Archive for the 'Property Division' Category

How the Judge Rules

Monday, October 25th, 2010

If the parties cannot reach an agreement about the equitable division and distribution of the marital estate and alimony, a judge does it for them, and he considers what are termed mandatory factors, and in some jurisdictions, discretionary factors.

In the 41 jurisdictions that use equitable distribution, the wording and interpretation of mandatory factors vary, but in general these considerations include:

1. the length of the marriage,

2. the age, health, and occupation of the parties,

3. lifestyle of the parties,

4. contribution of the parties,

5. liabilities and needs,

6. behavior of the parties during the marriage, and

7. employability.

Discretionary factors vary from state to state. In some courts, a spouse’s economic conduct may be a discretionary factor. For example, a spouse who dissipates marital property in the casinos or on high living with a girl friend may find the judge considering his behavior when it comes to dividing the marital pie.

Equitable division, it should be remembered, does not mean each spouse gets half. It means a judge tries to be fair, and one Pennsylvania judge said fair often means that both spouses are unhappy.

Empty House Woes and Worries

Friday, July 30th, 2010

Many people facing the tough decision about the family home find themselves being pulled by their head and pulled by the heart, but sharp pencil work should be done before making a decision. That so-called American Dream of homeownership can become a waking nightmare for a divorced spouse who fails to throw a cold eye on arrangement before signing the divorced settlement.

A divorce upends a lot of what makes a home attractive — particularly that warm and toasty feeling of the nest, a special place where people love and nurture one another and make shared memories. The home, post divorce, is an empty box on a piece of land.

Very often, courts award mothers the marital homestead on the theory that the children endure less disruption staying in the place they know. This may be true, but after a time, the mother discovers that the routine leaves her house rich and cash poor. Now she faces the logistics of selling the house on her own — the commission to the real estate agent and spiffying up the property to get it ready.

And this ignores the grim reality of a very depressed housing market. The woman who took the house as part of a divorce settlement in 2007 now faces a far worse housing market, and the much of the appreciation of housing during the boom vaporized in the collapse of the market.

And a single householder who did not take a haircut in the collapse of the market now faces paying capital gains on the first dollar above $250,000 when she could have taken the $500,000 capital gains exclusion if she and her partner had sold the house before the divorce.

This house equation is further complicated by the cost of taking over a mortgage (or getting new one) and the routine expenses associated with ownership, including maintenance and taxes.

Gifts: Not a problem during the happier times

Tuesday, June 29th, 2010

Presents and gifts between spouses are interspousal gifts, and during the unhappy times of divorce, courts struggle to determine whether the conveyance happened as a contract or a gift, and if it is a gift, whether it is marital (a “gift to the marriage”) or separate property.

Sometimes assets are conveyed when spouses enter into what are termed midnuptial or postnuptial agreements, either implied or written. Contract law generally governs these agreements, and they happen for a number of reasons, including tax and estate planning.

If the conveyance is not a contract, then the courts consider it a gift under the common-law definition of a gift, which means there must be intent on the part of the donor, delivery and acceptance by the recipient. When the property is transferred into one name alone, the burden of proof is on the person who claims that the intent is present — the recipient.

When property is transferred into joint names (as it often does in real estate and accounts for its acquisition and improvement), the joint title gift presumption very often comes to the fore. This places the burden of proof on the party who claims the transfer was not a gift. Disposition of interspousal gifts turns on whether a gift is a gift to the marriage or a gift to a spouse. Gifts to the marriage are marital property; gifts from one spouse to the other are generally separate property. If John gave Ginny a five-caret diamond as a present during happier times of the marriage, he may argue that the ring is an investment, and therefore, marital property; Ginny may contend that the gift is her separate property.

Gifts between spouses are subject to distribution in divorce, and they can become problematic depending upon the jurisdiction of the action. States are either community property or equitable distribution jurisdictions, and this can affect the way gifts between spouses are treated.

Generally gifts between spouses made during the marriage are subject to distribution because they come to be seen a marital property. When couples marry very often separate property becomes marital property. If one spouse owns a home before he marries and adds his wife to the deed after they married by selling her the house for a dollar, he made what is termed a “presumptive gift” to the marriage, turning the homestead into marital property. This means that the ownership is 100 percent marital property, not 50 percent each spouse.

In most jurisdictions, that symbol of hope and dreams — the wife’s engagement ring, sometimes the first “large” purchase a couple make together — remains the separate property of the wife.

A Key Step in Divorce

Wednesday, June 23rd, 2010

In a divorce, classification of assets is a preliminary to distribution of property. Everything a couple owns and owes is classified into one of two categories — marital or separate property. In twelve states — the so-called all property or kitchen sink states — both kinds of property are subject to distribution. In most states, however, only the marital property is divided.

After the assets are classified, they can be divided and distributed based on the applicable law in the jurisdiction where the couples divorce. Twelve states are all property; nine states are community property; and the rest are equitable distribution states.

Couples who want to avoid making lawyers rich should remind themselves that courts approve any reasonable division of property that the divorcing spouses fashion.

Generally, marital property is everything a couple earned or acquired during the marriage; generally, separate property is property that belongs only to one party, such as property owned before the marriage, gifts and inheritances, property acquired using separate assets.

That sounds easy but, needless to say, deciding what is marital property and what is separate property often becomes contentious. Problems arise when one party places separate property in joint names, when a spouse commingles separate property in an account that contains marital property, or in the case of a business, when one spouse made active contributions to the growth of a business the other owned before the marriage.

In general, however, when separate and marital funds are commingled, regardless of which came first, the resulting mixture is presumptively marital. The spouse who made the separate contributions can establish a claim to it by proving the nature and amount of the separate contribution.

Much, if not even most, separate property becomes commingled to one degree or another during the life of a marriage. Moreover, states treat the appreciation of assets, separate and marital, in different ways. Some states make a distinction between active and passive increases in income from separate property and active and passive appreciation in the value of separate property.

A Hurdle that Must be Crossed

Thursday, May 27th, 2010

Without a doubt, one of the biggest hurdles in a divorce is the negotiation about the terms and conditions of the marital property settlement, spousal and child support and visitation.

There is one no right way to negotiate, nor can a single, model schedule be fashioned. Negotiations, whether face to face or through lawyers or mediators or collaboratively, can be very difficult when one or both of the parties makes unreasonable demands or imagines that he or she can walk away with everything.

Most lawyers agree that negotiations move along when both spouses are at the same place emotionally and mentally, that is, when both the husband and wife each accept that the marriage is over and must end. In a surprising number of cases, one spouse is completely blindsided by the divorce. Rufus’s announcement that he wants a divorce may flatten Rhonda, who has no idea of Roxanne. Thus, the person who wants to leave may be way ahead of the person who does not see the breakup coming — at least emotionally and mentally. The person who is left may try to stall, sometimes in hope of a reunification, but as the divorce progresses, he or she moves toward the point where both spouses understand the marriage is over.

For this reason, many couples wait a period of time between separation and the onset of negotiations.

Some couples arrive at a rough agreement about the divorce and use lawyers to cross the t’s and dot the i’s; others turn the majority of the work over to the attorneys. A husband and wife who can negotiate with each other can save money and perhaps go separate ways, if not as friends, at least not as enemies.

Negotiations frequently bring into play what are termed leverage factors, considerations made by each of the parties pertaining to the issues that are being disputed.

In divorce actions, one leverage factor is, in whose interest is it to remain married longest? Answering this question can be a starting point at the onset of divorce negotiations because it creates leverage over the negotiations. If Rufus has left Rhonda for Roxanne, Rhonda has leverage she can work to her advantage in property settlement negotiations. A person prepared to wait has a bargaining tool that can be brought to bear in property negotiations.

When they end successfully, nothing is in dispute, and divorce can proceed through the courts. The terms and conditions of the divorce — the marital settlement, spousal and child support and visitation — can be memorialize in a settlement agreement, which becomes part of the divorce record.

An Important Calculation in the Marital Estate

Tuesday, April 20th, 2010

In dividing the marital estates, the appreciation of assets, both separate and marital, present difficult questions. Assets appreciate actively, which means as a result of improvements or actions by its owner, such as building a fireplace in the marital home, or passively, which means as a result of changes in the market, such as during the house boom. This sounds simple, but like everything in the context of divorce, it becomes more complicated.

Very often judges face complicated arguments about the active and passive appreciation of assets that are in part marital and in part separate. For example, in general, in a private company headed by a single owner all appreciation is generally active, but one of the most difficult situations in family law happens when courts must deal with the appreciation in the value of private, family-run businesses. Active or passive appreciation can become something of a Gordian knot in the case of private business that is separate property when marital or community funds are commingled with uncompensated contributions of a homemaking spouse. This situation happens very frequently, such as doctors who employ their spouses as secretaries.

The management of separate property investments can become problematic, particularly during the wide gyrations of the financial markets. When one spouse plays an active role in the management of separate property investments, the other spouse may claim that the increase should be marital, particularly when it is the husband managing the wife’s property. By the same token, a wife whose investments take a plunge may allege dissipation because her husband mismanaged her money. At the least, both spouses should have some idea of the original cost of an asset because this number is used to calculate any appreciation.

In general, courts have held that when a nonmarital asset appreciates because of the efforts of either party, the appreciation becomes marital. The asset need not be money. In a 1991 Montana case, a court held that a wife who had managed her husband’s collection of baseball cards should share in the appreciation of the collection.

One of the more difficult situations arises when separate property appreciates during the marriage. In general, in dual-classification, equitable distribution states, active appreciation that results from marital efforts is marital property while passive appreciation remains separate property. Courts look on appreciation as a result of marital efforts as active, and appreciation as result of market forces or third-party as passive.

A “metaphysical quest for the sound of one hand clapping”

Tuesday, April 13th, 2010

Many divorcing couples struggle to agree on the value of a professional practice, particularly its goodwill, which is its value beyond the market value of any tangible assets. Battling spouses argue vastly different calculations for this business asset that neither can see nor touch nor sell.

It is not an easy call. One Florida court likened “[t]he attempt to determine the goodwill value of the business of a sole professional practitioner, absent consideration of reputation, presence and tangible assets, is somewhat akin to a metaphysical quest for the sound of one hand clapping.”

Goodwill, which includes reputation, prestige, and company name, is the favor that a business enjoys by virtue of being established — that hard-to-calculate part of the whole that is greater than the sum of its parts. Goodwill is based on the observable phenomenon that when a business is sold, the sale price is greater than the value of its assets.

In divorce actions, particularly those involving professional practices such as a doctor or lawyer, goodwill becomes a point of contention when one side (usually the professional himself) contends that it is separate property and the other side (usually the wife) contends that it is marital. Very often goodwill can far exceed the value of any physical assets accumulated by the professional. Goodwill can also be a factor among tradesmen. Ralph runs a thriving shoe repair business out of a hole-in-the-wall shop on a side street, but when Ralph and Mrs. Ralph want to retire they cannot find a buyer because all the value of the business is Ralph and his reputation for good work.

In divorce actions, courts must grapple with the distinction between realizable goodwill, which can converted to cash by selling the business, and unrealizable goodwill, which is the business, professional and marketing skills of the owner. In general, most courts hold that realizable goodwill is marital property and take a variety of positions about unrealizable goodwill.

Or the craftsman, in the case of the shoe repair shop. In some businesses unrealizable goodwill may be the business. Ralph’s Shoe Repair has a substantial value as long as its founder, proprietor and sole employee does the work; without Ralph, its value is reduced to nothing but the sale value of his tools and tiny shop.

Goodwill questions also surface when courts must deal with the goodwill value of professional degrees acquired during the marriage, particularly when one spouse (often the wife) forsakes a career for the promise of a payoff of enhanced earnings because of the degree (taken by her husband).

A majority of American jurisdictions hold that personal goodwill of a business is unrealizable and cannot be classified as marital property; on the other hand, enterprise goodwill — “the corporate, transferrable reputation of the business itself” — is realizable and must be included in the marital estate. “If enterprise goodwill is not marital property, the valuation of a business will be much lower than the actual price than the same business could command on the open market.”

Surprises When the Marriage Ends

Tuesday, March 9th, 2010

The commingling of assets — the mixing of assets, separate and marital during the course of the marriage — makes for problems in equitable division when the marriage ends.

Very often, during the happier times of the marriage young couples pool their money, taking a “what’s mine is yours and what’s yours is mine” world view about their finances. For example, young couples frequently put all the cash they receive as wedding gifts into a pot with the idea that down the road they will use it for a house. During the happy times, neither spouses worries about ownership because “the money is ours,” but commingled property makes for surprises when it is divided in a divorce. Commingling, which is also called transmutation, can happen as a result of a transfer by contract, gift, or a mere change in legal title.

Money in the marital pool often becomes joint property. For example, a money gift to one spouse, which normally is the separate property of the person who received it, deposited in an account in both names become commingled property and may become a gift to the marriage, i.e., both parties.

Gifts between spouses can become very problematic, too. Even property that entered the marriage separate or immune sometimes ends in the pot because spouses, during the happier times, taint their individual claims of ownership by putting it in joint names. Rufus thought he and Rhonda belonged to ages when, on her birthday, he gave her that Picasso print (purchased with an inheritance, which is his separate property) she now claims is her separate property (hence 100 percent hers) and he says was a gift to the marriage (hence subject to distribution).

Unraveling commingled property often becomes like unmaking a martini or unscrambling an egg when it comes to the division of the marital home.
The purchase of the home very often involves the use of separate property (funds brought to the marriage by one party), gifts to the couple (from one or both parents), loans to the couple (again from one or both parents), and funds that one or both made toward the purchase.

Courts wrestling with classification of property conveyed from one spouse to the other must decide if the transfer is a contract, and if not a contract, a gift, and if a gift, one that is marital or one that is separate property. It sounds hard and it can be even harder to do, as is illustrated by Rufus’s Picasso print.

Unscrambling the egg of commingled property frequently demands good legal advice. Case law in jurisdictions varies on this subject.

Equitable Distribution: It Does Not Mean Equal

Monday, February 22nd, 2010

Very often in a divorce, spouses struggle to understand the idea of what is called “equitable distribution” of the marital estate because they find out that equitable does not mean equal or even half. And that, depending on which side of the equation a person is, does not seem “fair.”

Equitable distribution of the marital estate, which is the system used in 41 of the 50 states and the District of Columbia for dividing property acquired by spouses during their marriage, means the court has the power to divide and distribute marital property “based on equity and fairness” and are not bound by which party held title to the asset during the marriage. Some states say all property held by the couple is marital, but most equitable distribution states classify property as either marital or separate, and distribute the marital property equitably.

In practical application, equitable distribution very often results in the family home going to the custodial parent, who is often the stay-at-home mother with small children and other offsetting assets going to the noncustodial parent who is often the father. Judges make this division of property even when the division produces a dollar value that is not exactly equal and may indeed by short in favor of the mother. In the eyes of the judge this division is equitable to both parents and the children.

Put in the simplest way, equitable distribution — which is also called equitable assignment — means that a judge tries to be fair, and sometimes that means that when he cuts the loaf in half the pieces will not be equal in size.

The laws on equitable distribution differ from one jurisdiction to the other. In most equitable distribution states, judges must consider certain mandatory factors, but courts afford judges considerable latitude in the interpretation of these factors as part of what is called judicial discretion. The mandatory factors normally include 1) the length of marriage, 2) the age, health, occupation of the parties, 3) station in life and lifestyle of the spouses, 4) liabilities and needs, 5) tangible and intangible contributions of the parties to the marriage, 6) assets and liabilities, sources and amounts of income, 7) behavior of the parties during the marriage, and 8 ) vocational skills and employability.

Even when one spouse owns a great amount of separate property in his or her own right, equitable distribution does not limit his or her claims to the marital estate. Equitable distribution works from an assumption that the marriage is an economic unit and that what the spouse acquired during the marriage is subject to distribution — regardless of need.

A Serious Form of Marital Misconduct

Thursday, January 28th, 2010

Dissipation includes a variety of transgressions against the marriage — the wasting of marital assets through extravagant spending, high living, gambling, excessive borrowing or fraudulent conveyance to third parties.

Courts, which increasing view a marriage as an economic unit, look with disfavor on the dissipation of assets. Most consider it serious marital misconduct — more serious than, for example, marital infidelity.

Dissipation often happens when one spouse hides assets that might be shared with the other as part of the property settlement. Very often women are at a disadvantage because the husband manages the money. Sometimes these machinations become quite complicated and require a forensic accountant who can analyze financial records for evidence of secretion.

One common form of dissipation of assets is the expenditure of marital funds for a girlfriend or paramour.

Courts deal with dissipation after the fact via unequal distribution of the remaining marital assets in favor of the victim party. The most common way is to treat the dissipated assets as marital property and then distribute what is already gone as that party’s share of the marital pie. For instance, an alienated spouse who gambles away marital assets in the casinos may find the losses negatively credited to his or her share of the marital estate.

Sometimes assets improperly conveyed to friendly third parties may be ordered restored to the marital estate under the terms of Uniform Fraudulent Transfers Act (UFTA).

In dealing with dissipation, courts balance the competing goals of preventing dishonest or reckless expenditure of marital funds against reasonable use of marital funds for legitimate purposes.

Expenditures or loss associated with a valid marital purpose are more problematic. Valid marital purpose would be when one partner spends marital assets on routine living expenses, business expenses associated with a marital business, reasonable maintenance and payment of taxes on marital property.

Generally, a dissipated asset may be considered marital property if 1) the asset is lost; 2) the loss happened upon and after the breakdown of the marriage; 3) the guilty spouse controlled the asset at the time of the loss; and 4) the loss was not incidental to a valid marital purpose. Loss can take many forms. In one California case a number of years ago, an angry husband who heaved his wife’s jewelry in the Pacific Ocean learned the meaning of dissipation when the court charged the value against his share of the marital pie.