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Real Estate: Albatross in Divorce?

by bvertz on Aug 5, 2009 • Comments Closed • , , , , ,

Years ago, a wise lawyer published a column in the Pittsburgh Post-Gazette to advise her readers about family law issues (Patricia G. Miller, Esq., “Legal Eagle”). In one of her best-known articles, she described the most common mistakes made by women in divorce cases. (Later she published an article describing men’s most common errors.) Her words, now time-tested, ring even truer today. The most common mistake was sacrificing cash flow to keep the marital residence, becoming “house-poor.”

Pat Miller felt that some women had invested so much time and energy in creating a hospitable environment for the family that they could not bear to part with their life’s work, even though keeping the house would mean sacrificing liquidity and cash flow that they would need to support themselves and maintain their property.

I was reminded of Pat Miller’s article when I read an article recently in the Washington Times. The article, entitled ” The art of selling a home despite a marital split,” noted that real estate has become an albatross in some divorce cases where the value of property has decreased dramatically in the current recession. Properties that once had equity may be under-water in today’s declining real estate market. As a result, a spouse who wants to keep a house may have an asset with negative value. Worse, it may be impossible to refinance a mortgage to relieve the other spouse from the obligation.

A long-term perspective might help to resolve these situations but sometimes there is no choice other than divesting property that has minimal or negative value.  In a tough economic climate, a pragmatic approach must be considered. Sentimentality may be costly.

Top Five Things to Do if You are Separating

by bvertz on Jul 30, 2009 • Comments Closed • , , , ,
Top Five Things to Do if You are Separating

It’s never easy to take the first step on any journey. When you are facing a marital separation, there are five things that you can do to protect yourself, financially and emotionally.

1.         Secure your property. Review your joint bank and credit card statements regularly to ensure that no unexpected withdrawals or charges have been made. You might want to divide joint accounts or close credit cards if there is no legal restriction, but check with your divorce lawyer first. It’s also a good idea to secure property that may have sentimental value, like family heirlooms, where they cannot be misplaced or damaged.

2.         Conserve resources. Creating a budget and sticking to it are always prudent measures, especially during a marital separation. When one household becomes two households, the expenses are increased but income is not. When making financial decisions, consider the effect on cash flow and liquidity. It might be better to pay joint debts out of joint income and assets instead of your separate income and assets, but check with your divorce lawyer first.

3.         Gather financial records. If you keep your records organized, you will have an advantage in the divorce process and save legal fees. Make photocopies and keep them in a secure place so that you can furnish them to your divorce lawyer when asked. If you have access to your spouse’s records legally, make copies of them as well. You can obtain most documents through a legal process known as discovery, but it is cheaper to make copies yourself.

4.         Think twice before acting. Imagine at all times that your kids and a family judge are watching every action and reading what you write. Anything you say or write in emails and text messages might be used as evidence. How would a family judge react to your Facebook profile? If you have a temper, consider moving out before you do something that might result in a restraining order. Don’t make any agreement without consulting a lawyer first.  

5.         Contact reliable allies. Trust is one of the first casualties of divorce, so you need to find reliable allies. Consider supportive friends and family members who are able to keep your confidences and empathize with your feelings. Physical activities like exercise can reduce stress more effectively than alcohol or junk food. Hire a family lawyer that you feel comfortable with. It is very important to understand what your lawyer is saying and to be heard when you speak to your lawyer. Consider lawyers who concentrate their practice in divorce and know the nuances of this complex area of legal practice.

Life Insurance Proceeds: Marital Asset?

by bvertz on Jul 17, 2009 • Comments Closed • , , , , , , ,

Here is an interesting issue, not yet resolved by the Pennsylvania courts: whether the proceeds of a life insurance death benefit may be counted as a marital asset. Here’s the story:

Let’s say that husband and wife are separated, and one of them dies. If the grounds for divorce existed prior to the death (i.e., both spouses filed their affidavits of consent, or they were separated two years prior to the death), the divorce action does not abate. The deceased spouse’s estate becomes a party to the divorce action, which must go on to its conclusion. If the deceased spouse was insured under a life insurance policy (let’s say a whole life or universal policy, which has cash value), then someone is going to receive a death benefit.

Perhaps the surviving spouse was named as the death beneficiary before the spouses were separated. The divorce court might have even entered an order compelling the now-deceased spouse to name the surviving spouse as the beneficiary under the life insurance policy. (We will discuss the other possibility – that the deceased spouse named someone other than the surviving spouse as beneficiary – another time.) 

The death benefit of a life insurance policy is usually greater than its cash value. (For a whole life or universal life policy, the cash value is equal to the excess premiums that were paid over the cost of term insurance; the excess premiums accumulate, and the insurance company invests them for the benefit of the policy owner.)  In a divorce case where whole or universal life insurance is a marital asset, the asset value is generally equal to the cash value less any policy loans. But now that a spouse is dead, there is no cash value. There is only the proceeds of the life insurance death benefit, which likely exceed the cash value. Is the death benefit a marital asset?

It might depend on what our law means by the word “acquired.” You see, property acquired prior to separation is marital property unless it falls into one of the statutory exclusions. The policy itself was acquired during the marriage, but the death benefit was not acquired until after separation (which would make it separate property). In the case of a personal injury settlement or verdict, our law says that the property is “acquired” when the settlement agreement is signed or the judge enters the verdict, even if the injury occurred prior to separation. The post-separation settlement or verdict does not “relate back” to the pre-separation injury under our law, so it is not marital property.

But there is a problem. If we treat life insurance proceeds like personal injury settlements, then a marital asset (the cash value) has disappeared and there is no marital asset to replace it.

Property which is received in exchange for marital property is, generally, marital property. For instance, if a divorcing couple owns a bank account, and after separation, someone withdraws money to buy a TV, the TV is marital property. So a life insurance policy could be viewed as a lottery ticket that was purchased prior to separation, and its proceeds would be deemed to be property received in exchange for marital property, which is still marital property.

What if the deceased spouse named someone other than the surviving spouse as a beneficiary? The analysis becomes even more troublesome, because now we have to balance the interests of the surviving spouse against the interests of a third party. If we decide that the life insurance proceeds are entirely non-marital, then the marital estate may be diminished. But if we decide the proceeds are marital, a third party’s property rights are impaired. As I mentioned, the courts have not yet resolved this matter.

Basics of Pennsylvania Law: Double Dip, Part V

by bvertz on Jul 5, 2009 • Comments Closed • , , , , , , , , ,

This is the last in a series of posts containing summaries of Pennsylvania case law on the issue of double dipping in divorce. “Double dipping” occurs when an income-producing asset (such as a pension or business) is counted as marital property subject to equitable distribution, as well as income subject to an alimony or child support obligation.

Steneken v. Steneken, 873 A.2d 501 (N.J. 2005).

Although it is not a Pennsylvania decision, no discussion of double dipping would be complete without Steneken, a 2005 decision of the New Jersey Supreme Court. In this case, the husband was the sole owner of a business which was marital property subject to equitable distribution. The valuation expert performed a normalization of the owner’s compensation in his report, reducing the company’s salary expense and thereby increasing the value of the company. In determining an alimony award, the husband argued that the court should consider his lower, normalized compensation instead of his actual salary (since the excess compensation had been capitalized as part of the business valuation and divided as marital property). The trial court accepted the husband’s argument and used his normalized salary instead of his actual salary.

An appeal ensued, and the case was remanded to the trial court because the intermediate appellate court held that the record was not fully developed. On remand, the trial court reversed its earlier position and used the husband’s actual salary to determine the proper amount of alimony.

The intermediate appellate court, reviewing New Jersey’s divorce statute, held that the prohibition on “double dipping” extended only to pensions and affirmed the trial court’s decision. The husband appealed to the New Jersey Supreme Court to extend the principle to double dipping arising from the capitalization of earnings in the context of a business valuation. Since an income capitalization approach had been used by the valuation expert endorsed by the trial court, and was not challenged, the husband argued that he should not have to pay alimony from the excess compensation that had been capitalized and distributed as part of the value of the business.

The New Jersey Supreme Court disagreed, affirming the trial court’s decision to permit double dipping. Rather than adopting the intermediate court’s rationale, the New Jersey high court attacked the husband’s reasoning.

The logical flaw in defendant’s argument lies at its core. Defendant mistakenly equates the statutory and decisional methodology applied ni the calculation of alimony with a valuation methodology applied for equitable distribution purposes that requires that revenues and expenses, including salaries, be normalized so as to present a fair valuation of a going concern. Simply said, defendant’s charged mischaracterization of the issue here as one of “double counting” both misstakes the issue and ignores the fundamental principles that undergird related yet nonetheless severable alimony and equitable distribution awards.  As our statutory framework and decisional precedent make clear, the proper issue is whether, under the circumstances, the alimony awarded and the equitable distribution made are, both singly and together, fair and consistent with the statutory design. . . . Because we embrace the premise that alimony and equitable distribution calculations, albeit interrelated, are separate, distinct, and not entirely compatible financial exercises, and because asset valuation methodologies applied in the equitable distribution context are not congruent with the factors relevant to alimony considerations, we conclude that the circumstances here present a fair and proper method of both awarding alimony and determining equitable distribution.

The New Jersey court’s opinion is not convincing; other reasons might have been more forceful. For instance, the court might have started with the observation that a business valuation expert ordinarily has no expertise in executive compensation. To identify part of the owner’s salary as excessive is tantamount to saying that the business could hire someone to do the job for less, or conversely, the owner would earn less if he or she sought employment elsewhere. Such determinations are beyond the expertise of most valuation experts, and should not be relied upon to determine the owner’s earning capacity for alimony and support purposes. Yet, if those normalization adjustments are not suitable to determine the owner’s earning capacity, why should we rely on them for the business valuation?

The New Jersey court noted that if a different valuation methodology had been applied, there might be no normalization adjustment to the owner’s salary. That is true, in the case of an asset approach. However, an asset approach assumes liquidation of the company, not ongoing concern value. The owner’s excess compensation does not get capitalized under the asset approach, so there is no possibility of double dipping. In the market approach, normalization of the income statement or cash flow is performed before applying a multiplier. Therefore, the potential inconsistency perceived by the Court is illusory.

In a vigorous and well-reasoned dissent, three of the seven Justices enunciated a compromise position: that the trial court need not use normalized compensation when computing the owner’s alimony obligation but should have discretion to adjust the value of the business or the alimony award to alleviate the double dip.

Basics of Pennsylvania Law: Double Dip, Part IV

by bvertz on Jun 24, 2009 • Comments Closed • , , , , , , ,

This is the fourth in a series of posts containing summaries of Pennsylvania case law on the issue of double dipping in divorce. “Double dipping” occurs when an income-producing asset (such as a pension or business) is counted as marital property subject to equitable distribution, as well as income subject to an alimony or child support obligation.

McFadden v. McFadden, 563 A.2d 180 (Pa.Super.1989).

            McFadden was a post-divorce alimony modification proceeding.  In this case, the husband’s pension annuity benefit was in pay status, and he was receiving the entire pension benefit. Yet, the court found that the husband’s pension had not been identified as marital property at the time of equitable distribution. Therefore, the Superior Court did not reverse the trial court’s calculation of the husband’s income, which included the pension benefit. Most troubling, in dicta, the Superior Court held (per Popovich, J.): “[I]t is equally clear that income from a pension is to be considered when fashioning an alimony award, even if the pension was previously subjected to equitable distribution. See 23 Pa.S.A. § 501(b)(3), (10), (13); Pacella v. Pacella, 342 Pa.Super. 178, 190, 2492 A.2d 707, 711-712 (1985)(court did not err in consideration earlier equitable distribution property in fashioning alimony); Braderman, 488 A.2d at 620 (pension subject to equitable distribution also may be used to calculate alimony award).”

Basics of Pennsylvania Law: Double Dip, Part III

by bvertz on Jun 14, 2009 • Comments Closed • , , ,

This is the third in a series of posts containing summaries of Pennsylvania case law on the issue of double dipping in divorce. “Double dipping” occurs when an income-producing asset (such as a pension or business) is counted as marital property subject to equitable distribution, as well as income subject to an alimony or child support obligation.

Miller v. Miller, 783 A.2d 832 (Pa. Super. 2001)

In Miller, the parties settled their division of property, and Wife subsequently sought a modification of child support based on the income that Husband derived from the sale of his share of marital assets. The Superior Court held that the proceeds from the sale of assets were not “income” within the statutory definition. The Superior Court affirmed the trial court’s refusal to modify child support when the payor received proceeds from the sale of marital assets after the divorce and division of property. The double dip in Miller was another reason for the Court’s decision.

Rohrer v. Rohrer, 715 A.2d 463, 465 (Pa. Super. 1998).

            Rohrer was the first published decision to prohibit double dipping in Pennsylvania. (Interestingly, the opinion was written by Judge Popovich, who had held in McFadden that double dipping was permitted.) In Rohrer, the husband was an owner of a business organized as a Subchapter “S” corporation. At an early stage of the proceedings, the pass-through earnings of the business were included in the husband’s income when calculating his support obligations. At equitable distribution, the husband asked the master to exclude retained earnings from the value of the business, in order to avoid double dipping. Husband’s request was granted by the master, but only to the extent that retained earnings from the date of the support order forward into the future were excluded. The retained earnings that accrued prior to the support order were counted as part of the value of the business.

            The trial court reversed the master’s decision and excluded all of the retained earnings. On appeal, the Superior Court reversed and adopted the master’s finding. The Superior Court held that “money included in an individual’s income for the purpose of calculating support payments may not also be labeled as a marital asset subject to equitable distribution.” Rohrer, at 465.

Basics of Pennsylvania Law: Double Dip, Part II

by bvertz on Jun 1, 2009 • Comments Closed • , , ,

This is the second in a series of posts containing summaries of Pennsylvania case law on the issue of double dipping in divorce. “Double dipping” occurs when an income-producing asset (such as a pension or business) is counted as marital property subject to equitable distribution, as well as income subject to an alimony or child support obligation.

Cerny v. Cerny, 656 A.2d 507 (Pa.Super.1995).

            Prior to separation, the husband received a cash severance payment, which was counted as income in determining his support obligation. The severance payment was excluded (in a prior, unpublished Superior Court decision) from the marital estate to avoid double dipping. Subsequently, the IRS issued a tax refund to the husband, as the severance payment was not taxable income. The trial court held that the tax refund should be counted as marital property. On appeal, the Superior Court reversed, holding that the tax refund retained the same nonmarital nature as the income from which it was derived. The opinion does not reveal whether the tax was deducted from the payor’s income when determining his support obligation, but if so, then the result may have been inequitable.

Basics of Pennsylvania Law: Double Dip, Part I

by bvertz on May 27, 2009 • Comments Closed • , , , ,

The concept of a “double dip” is logical and intuitive. If an income-producing asset has been awarded to a party in equitable distribution, the same asset cannot be counted as a source of income from which alimony may be paid. For instance, a pension in pay status cannot be counted as income for alimony purposes if it was also a marital asset that has been divided in equitable distribution. This concept has been recognized and adopted by the Pennsylvania courts at the trial and appellate levels. Butler v. Butler, 541 Pa. 364, 663 A.2d 148, 156 (1995)(professional goodwill); Diament v. Diament, 816 A.2d 256, 277 (Pa.Super.2003)(advance of marital assets); Miller v. Miller, 783 A.2d 832 (Pa.Super. 2001)(proceeds from sale of marital property); Rohrer v. Rohrer, 715 A.2d 463 (Pa.Super. 1998)(retained earnings of a business); Kokolis v. Kokolis, 83 Pa.D. & C.4th 214 (Ally. 2006)(pension in pay status), affirmed, 927 A.2d 663 (Pa.Super. 2007); cf. McFadden v. McFadden, 563 A.2d 180 (Pa.Super.1989)(pension in pay status).

This post is the first of a series describing Pennsylvania case law concerning the double dip.

Berry v. Berry, 898 A.2d 110 (Pa.Super.2006).

The husband in this case was terminated from his employment as a partner in an accounting firm just weeks after the commencement of a support claim within a divorce action. Upon his termination, the husband received a distribution of his partnership capital account plus a cash severance payment equal to seven months’ base salary. The wife argued at the trial court level that neither of these items should be included in the husband’s income when determining his child support obligation. (The husband had secured other employment paying a salary sufficient to justify a Melzer analysis.) The trial court held that the capital account distribution and cash severance were income for support purposes. The wife appealed, prompting the Superior Court to vacate and remand the case.

The Superior Court held that the partnership capital account was marital property which should not have been included in the husband’s income because doing so would constitute a double dip.  On the other hand, the Superior Court held that the cash severance payment was strictly income. In its decision, the Court distinguished between money earned prior to the marital separation (in this case, a partnership capital account) and money acquired after separation (in this case, a severance payment). Since the partnership capital account was acquired prior to separation, it fell within the statutory definition of marital property. The cash severance acquired after separation did not.  The Superior Court held that the capital account was marital property while the severance payment was income. In both of its findings, the Superior Court refused to double dip.