inheritance can decrease that spouse's need for a certain level of alimony, even if that spouse never worked during the marriage. 

Notably, it is the inheritance's potential to generate income that matters, so a spouse who receives an inheritance cannot deliberately shield an inheritance in an attempt to affect to raise or lower the alimony award.  It also does not matter if that spouse chooses to actually receive the income derived from the inheritance, choosing instead to reinvest it. 

This issue was recently addressed again by the Appellate Division in the unreported decision of Overbay v. Overbay, where the Appellate Division affirmed the trial court's finding that the Wife who had received an inheritance was able to generate additional investment income from the inheritance without any risk of loss or depletion of the inheritance principal.  In so doing, the trial court considered expert testimony from both sides, as well as testimony from a court-appointed expert, to determine an accurate imputed rate of return on the inherited investments. 

The rate of return for imputation that the trial court ultimately came to was also based on historical rates of return, the Wife's age, and her health issues.  The Appellate Division essentially affirmed the trial court's willingness to take a prudent ground between the parties' respective approaches to investment - not surprisingly, the Husband, who possessed financial expertise, favored an aggressive approach that could potentially lead to greater returns, while the Wife favored a more conservative approach, especially as she dealt with her own health issues.

This was not the first time that the Appellate Division had reviewed the issue between the parties, as it had previously determined in a 2005 reported (precedential) decision that the Wife's interest earned on the inheritance should be imputed to her as income for purposes of determining alimony.  In so doing, the Appellate Division there concluded that, where a spouse has underearning investments and can generate additional earnings - without risk of loss or depletion of principal - but does not do so, a court can impute to that spouse a more reasonable rate of return to such assets.  The Appellate Division noted there that if a prudent rate of return is applied, then additional income need not be imputed even if a more aggressive investment strategy would provide additional earnings. In other words, someone with a lower tolerance for risk historically would not likely be imputed the highest possible rate of return.

Tags: , ,
Posted on April 30, 2009 by Eric S. Solotoff

LAW MODIFIED TO PREVENT ABUSIVE AND NEGLECTFUL PARENTS FROM RECEIVING ALIMONY AND INHERITANCE

In reaction to the Supreme Court's decision in Mani v. Mani (which held that non-economic fault was not relevant to alimony except in "egregious circumstances") and the Appellate Division's decision in Calbi v. Calbi (which did not preclude alimony to a woman who beat and kicked her 14 year old son to death during an alcohol related incident), on April 17, 2009, Governor Corzine signed a bill that did the following:

  • It amended the alimony statute to deny alimony to a person convicted of murder, manslaughter, criminal homicide, death by auto, aggravated assault of a similar office in a other jurisdiction if the crime results in the death of a child and is committed after the divorce.
  • It eliminated inheritance rights for a surviving parent that abused, abandoned, committed a sexual offense against or negligently endangered the child
  • It eliminated under the worker's compensation statutes recovery by a parent who committed those same acts against their child. 

We previously blogged about the tragic Calbi case.  To see that post, click here.

The new law takes effect in July 2009.

Though the Appellate panel in Calbi invited the Legislature to amend the law, it will be interesting to see if there will be further legal challenge to these laws, particularly as to the alimony  and worker's compensation aspects, because of the specific purpose of those laws. 

 

Tags: , , , , , ,
Posted on August 25, 2008 by Eric S. Solotoff

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. 

Tags: , , , , ,