Economic Issues in Divorce

1
Economic Issues in Divorce

• Property
• Maintenance (Alimony)
• Child Support

2
Property at Dissolution

• Classification
• Valuation
• Division

3
Characterization Who owns the property?
An Individual?
The Marriage?
4
Two Property Schemes
Common Law
Community Property
5
Community Property Systems
The Marital Community
Husband
Wife
6
Community Property Keys

• Three title possibilities
• Governs property ownership and control during
  marriage, at death and at dissolution
• Includes all property acquired during marriage
  except gift inheritance bequest

7
Common Law Property Systems
Joint Title
Husband
Wife
8
Common Law Property Keys

• Creates Two Title Possibilities
• Governs property ownership during the marriage
  and at death
• Has been abandoned as a method of characterizing
  property at dissolution in all states

9
Modern Common Law Property Systems at Dissolution
Marital Property
Husband
Wife
10
Factors in Classification

• When acquired
• How acquired

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All Property
Earned
Marital Property
Given
Marriage
Divorce
12
Acquired During the Marriage
Earned
Marital Property
Given
Marriage
Divorce
13
Acquired During MarriageExcept Gift, Devise,
Inherit.
Given
Marital Property
Earned
Marriage
Divorce
Excluded by Agreement
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Missouris Property System Mo. Rev. Stat.
452.330

• Deferred Community Property Marital Property is
  all property acquired during the marriage except
  
• Gift, bequest or inheritance
• Exchanged for separate property
• Acquired after legal separation
• Excluded by valid agreement OR
• Increase in value of separate property unless
  there is a marital contribution

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2. Valuation

• When to value?
• How to value?

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3. Division

• Equal division
• or
• Equitable division

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Equitable Distribution Factors

• Contribution
• Economic need
• Custody of children/ family home
• Need for rehabilitation
• Conduct of Parties

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Discretion Property

• Of these three issues, which one allows the most
  discretion?

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Find the Discretion
Character Value Division
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Find the Discretion
Character Value Division
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Missouris Property System

• Deferred Community Property
• But Presumption of Marital Property

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When does marriage begin?

• The engagement ring (Brown v. Thomas)
• The home purchased in contemplation of marriage
• The joint money market account during cohabitation

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When does marriage end?

• Separate Petition? Decree?
• Apart?
• DISCRETION?

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General principles

• Marriage is an economic partnership
• Property division is to be used to address
  post-divorce economic circumstances
• Property division should sever economic ties of
  the couple

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IMPORTANT MO. RULES

• Presume all property is marital
• Earnings during marriage are marital
• Separate property stays separate
• Passive increased value of separate property is
  separate
• Active increased value of separate property (due
  to spousal contributions) is marital
• Income from separate property is marital
• Character of property is determined by character
  of acquiring funds If acquired with both
  separate and marital funds, source of funds
  calculation is used to determine proportions.

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Some easy calls

• Earnings
• Savings Investments
• Real Personal Property purchased with marital
  funds
• REGARDLESS OF TITLE

Marital Property
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REMEMBER in common law states

• DURING MARRIAGE,
• OUTSIDE OF MARRIAGE, and
• AT DEATH
• Common law property system determines who owns
  property
• THERE IS NO MARITAL PROPERTY IN THESE SETTINGS.

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Kirchberg v. Feenstra

• Case involves control of jointly owned property
  DURING the marriage.
• Mo. resolves this by declaring joint management
  but does not require joint decision-making one
  party may make decisions subject to the consent,
  agreement or acquiescence of the other spouse

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BUT.

• AT DIVORCE
• Imported community property notions apply to
  the determine who owns property.
• PROPERTY CAN BE SEPARATE, MARITAL, OR SOME OF
  EACH.

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Identify the states approach to defining marital
property

• Remember there are 3 methods.

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All Property (Ks.)
Earned
Marital Property
Given
Marriage
Divorce
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Acquired During the Marriage
Earned
Marital Property
Given
Marriage
Divorce
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Acquired During MarriageExcept Gift/Inherit (Mo.)
Given
Marital Property
Earned
Marriage
Divorce
Excluded by Agreement
34
Missouri StatutesMarital Property Presumption

• Property acquired
• during marriage is
• presumed to be marital

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Houses and such
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Problem E, p. 446

• On date of marriage John owns a home valued at
  30,000 and subject to a 20,000 mortgage. What
  is Johns nonmarital interest or equitable
  position in the home?
• Johns equitable position on date of marriage is
  1/3 or 33 1/3 percent.

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Problem One

• FMV of home before marriage 30,000
• Equity in home (paid 10,000 so equity
  10,000/30,000
• So, Johns non-marital interest is 331/3 of the
  home

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Adding on

• After John married, he and Pam add a bedroom
  using 10,000 in marital funds.
• At the time the room is added, it increases the
  market value of the home from 30,000 to
  40,000.
• How does this affect Johns nonmarital or
  equitable interest in the property?

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Recalculating the value

• The room addition reduces Johns equitable
  interest in the home from 33 1/3 to
• 25. (10,000 is 25 of 40,000).

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Effect of inflation?

• Years later John and Pam divorce. The home is
  valued at 100,000 and has a 10,000 mortgage.
• John retains his nonmarital interest in the home,
  which is what? 10,000 or 25?

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The theory

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

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Johns Non-marital share

• 25 x 100,000 (All nonmarital)
• 25,000 is set aside for John as his separate
  property.
• Remainder of the houses equity
• 75,000 - 10,000 mtg. 65,000
• This equity will be subject to equitable
  distribution between the spouses as marital
  property.

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What about the debt?

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

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Transmutation
Whats Mine is Ours.

• Changing separate property to marital property
• Critical proof INTENT

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How to Prove Intent?
Puts title in name of HW? Uses marital funds to
pay off mortgage? Treats house as family home?
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Transmutation

• Suppose John mortgages house in order to pay for
  room addition, and changes the title to HW,
  husband wife.
• Does John still retain separate interest in the
  property?

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Title

• Will joint title transmute character of property?
• Can property be separate if jointly titled?
• Can separately titled property be marital?

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Commingling

• Will commingling separate and marital property
  change the character of the property?
• 452.330.4 - commingling in and of itself
  insufficient

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Family Farms

• Cases involving family farms are less likely to
  result in transmutation
• Why?

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Ongoing Acquisition

• How do we determine title to property that is
  purchased over a period of time?

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Schmitz v. Schmitz.

• Where nonmarital down payment was made on real
  estate, contributing spouse shares
  proportionately in increased value of the asset.

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Approaches

• Inception of title rule
• Source of funds rule

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Source of funds

• Start with presumption
• Marital funds becomes marital property
• What about separate funds of non-titled spouse?

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Marital source of funds

• Marital funds used to purchase property.
• Marital funds used to improve separate property.
• Marital efforts used to improve separate property.

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Exchanges of separate property

• If separate property changes form (e.g., money
  becomes house stock splits) it remains separate.
• Marital contributions must be used to reduce a
  debt or enhance the value of an asset in order to
  create marital lien.

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Income Inflation

• Income from separate property is marital
  (Missouri rule)
• Increase in the value of separate property is
  separate

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The Fixer-Upper

• Hs House at marriage (paid 50,000)
• Loan to put on roof (8,000)
• Ws work on interior (?)
• Houses value at divorce (90,000)

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How much, if any, is marital?

• Has the property transmuted?
• What are the marital source of funds/efforts?
  Were those funds/efforts used to to reduce a debt
  or enhance value of asset?
• What percentage of the increase in value is due
  to marital funds and efforts?

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The Marital Share

• NMC/TC X EQUITY SEP. PROP.
• MC/TC X EQUITY MARITAL PROP.

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Marital Efforts as Funds

• contribution of substantial services,
• directly correlated to increase in value,
• amount of increase in value,
• services were during marriage, and
• value of services,
• lack of compensation or inadequate compensation.

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Proving causation in increased value

• Is going to the office party a contribution?
• Hosting the office party?
• Staying home with the kids so wage-earning spouse
  can go to the party?
• See http//www.madkane.com/officeparty.html

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House example

• Marital contribution 8,000 loan plus value of
  interior decorating (2,000)
• Non-marital contribution 50,000
• Total contribution 60,000
• Equity 90,000

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Calculations

• Non marital is 5/6 x 90,000 75,000
• Marital is 1/6 x 90,000 15,000

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Of Earnings and Income
65
Income from Earnings

• Earnings from labor during the marriage are
  marital property.
• Other Human Capital is not marital property.
  (e.g., earning capacity, professional degrees)
  (but see the OBrien case)

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Vacation Severance Pay

• Is it earned from labor during the marriage?
• If not, what does it represent?
• When does one earn the right?

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Human Capital - General rule

• Human capital not reduced to earnings
• is not considered marital property

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Future Payments

• When the payment is earned is the key issue, not
  when it will be paid
• If the right to the payment is clear and its
  present value can be determined, include it as
  marital property

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In re Marriage of Estes

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

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Human capital

• earning capacity
• professional licenses
• business goodwill

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OBrien v. OBrien

• Medical license of husband acquired during
  marriage is marital property and can be equitably
  distributed upon divorce.
• New York is unique in this approach why? How
  else can law protect the contributing spouse?

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Arguments

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

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Alternatives to Protect Supporting Spouse

• Separate claim for restitution
• Factor in considering division of other property
• Factor in granting maintenance

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In re Studyvin

• It is not necessary to hamstring our trial
  courts by confining them to a marital property
  theory or a lump sum maintenance theory, or any
  other particular approach.

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Benefits Compensating Loss

• Insurance, Personal Injury, Disability, etc.

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Insurance Payments

• Mechanistic approach timing of the award
• Source of contribution character of funds used
  to purchase policy (reimbursement or
  recharacterization?)
• Analytic character of asset intended to replace.

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Lopiano v. Lopiano

• a) separate property of injured spouse
• b) look at purpose of compensation pain and
  suffering personal, lost wages marital
  (Missouris approach)
• c) marital property

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Insurance Interest

• Property insurance
• Disability insurance
• Life insurance

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Characterization Questions

• What does the payment represent what is is
  replacing?
• How is the right to payment earned? Does the
  payment represent a form of compensation?
• What are the source of funds used to gain the
  right?

80
Business Interests General Rule

• Business acquired during marriage is marital
  property.
• Goodwill is a component.

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Wood Nardini

• Wood Husbands separate medical practice
  increased in value during the marriage
• Nardini valuing a closely held corporation
• Determining spousal contributions

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Valuing a Business

• Inventory, receivables, etc.
• Goodwill (but what is enterprise goodwill and
  what is personal goodwill?)

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Professional Practices

• Should goodwill in professional practices be
  recognized as marital property?
• How to value?

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Concerns

• Difficult to distinguish goodwill from personal
  professional reputation
• Value may be based in part on future
  (non-marital) income
• Professional spouse must give up tangible assets
  in exchange for intangible he/she retains
• Double dipping
• Valuation is difficult capitalization formulas?
  FMV/ Buy-sell agreement?

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Approaches to Bznz Goodwill

• _______________________________
• Prof. GW GW marital GW
• Is separate only if sep.
  marital
• WI/Tex from reputation. even
• MO/ NE
  solo pr
• 
  OR/NJ

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Marital efforts used to increase the value

• Were services substantial?
• Is there a direct correlation between services
  and increase in value?
• How much is increase?
• Were services performed during marriage?
• What was value of services, was there
  compensation?

87
Retained earnings as marital

• If owner-spouse
• took no or very little salary
• had the power to influence compensation paid and
  
• owner-spouse received inadequate compensation.

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Pensions

• Clearly compensation, but difficulties lie in
  valuing, apportioning dividing

89
Pensions

• General rule treat as deferred compensation and
  characterize according to the source of funds
  earning the right

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Stages of Pension Benefits
Not Vested Not Mature
Vested but Not Mature
Vested Mature
Current cash value or right to withdraw
contributions
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Vocabulary of Pensions

• Defined Benefit or Defined Contribution
• Relative value or Relative time
• ERISA
• QDRO

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Early in the career divorces
Not Vested Not Mature
Vested but Not Mature
Vested Mature
Current cash value or right to withdraw
contributions
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The New Career Divorce

• Contingencies in a non-vested pension
• Pay now or pay later?
• Discount for contingencies?

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Mid-career divorces
Not Vested Not Mature
Vested but Not Mature
Vested Mature
Current cash value or right to withdraw
contributions
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The Mid-career divorce

• Difficulties in valuation, especially in defined
  benefit plans
• Project work life
• Project payment
• Apportion marital / non-marital

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Apportionment

• Relative value or relative time
• Defined benefit plans make apportionment difficult

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Paying pensions

• Make H pay now, even if doesnt retire now
• Make W wait until H retires
• Bifurcate the pension
• Order H to buy out Ws interest
• Trade off property

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QDRO

• Covers ERISA pensions
• Makes ex-spouse the alternate beneficiary
• Directs Administrator to make direct payments to
  ex-spouse
• Cannot alter terms of plan
• Can take 10 years before normal retirement date
  but must assume any penalties

99
End-of-career divorce
Not Vested Not Mature
Vested but Not Mature
Vested Mature
Current cash value or right to withdraw
contributions
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End of Career Divorce

• Some difficulties if employee wishes to delay
  retirement
• QDROs solve most of these problems
• Question is the pension also post-divorce income?

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Special Forms of Pensions

• Teacher Retirement Funds
• Military Pensions
• Medical Benefits
• Social Security

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Exam Questions Increase in value of bank account

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

103
Characterize

• Bank account in Hs name, opened prior to
  marriage but into which some marital funds have
  been deposited.
• Interest on the bank account
• Rental income from Hs separate duplex, managed
  by W during marriage for no compensation.
• Profit H generated by buying, restoring, and
  selling automobiles during marriage.
• Payments from Hs pension plan, which vested and
  matured prior to marriage.

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Dividing the Marital Estate

• Characterization
• Valuation
• Division

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(No Transcript)
106
What is Separate Property?

• Which property is clearly separate?
• What arguments did you have about
  characterization?
• Did you divide separate property?

107
Valuation

• Which was the most difficult asset to value?
• How did you arrive at values?

108
Dividing the Property

• Could you agree?
• What made it difficult?
• How do you think it would have been different had
  I assigned clients as well?

109
Division Methods

• Equal
• Equitable (Single-factor)
• Equitable (Multi-factor)

110
Equal Division (Cream v. Cream)

• Clear but inflexible
• Must use maintenance to balance inequalities
• Need to ignore contributions
• Increases stakes of characterization

Mine
Yours
111
Division based on Contribution

• Saff v. Saff
• What is a contribution?
• How do you value it?
• Note the relationship to the inception of title
  approach to characterization.

112
Equitable Division Issues

• Burden of proof?
• List of factors exclusive?
• List of factors weighted?
• Basic principles?

113
Critical factors

• Length of Marriage
• Contribution
• Need
• Custody of minor children
• Economic misconduct

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(No Transcript)
115
Which factors most influenced your division?
116
Division methods

• Need not be in-kind
• Can create liens and contingent interests
  (especially family home)
• Can order lump-sum payments to equalize, even if
  not liquid assets available.

117
Some Methods of Division

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

118
Dividing debts

• Courts will apportion debts, but this cant
  affect third party creditors rights
• Use indemnification agreements to protect rights
• Same factors used to apportion debts as to divide
  property