Financial Aspects of Divorce
Property acquired by either or both spouses during the marriage before the separation agreement or action, regardless of the form in which the title is held.
Includes property which is acquired before marriage or by gift, bequest, devise. This appreciation in value of separate property is marital property when the appreciation is due to the indirect contribution of the spouse even if it is as homemaker/parent and can be considered de minimus contributions to the business
The sustenance or support of the wife by her divorced husband which stems from the common law right of the wife to support by her husband. Allowances which husband or wife by court order pays other spouse for maintenance while they are separated or after they are divorced (permanent alimony), or temporarily, pending a suit for divorce (pendente lite). Generally, alimony is restricted to money unless otherwise authorized by statute.
Payments to effectuate the division or distribution of property in a matrimonial action.
Payments provided per agreement, but must terminate upon death of either party or upon the recipient’s valid or invalid remarriage.
Community property/ states:
There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Under a community property system, husband and wife are considered co-owners of property acquired by either during the marriage.
No-fault divorce statutes in certain states (e.g. New Jersey) grant courts the power to distribute equitably upon divorce all property legally and beneficially acquired during marriage by husband and wife, or either of them, whether legal title lies in their joint or individual names.
Qualified Domestic Relations Order (“QDRO”):
A device created by federal legislation in 1984 that permits courts to enlist pension plan administrators in the work of dividing pensions.
Often the financial aspects of the divorce constitute the most acrimonious point of the controversy. For both parties, dividing up assets (and debts) of the marriage has both emotional and practical implications.
Starting in the 1970s, a number of U.S. Supreme Court decisions have applied the Equal Protection Clause of the Fourteenth Amendment to family law issues, such as gender-based alimony, usually favoring the wife. As a result, today, either men or women may be awarded alimony, depending on the circumstances.
Property Division—Community Property Laws
Nine states have community property laws (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) which may change the distribution of property upon divorce. Community property laws define the interests of spouses in property acquired during the marriage. Generally, both the husband and wife are deemed to have an undivided, equal, present vested interest in each item of community property. Property acquired before the marriage or after the dissolution of the marriage is separate property and not subject to community property dictates. In addition, property acquired through gift or inheritance is separate property.
Example: David buys a house before his marriage to Amy. Amy makes improvements valued at $10,000. The court held that the house was David’s separate property, but granted Amy an equitable lien for the value of the improvement. See, e.g., In re Elam, 650 P.2d 213 (Wash. 1982).
Property Division—Equitable Distribution
Almost all states which do not have community property laws divide property according to equitable distribution laws which allow the courts to divide property equitably between the spouses. To aid in that division of property, certain classifications are used.
As under community property laws, separate property acquired before the marriage or by gift or inheritance during the marriage is not divided upon divorce. Rather, the property is returned to its respective owner.
An equitable division of marital property is based on factors such as age, health, length of the marriage, occupation and income of the parties; the needs and contributions of the parties in acquiring the property; and the alimony awarded.
Example: Martin and Stella were married for 12 years before they divorced. During the marriage, Stella was a full-time housewife. Stella stayed home to take care of their two children. In addition, she performed the requisite duties of a “corporate wife,” which contributed to his advancement to CEO of a major corporation. When the court divided their marital property, she received credit for her services as a housewife, which was considered a substantial contribution to the marriage. This policy is consistent with the reasons for no-fault divorce. See, e.g., DiFlorido v. DiFlorido, 331 A.2d 174 (Pa. 1975); In re Marriage of Dietz, 527 P.2d 427 (Or.App. 1974).
Property distribution becomes more complicated when funds get commingled. Specifically, property is purchased with a combination of separate funds and marital funds. To solve this problem, many courts use the theory which looks at the source of payments for the property. Accordingly, the spouse who contributed separate property is entitled to a proportionate interest in the property which is not subject to division. The balance of the property is deemed marital property and is subject to equitable distribution.
Example: Christine purchases a house one year before she marries Byron. Although she and Byron make it their marital residence, she never adds his name to the title. Both contribute to paying the mortgage. During their five-year marriage, the house appreciates 40%. Given the commingled funds, the house is considered marital property, even though the title was in Christine’s name. Christine is entitled to the proportion of her contribution of separate property. In order to recapture the appreciation, the court ordered the house sold, with the balance of the proceeds divided equally. See, e.g., Harper v. Harper, 448 A.2d 916 (Md. 1982).
Imagine putting your spouse through a costly educational program, such as law or medical school, and then ending up divorced upon his or her graduation rather than reaping the rewards of the person’s increased earnings potential. To compensate the abandoned spouse for years of sacrifice, courts have recognized intangible property as eligible for distribution.
Intangible assets are considered by the court in connection with either a division of property or alimony. The principal areas are:
Professional degrees are probably the most frequently-litigated item, as to whether they should be classified as marital property (and thus subject to property division). The majority view is that such degrees should not be considered marital property and therefore not subject to equitable distribution. See, e.g., Becker v. Perkins-Becker, 669 A.2d 524 (R.I. 1996); Riaz v. Riaz, 789 S.W.2d 224 (Mo.App. 1990); Hoak v. Hoak, 179 W.Va. 509, 370 S.E.2d 473 (1988). The reasoning in these jurisdictions is that future earning capacity does not fit within legally accepted understandings of “property.” In addition, these earnings come from working after dissolution of the marriage. Furthermore, unlike an alimony award, property settlements are final. As such, it is not possible to make modifications if the speculative amount of earnings does not come to fruition. A more palpable method of dealing with this issue is to reimburse the contributing spouse for the contributions while the other spouse was in school.
In contrast, the New York Court of Appeals classified a professional license (i.e. increased future earning potential) as marital property in 1985. See O’Brien v. O’Brien, 66 N.Y.2d 576, 498 N.Y.S.2d 743, 489 N.E.2d 712 (1985). The lasting affect of this decision could be seen in the very public, acrimonious divorce of Rudy Giuliani (former New York City mayor) and his ex-wife Donna Hanover (namely, celebrity status as marital property). See, e.g., Piscopo v. Piscopo, 232 N.J. Super. 559, 557 A.2d 1040 (1989) (actor); Elkus v. Elkus, 169 A.D.2d 134, 572 N.Y.S.2d 901 (App.Div.1991) (opera singer Frederica von Stade); Golub v. Golub, 139 Misc.2d 440, 527 N.Y.S.2d 775 (1994) (model Marisa Berenson).
Example: Giuliani filed for divorce in October 2000 (after 20 years of marriage and two children), charging Hanover with cruelty. In response, Hanover blamed the ex-mayor’s “open and notorious adultery” for the split. He often appeared in public with his girlfriend Judy Nathan (they are married now). When they initiated their divorce proceedings, Giuliani was a modestly paid government official. In fact, Hanover earned more money as an actress. That changed after the terrorist attack in New York on September 11, 2001. As a result of Giuliani’s role in dealing with this tragic event, his future earning power increased substantially. Accordingly, Hanover was entitled to share in this windfall by receiving an equitable distribution valued at more than $6.8 million.
The UMDA’s provisions on the distribution of property upon divorce have been influential, although not followed by all states. Under the UMDA, a professional degree is not property and therefore not subject to equitable distribution upon divorce. Although an asset, its future monetary value is too uncertain, and is not transferable. However, the contributing spouse is entitled to some compensation for helping the spouse obtain the degree. Thus, reimbursement alimony will be awarded for this purpose; to reimburse for monetary contributions made for the education of the degreed spouse. See, e.g., Mahoney v. Mahoney, 91 N.J. 488, 453 A.2d 527 (1982).
Although most jurisdictions do not recognize a professional license as a marital asset, professional goodwill is considered marital property that may be equitably distributed. “Professional goodwill” is described as the enhanced earning capacity that comes from a professional’s reputation, and client or customer list. See, e.g., Dugan v. Dugan, 457 A.2d 1 (N.J. 1983) (law practice); In re Marriage of Fleege, 568 P.2d 1136 (Wash. 1979) (dentist’s practice).
Pension rights are also marital property that can be divided. These can either be vested (where the employee would be entitled to the benefits immediately if he or she quit or was fired) or non-vested. Although the receipt of non-vested benefits may be uncertain, both types of pension rights are now readily recognized as property subject to distribution. See, e.g., Bender v. Bender, 258 Conn. 733, 785 A.2d 197 (2001). To determine the amount distributable if the pension rights are non-vested, courts calculate the “present value” of future pension benefits.
Sometimes, the amount of pension benefits that must be distributed exceeds the amount of available assets. Accordingly, courts have used an alternative method of distributing pension benefits—reserved jurisdiction instead of present division. Reserved jurisdiction involves deferring distribution until the beneficiary-spouse actually begins receiving benefits. This method necessitates involvement by the pension plan administrator. A “Qualified Domestic Relations Order” (QDRO) is the required document to effectuate payment to the beneficiary’s former spouse. A QDRO must follow stringent requirements to be valid. (Those requirements are beyond the scope of this course.)
Alimony arose in the English ecclesiastical courts at a time when divorce was not permitted and a married couple could obtain only a legal separation. Because it was incident to a separation, alimony originally “was a continuation of the husband’s (and only the husband’s) legal duty of support, and a duty that was not discharged because the marriage had not terminated.” Where the wife was at fault (for the judicial separation), she was not entitled to alimony.
The original alimony concepts carried over to modern American divorce laws. Divorce, as it was recognized by courts in this country, was initially wholly fault-based, and so a woman could collect alimony from her ex-husband only if he was found to be at fault for the divorce. Furthermore, alimony could be temporary (awarded while divorce is pending—alimony pendent lite) or permanent (awarded at the conclusion of the litigation).
Today, alimony awards are generally based upon the needs and abilities of each party, using the following factors:
When divorce statutes were fault-based, there were two additional factors courts considered:
(1) degree of fault and
(2) maintenance of status.
Taking into account the above factors, courts sometimes award rehabilitative alimony, which was used to support the spouse during a period of retraining or re-education for entry into the workforce, thereby enabling the spouse to become self-supporting.
Example: Dolores lives in a state that limits alimony awards to three years where there are no minor children, but permits an extension of the period if warranted. Dolores petitioned for an extension; however, she did not articulate any justifiable reason for the request. The court denied her demand, reiterating that alimony was only a short-term support mechanism until the spouse could become self-supporting. Dolores had the burden of proving that justice required an extension. See, e.g., Calderwood v. Calderwood, 327 A.2d 704 (N.H. 1974).
As mentioned, historically, only the wife was entitled to alimony. Since 1970, most states no longer base alimony awards on the spouse’s gender. See, e.g., Pfohl v. Pfohl, 345 So.2d 371 (Fla.App. 1977).
Once a court grants alimony, it may later be modified by the court or even terminated completely, under certain circumstances (e.g., a substantial change in the circumstances). For example, UMDA § 316 allows the amount to be changed “only upon a showing of changed circumstances so substantial and continuing as to make the terms unconscionable.” Other grounds for termination are remarriage, cohabitation and death (of either the payor or payee).
The classification of the distribution determines its taxability. Specifically, property settlements are not taxable transactions to either spouse. See IRC § 1041. Alimony is taxable to the recipient and deductible by the payor, see IRC § 71 and §215, respectively, provided it meets certain requirements.
A payment to or for a spouse under a divorce or separation instrument is considered alimony if the spouses do not file a joint return with each other and all the following requirements are met:
(1) The payment is in cash.
To get the benefit of a deduction, the amounts attributable to alimony must be designated as such in a written divorce decree. One reason the Internal Revenue Service requires specific designation is so that the payor does not overstate the deductible amounts paid to the ex-spouse. Not all payments under a divorce or separation instrument are alimony. Alimony does not include:
Any amounts that do not meet the alimony definition are neither deductible nor includable in income. The biggest area for possible abuse clearly is child support.
This is just an overview of the tax considerations
involved in divorce. More detailed discussion of this subject is beyond
the scope of this course.
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