Property Division

Class #3

Property Division upon divorce

All states provide for division of assets and assignment of liabilities upon marital dissolution

Systems of Marital Property

Equitable distribution (f/k/a common law)– Majority of states, including FL

Community Property– 8 states mostly in West and Southwest (AZ, CA,

ID, LA, NV, NM, TX, and WA)

Community Property

Each spouse has an immediate interest in all property acquired during the marriage, with a few exceptions

Upon divorce, operates almost identically to equitable distribution

Definition of “community property” parallels the definition of “marital property” in equitable distribution states

Equitable Distribution

During marriage - spouse that holds title can freely buy, sell, or otherwise dispose of property in his/her sole name

Only at time of divorce does the concept of “marital property”, essentially synonymous with concept of “community property”, become relevant.

What is Marital or Community Property

Property acquired by either spouse during the marriage, no matter how titled.

This rule has many exceptions

Exceptions to Marital Property (UMDA)

Property owned before the marriage Gifts or inheritances received during marriage,

including gifts from one spouse to the other Property acquired during marriage in exchange for

premarital or separate property Property acquired after legal separation Property excluded from the marital estate by valid

agreement Appreciation of separate property (with some

exceptions)

When is appreciation of separate property “marital”? (Middendorf)

Where appreciation is “active”, not “passive”, in that it required efforts by owner-spouse during marriage

Non-owner spouse made contributions (sweat equity)

Marital asset or income contributions, such as paying property taxes on premarital property with income earned during marriage

Changing the classification of property (typically separate to marital)

Transmutation Commingling

Transmutation

Converting property from separate to marital, intentionally or not, by placing it in joint names or some other act

Example: Refinancing separate home, but doing so in joint names (states differ on this one)

This creates a presumption of “gift” to the marital estate that can be rebutted by evidence of intent to keep separate

Commingling

Mixing separate property with marital property can convert it, in whole or part, into marital property

Example: Investing separate funds to improve marital home

Creates presumption that intent was to create marital property, but can be rebutted. Rebuttal usually requires documentation to clearly “trace” the source of the funds

Trends in Property Division, 1970’s to present

Recognition of non-economic contributions to the marital estate (DeCastro)

Push for roughly equal division of marital property (some states have a presumption of equal division)

Recognition of new forms of property, often intangible property

New forms of marital property in last few decades

Pensions Goodwill of a business or profession Professional or advanced degree Stock options and other employment benefits

Pensions – may be largest marital asset other than real estate

Pension benefits accrued during marriage deemed marital, if vested

Unvested benefits also included if just and equitable to do so (important in old-style “cliff vesting” plans)

May even consider premarital or post-divorce pension accruals under some circumstances

Types of pensions

Defined contribution (account balance)– 401k– Profit-sharing trusts, etc.– Increasingly common

Defined benefit– No determinable account balance at a given time– Promise to pay a certain monthly dollar benefit

upon a certain retirement age– Becoming less popular

Division of pensions upon divorce

Offset – assign a present value to the stream of future payments, discount for mortality, then award to pension holder and give property of equivalent value to other spouse (often equity in marital home)

Deferred division – Use a deferred division order such as a Qualified Domestic Relations Order (QDRO) to require pension administrator to divide payments between the spouses when pension reaches pay status

Offset division of pension

Pro– Clean break, no need for future contact– No need for third-party administration

Con– Often inequitable because pension holder may

get little or no other assets– Can’t predict the future, what if pension holder

dies before or just after retiring? Has effect of grossly overstating value of pension to the holder

Deferred division of pension

Pro– Tends to be more equitable, less guess work– Equalizes the tax burden, each party pays taxes

only on share they receive

Con– Requires cooperation from third-party plan

administrator– Many complex requirements, QDRO’s hard to

draft, expensive, and high malpractice risk for lawyers who draft them

Valuation of business interests (Bowen)

Area of great contention for closely held businesses and professional practices

“Experts” often give widely divergent opinions of value depending on which party hired them

Theory of value based on IRS Revenue Ruling 59-60

Buy-Sell agreements and book value generally not binding on court in determining value

IRS Revenue Ruling 59-60

Goal: arrive at a FMV for stock which has no market Consider:

– History of firm– Nature of the company– Outlook for the industry– Book value of the stock– Whether the interest valued is a controlling

interest– Existence of “goodwill” or other intangible assets

(good name and reputation of the company or owner) (Yoon)

Capitalization of Earnings – Key Valuation Method Today

Take annual earnings and “capitalize” it depending in large part on the risk associated with that business or industry

In other words, what rate of return would an investor in the business expect in order to make that investment.

Riskier the business, the higher the rate of return to lure an investor

Determine earnings

Look to a multi-year average (often 5 years) Give more weight to more recent years Don’t ignore other factors, such as general economic

conditions and prospects for that industry or individual company in predicting whether earnings history will continue into future

Divide earnings by ownership percentage if there is more than one stockholder

Often need to determine “excess earnings”

In professional practices and some other types of closely-held service businesses, valuation method is typically thought of as “capitalization of excess earnings”

Excess earnings: Annual earnings minus reasonable compensation for the owner if that owner were a non-owner employee hired to run the business or professional practice (essentially fair value for his/her services)

Determine the capitalization rate

Cap rate depends on risk factors What annual rate of return would a

disinterested investor require in order to be induced to invest in that business or professional practice?

Most closely held business are fairly risky, so rates tend to start at 20% and go up from there.

Apply capitalization rate to earnings (or excess earnings)

Divide the earnings by the capitalization rate Example: If earnings are $100,000 and the

cap rate is 20%, the value will be $500,000 This is alternatively referred to as an

“earnings multiple” of 5 Many professional practices and closely held

corporations have earnings multiples in the range of 2 to 5 (cap rates of 50% to 20%)

Final valuation steps

Add value of assets on books (except perhaps loan receivables owed by owner/operator which may never be repaid)

Subtract debt of the business (except perhaps debt owed to owner/operator that may never be repaid)

Consider discounts if the owner/stockholder has minority (non-controlling) interest

Professional or advanced degrees (Olar)

States take a variety of approaches: Present value of increased earning capacity

over working career (tends to be high value) Restitution to spouse who supported other

through medical, or law school (often through an alimony award)

Blended approach to reward expectancy or investment interest in other spouse’s career

Stock options – widely used during the “.com” boom years (Short/MS case)

Awarded and vested during marriage are generally marital, even if not yet exercised

Awarded during marriage but not yet vested may be marital– Depends on whether award was for past services

or incentive to remain an employee in the future

Time rule for determining what portion of stock options are marital or separate

Uses a fraction– The numerator is the period of time (in months or

years) from the commencement of employment until the parties’ separation or divorce

– The denominator is the period of time (also in months or years) from the commencement of employment to the date the options are first exercisable (become vested)

Similar rule - often called “coverture fraction” - can be used to determine marital portion of a pension (Kelm)

Numerator: Years of employment during marriage

Denominator: Years of total employment, including premarital

Can be used (per Kelm) to grant interest in post-divorce pension accruals as well

Florida property division law

P.E.A.C.E – Keeping Things in Order

Parental Responsibility– Child Custody and Visitation

Equitable Distribution of Property Alimony Child Support Everything Else

Equitable Distribution AFTER Consideration of Parental Issues

Fla. Stat. § 61.075(1)(h) directs the court, before equitably distributing the parties' marital assets, to consider “[t]he desirability of retaining the marital home as a residence for any dependent child of the marriage, or any other party, when it would be equitable to do so, it is in the best interest of the child or that party, and it is financially feasible for the parties to maintain the residence until the child is emancipated or until exclusive possession is otherwise terminated by a court of competent jurisdiction."

Four Major Steps In Every Equitable Distribution Case

Identification of Assets and Liabilities Classification of Assets and Liabilities as

Marital or Non-Marital Valuation of Marital Assets and Liabilities Equitable Distribution of Marital Assets and

Liabilities

Marital Assets and LiabilitiesFla. Stat. 61.075(5)(a)

Assets acquired and liabilities incurred during the marriage, individually by either spouse or jointly by them

The enhancement in value and appreciation of non-marital assets resulting either from the efforts of either party during the marriage or from the contribution to or expenditure thereon of marital funds or other forms of marital assets, or both

Also Marital

Inter-spousal gifts during the marriage– Contrary to majority rule that inter-spousal gifts

during marriage create separate property

All vested and non-vested benefits, rights and funds accrued during the marriage in retirement, pension, profit sharing, annuity, deferred compensation and insurance plans and programs

And finally…

All real property held by the parties as tenants by the entireties, whether acquired prior to or during the marriage, shall be presumed to be a marital asset

If, in any case, a party makes a claim to the contrary, the burden of proof shall be on the party asserting the claim for a special equity (treating an asset that is technically marital as a separate asset or awarding one party a disproportionate share based on that party’s contributions, etc.)

Non-Marital AssetsFla. Stat. 61.075(5)(b)

Assets acquired and liabilities incurred by either party prior to the marriage and assets acquired and liabilities incurred in exchange for such assets and liabilities

Assets acquired separately by either party by non-interspousal gift, bequest, devise or descent and assets acquired in exchange for such assets

And…

All income derived from non-marital assets during the marriage, unless the asset was treated, used or relied upon by the parties as a marital asset (commingled)

Assets and liabilities excluded from marital assets and liabilities by a valid written agreement of the parties and assets acquired and liabilities incurred in exchange for such assets and liabilities.

Marital presumptionFla. Stat. 61.075(7)

All assets acquired and liabilities incurred by either spouse subsequent to the date of the marriage and not specifically established as non-marital assets or liabilities are presumed to be marital assets and liabilities

The presumption is rebutted by a showing that the assets and liabilities are non-marital

Commingled assets

Commingling of marital and non marital assets within the same account can establish the entire account as marital.

However, the use of non marital assets as collateral for marital loans does not convert the underlying asset to a marital asset. Farrior v. Farrior, 736 So. 2d 1177 (Fla. 1999).

Date of valuation of marital assets

Earliest date the parties enter into a valid separation agreement

Such other date as may be expressly established by such agreement

Date of filing of a petition for dissolution of marriage Date the judge determines are just and equitable

under the circumstances Different assets may be valued as of different dates,

in the judge's discretion

Special Circumstances in Valuation Dates

The trial court's determination of the value of the husband's business as of the date of filing was remanded because of the tremendous increase in its value between the date of filing and the date of trial.

- Perlmutter v. Perlmutter, 523 So.2d 594 (Fla. 4th DCA 1987).

Establishing Value of Assets

Testimony of the owner of property. Crockett v. Crockett, 708 So. 2d 329 (Fla. 1st DCA 1998)

Expert testimony (accountants, appraisers, economists, dealers). However, trial court is not bound by the expert testimony, and may base valuation on the testimony of a party. Misdraji v. Misdraji, 702 So. 2d 1292 (Fla. 3d DCA 1997)

Stay within the range of values

When a court assigns a value outside the range of testimony presented by the experts or parties, it will be reversed (no matter how deeply the court may disagree with the range of values presented). Ingle v. Ingle, 689 So. 2d 314 (Fla. 5th DCA 1997)

What is Equitable Division of Assets?

The starting point is usually equal, absent specific facts relating to the statutory factors. Robbie v. Robbie, 788 So. 2d 290 (Fla. 4th DCA 2000).

Fla. Stat. § 61.075 contains factors to consider when deviating from equal division.

Factors affecting property allocation

The contribution to the marriage by each spouse, including contributions to the care and education of the children and services as a homemaker.

The economic circumstances of the parties. The duration of the marriage. Any interruption of personal careers or

education opportunities of either party.

…and

The contribution of one spouse to the personal career or educational opportunity of the other spouse.

The desirability of retaining any asset, including an interest in a business, corporation, or professional practice, intact and free from any claim or interference by the other party.

The contribution of each spouse to the acquisition, enhancement and production of income or the improvement of, or the incurring of liabilities to both the marital assets and the non marital assets of the parties.

…and more

The desirability of retaining the marital home as a residence for any dependent child of the marriage, or any other party, when it would be equitable to do so, it is in the best interest of the child of that party, and it is financially feasible for the parties to maintain the residence until the child is emancipated or until exclusive possession is otherwise terminated by a court of competent jurisdiction. In making this determination, the court shall first determine if it would be in the best interest of the dependent child to remain in the marital home; and if not, whether other equities would be served by giving any other party exclusive use and possession of the marital home.

…finally

The intentional dissipation, waste, depletion or destruction of marital assets after the filing of the petition or within 2 years prior to filing of the petition.

Any other factors necessary to do equity and justice between the parties.

What about marital debts?

Analyze and allocated using the same factors used for assets.

Take into account possible bankruptcy discharge issues of debts are joint.– Discharge by spouse assigned debt in divorce

could allow creditor to come after other spouse. – Creditors and other third parties not bound by

terms of divorce.

Finding of Fact Required

Any distribution of marital assets or marital liabilities shall be supported with factual findings in the judgment or order based on competent and substantial evidence with reference to the factors previously enumerated.

- Fla. Stat. § 61.075(3)

Findings on…

Clear identification of non-marital assets and ownership interest;

Identification of marital assets, including the individual valuation of significant assets, and designation of which spouse shall be entitled to each asset;

Identification of marital liabilities and designation of which spouse shall be responsible for each liability;

Any other findings necessary to advise the parties or the reviewing court of the trial court's rationale for the distribution of marital assets and allocation of liabilities.

Inadequate findings

Absence of specific findings on asset distribution compels reversal. Miller v. Miller, 589 So. 2d 317 (Fla. 1st DCA 1991)

Using a valuation date other than date of petition requires specific findings that the alternate date is just and equitable. Bauzon v. Bauzon, 588 So. 2d 660 (Fla. 1st DCA 1991)

When deviating from equal

Court must make ample findings of fact justifying its deviation from an equal division. Escudero v. Escudero, 739 So. 2d (688 (Fla. 5th DCA 1999)

Property before alimony

P.E.A.C.E mandates “equitable distribution” before determination of “alimony”.

Fla. Stat.§ 61.075(8): "The court may provide for equitable distribution of the marital assets and liabilities without regard to alimony for either party. After the determination of an equitable distribution of the marital assets and liabilities, the court shall consider whether a judgment for alimony shall be made."