Cases Citing Recent Decision as to When Lawsuit Proceeds Are Marital Begin to Roll In
This decision was recently cited in the July denial of an appeal from a Northumberland County decision, Glosek v. Glosek, CV-2005-1695.
Being Prepared
My friend's husband died just over six months ago, and although it was not unexpected, what was unexpected was the state of the finances after he passed. He had handled the finances during the parties' marriage, and my friend knew little of the parties' finances. How much do you know about your family's finances? Do you know who holds your mortgage, if there is a car payment and when it is due? Do you know the passwords to your on-line accounts - are there on-line accounts? Do you know where your important financial records are located?
Now is the time to educate yourself. Look at your tax returns, bank, brokerage and credit card statements, safety deposit boxes, and other important financial documents to get a general understanding of your finances. Talk to your spouse about the bills, and perhaps offer to help.
A great way to consolidate your financial holdings is through mint.com. It's free, and you can even set up a budget for yourself. You can upload all of your accounts to mint.com, and it will update your accounts every time that you log on. It will also keep track of big purchases and let you know when you are over your budget.
Not only are current financials important, but make sure that your estate planning is done, as well. If it was done a long time ago, take the time to review it with your spouse and/or estate attorney and make any updates that might be needed.
It is important to be aware of your finances in the event that you and your spouse separate and/or divorce. Knowing your state of financial affairs will make a difficult situation easier and help you make the transition into independently managing your personal finances and estate.
Expensive Shoe Collection Brings Divorced Couple Back to Court
Jenice Armstrong of the Philadelphia Daily News wrote a column about Beth and Daniel Shak’s divorce. The Shaks divorce was finalized in 2009, but recently Mr. Shak filed a petition to enforce the parties' settlement agreement and is seeking 65% of Mrs. Shak’s extensive (and expensive) shoe collection. Mr. Shak contends that this collection is an asset that was not disclosed as part of the parties’ property settlement agreement and that Mrs. Shak did not provide a “full and fair” disclosure of this collection nor did she list it in an inventory of her assets.
Continue Reading...Superior Court Upholds Distribution of Pre-Embryos in Equitable Distribution Case
The Pennsylvania Superior Court recently decided its first case addressing the allocation of frozen pre-embryos between divorcing spouses. The pre-embryos were created as part of the parties’ in vitro fertilization process shortly after wife was diagnosed with breast cancer and would likely be unable to reproduce after treatment. The appeal was brought by the husband from the trial court’s decision to award wife the thirteen (13) pre-embryos in equitable distribution. The parties in Reber v. Reiss (2012 PA Super 86; 2012 WL 1202039 (Pa.Super.))
Continue Reading...
Clever QDRO's and "Sham" Divorces Give Pilots Access to Retirement Funds
Mark Hess, a partner in our Los Angeles office and an attorney who specializes in employee benefits, wrote an article on Qualified Domestic Relations Orders (QDRO's) and an interesting 5th Circuit case, Brown v. Continental Airlines, Inc. In the Brown case, Continental Airline pilots and their spouses used QDRO's and what amounted to sham divorces to avoid retirement plan rules and receive their retirement funds without taking the usual tax hits.
QDRO's can be complicated and very technical; for the layperson, they can be overwhelming, but the Brown case shows not only a great example of legal creativity, but the facts as conveyed in Mark's article also help demonstrate how a QDRO operates in a divorce, its utility, and their purpose.
Pre-Nups
Pre-Nuptial Agreements are a hot button for engaged couples, but they can be a great way to minimize risk, exposure, and litigation in the event of a divorce or death of one of the parties. You may want to consider a Pre-Nuptial Agreement if it is a second marriage for at least one of the spouses and there are children of one or both people who will inherit instead of the spouse; if there is an existing business to be kept out of the marriage; or if the parties about to marry do not want to share their assets or the increases in value of those assets after they marry. Without a Pre-Nuptial Agreement, pre-marital assets are valued by the increase value from the date of marriage to the date of separation or distribution (whichever results in the lesser increase). However, with a Pre-Nuptial Agreement, parties can agree that separate assets do not become part of the marital estate. In addition, parties can also determine how assets in joint names will be divided in the event of divorce or death. The parties can also negotiate temporary support and alimony in the event of a separation/divorce.
A well-written Pre-Nuptial Agreement will provide a clear road map in the event of a divorce or death of a party, and hopefully minimize the inevitable stress associated with either occurrence.
Divorce Proofing Your Business
Family law has seen an evolution of facts in cases that are directly tied to the economy. One of the more common has been the long-term separation in the same house, but another has been the motivation of business owners to pursue a divorce. Anecdotally, we have seen cases in which the plaintiff is an entrepreneurial business owner who has opted to take advantage of the economic downturn to seek a divorce and secure ownership of their company through equitable distribution. Not surprisingly, a good businessperson who can build a successful company can also see the upside to divorcing in a recession: a depressed business value means they can buy-out their spouses interest for less.
Some of the suggestions make more sense than others under Pennsylvania's equitable distribution laws, but it makes the point that good business planning does not stop with the business; it should also include contingencies for things like divorce, death, or incapacity. These events should be considered early on in the creation of the business and at the time of marriage.
The best way to keep your business after a divorce is to create a good plan before you get married.
Protect Yourself
We all know that the world economy is a mess, and if you are getting divorced, chances are your own personal "economy" is a mess as well. Here are a couple of pointers to protect your credit during your divorce:
1. Make a list of all of your joint credit cards, and take the necessary steps to close joint credit cards. If there is a balance, look into transferring the balance to a credit card with no interest rate on a balance transfer. Keep your credit card statement as of the date of separation, and keep track of all payments made to the joint credit card. If possible, have an agreement with your spouse as to how the payments will be made and how a credit will be given in equitable distribution.
2. Establish your own credit by getting a credit card in your name alone. If you maintain a low balance (or no balance) in comparision to your credit limit that will help re-establish your credit in the event it was damaged.
3. Think about what is going to happen to the marital residence. If both names are on the mortgage, the mortgage will have to be refinanced or the house sold. It is unlikely if your name is on one mortgage that you will be likely to qualify for another mortgage, which could limit your ability to purchase a new home.
There are many things you can do to protect your credit during a divorce, you just have to know what to do.
Short Deadline Prevents Battered Spouses from Raising "Innocent Spouse" Defense
Not surprisingly, the two year rule has been coming under fire in Congress with the introduction of legislation by presidential candidate and Minnesota Representative Michele Bachmann, as well as a demand by Senate Finance Committee Chairman Max Baucus that the IRS review the two year deadline.
With respect to divorce, particularly in Pennsylvania where two years of separation is not an uncommon occurrence, people could easily sign a joint tax return as a routine action, without taking the time to carefully review the contents of the filing. Factor in abuse, fear, and intimidation and it is not a surprise that truly "innocent spouses" are being denied the right to raise that defense due to the two year limitation.
For most families, filing joint taxes is a routine affair – seldom is the time when filing under a different designation other than "married filing jointly" place a family in the most advantageous tax position. For couples who are separated, continuing to file jointly may continue to make the most sense.
There are times, however, when one spouse has no knowledge of the family’s financial affairs. If the situation warrants it, that spouse could claim relief from the IRS under the "innocent spouse" rule. This rule is designed to protect taxpayers who should not be responsible for the tax liability incurred by the culpable spouse, even in situation where a joint return was signed by the "innocent spouse."
A recent article, however, highlighted how the IRS has persistently struck down appeals by "innocent spouses" due to their failure to seek relief within two years of their receipt of an IRS tax collection notice. What makes these decisions particularly difficult to accept is that they are being made against battered spouses or other parties who were not in a position to know about the tax liability due to abuse or estrangement from the other spouse. Consequently, they often do not even know there is a problem before the two year limit lapses.
Fraud or Foolishness: Ex-Husband Using Madoff as Excuse to Invalidate Divorce Settlement.
Following up on Mark Ashton’s “celebrity” themed blog entry on the Los Angeles Dodgers’ ownership, another high profile individual is having a residual effect on divorces: Bernie Madoff.
Mr. Madoff’s crimes are well-documented and high profile. His arrest has given rise to a media niche on scan artists, including Montgomery County’s own “Madoff”, Robert L. Krikorian, who was recently convicted of a Ponzi scheme and sentenced to three to seven years in jail for bilking investors out of (a paltry) $870,500.00 over about four years. If you rip off your investors you are labeled a “Madoff.”
But in being duped, should people get the chance to redo the a Marital Settlement Agreement negotiated and executed years before the fraud was discovered? That is the question being asked in New York where a well-heeled couple split their assets in 2006, including a large investment account with Madoff. Wife pulled her money from the investment, while Husband kept his in. You probably can guess what happens next: Husband’s money gets lost in the Madoff scandal while Wife continues to live well in her Upper East Side apartment.
The question before the New York bar is whether Husband can sue to have the Marital Settlement Agreement reopened and the funds Wife retained redistributed to account for his Madoff loses. Sides are being taken in this dispute and many practitioners view a favorable outcome to Husband as having wide reaching implications to contract law and beyond; it calls into question whether a deal is ever really “done.”
The crux of Husband’s case rests on the argument that the parties’ Agreement (contract) is nullified by “mutual mistake;” they were both mistaken by the existence of an account with Madoff. It appears that Husband is arguing in that they were both mistaken their belief that they had an account containing millions of dollars with Madoff. – the Madoff fraud proves they, in fact, had no “account” with Madoff. So, even if they had moved $1 million dollars over to Madoff, they really weren’t investing it. Madoff stole just stole it…except for the $6.6 million cash payment Husband swung over to Wife from the account.
This case basically sets up the possibility that events subsequent to an agreement could allow for a total reexamination of the deal. Interestingly, we had (have) a national crisis over real estate values (many would argue millions of frauds were committed), yet I am not aware of any parties successfully trying to re-litigate a deal in which they kept the marital residence and off-set its equity value with cash assets. No one is successfully re-litigating their stock holdings that tanked. In my experience, a client and her husband split their stock account when they separated; my client moved her money into cash, while Husband – allegedly a financial guru – keep his in stocks. Two years later, my client has retained most of her money in cash, while husband has lost all of his money to his lifestyle and stock market. Husband unsuccessfully argued that Wife should bear some of the liability because the assets were marital in nature, but the court held that he was responsible for his portion of the money.
In New York, Husband’s case looks, in many respects, as a brazen attempt to capitalize on a highly publicized crime for which neither party had any knowledge or control over. The only control they had was how they decided to invest their individual pieces of the marital estate after the divorce. Wife chose to pull her money out; Husband opted to keep his in. Wife mitigated her risk; Husband appeared to have raised the stakes.
After a trial court dismissal, the New York appellate court reached a 3-to-2 decision in favor of Husband’s right to sue to revise the deal based on “mutual mistake.” Whether he will successfully revise the deal remains to be seen.
QUALIFIED PERSONAL RESIDENCE TRUSTS; ARE THESE HOMES SUBJECT TO CLAIMS IN EQUITABLE DISTRIBUTION?
It was announced on May 24, 2011 that new home sales rose for the second month in a row; a fact that startled many economists. Have we reached the bottom? No one can be certain but a device from the estate planners portfolio is getting renewed interest and it is one that Domestic Relations lawyers like because it would appear to insulate family members from “increase in value” claims by spouses who are not part of the family.
The devise is called a Qualified Personal Residence Trust. The purpose from the estate planners viewpoint is to get appreciating residential property out of a person’s estate. Here is how it works.
Mr. and Mrs. Warbucks buy a house in Longport NJ in 1970 for $35,000. To quote Billy Joel, they live in Allentown but spend their weekends at the Jersey shore. Mr. and Mrs. Warbucks are now in their 70s and still enjoy the property but it is mostly a grandchild magnet today. At the height of the market in 2007, the property was worth $3,000,000 and thus had a $2,930,000 capital gain. The Warbucks children would like to keep the property after their parents die and pass it along to other family members.
The game with a QPRT is this. Today, the Longport property would appraise for $2,200,000. If the Warbucks deed the property into a QPRT, they do so at today’s appraised value and they report that as a gift depending on how long they want the trust to last. The key is deciding how long the trust should last because if you guess wrong and the grantors die before the trust term expires, the magic of the tax scheme turns into a pumpkin. But if they are still living when the trust does terminate (typically 5-10 years) any increase in the value of the property is not part of the Warbucks’ taxable estate for federal purposes. At the end of the trust, the property goes to the trust beneficiaries as owners in fee (i.e., complete owners) subject to the right of the grantors to remain in residence for their lives. In a world where prices are rising, this is a very efficient tax device.
This has a useful divorce device as well. Many folks with property like the Warbucks tried to do the same thing by turning the house into a partnership and conveying increasing interests to the next generation each year. This also is tax efficient. Once an interest is conveyed to the child, the increase in the value of the interest belongs not to the older generation but the new partners. But, as we saw in a case a couple of years ago, when the second generation couple split up, the daughter in law of the Warbucks laid claim to an increase in value on the partnership interest. It cost more than $100,000 to buy out the “increase in value” of the partnership interest when the divorce settlement was reached. Did Mr. and Mrs. Warbucks want to give their no good ex daughter in law $100,000 so that their son could settle his divorce case? Of course not. But the claim was made and the claim was real.
With the QPRT a similar result was achieved but because the son of Mr. and Ms. Warbucks never had a “possessory” interest in the trust assets, it is our impression that any increase in value up to the time the trust terminates would be excluded as property subject to equitable distribution. That probably changes when the interest becomes possessory and there is an interesting question as to whether the property is in possession but subject to a life estate by the grantors. The leading case on “increase in value” of trusts is Solomon v. Solomon, 611 A.2d 686 (Pa. Supreme 1992).
In any event, if your family is in the range of paying federal estate taxes and you have folks with very highly appreciated property, the QPRT is a device worth speaking to an estate planning attorney about. Because if prices do begin to rise again, this device has a means of seeing the fruit grow in the estate of a new generation.
Agreements and Statutes of Limitations
Many marital settlement agreements contain language that says, in effect, that just because a party does not pursue a contempt action for a breach of the agreement, does not mean they waive their right to enforce the agreement in the future. In other words, just because I don’t take you to Court over your mistake, does not mean I am saying what you did was okay and will let it slide indefinitely.
A recently published Erie County case, however, highlights the fact that both attorneys and parties need to remember that even marital settlement agreements are subject to common law contract principals like statutes of limitations. In the Erie County case, Deeter v. Deeter, 94 Erie 24 (Dec. 17, 2010), the Court considered the issue of whether a party’s breach of the marital settlement agreement was actionable or barred by a four year statute of limitation. In this instance, the Court found that the party had to file an enforcement action within four years of the breach rather than within four years of the execution of the agreement.
This holding reminds parties and practitioners that a Marital Settlement Agreement, Pre-nuptial Agreement, or Ante-nuptial Agreement is, at its essence, a contract that applies contract principles for the enforcement, creation, and interpretation of that contract. Diligence as to the adherence and prosecution of breaches of the agreement are equally important to ensure that both parties to the agreement fulfill their contractual duties. If you are the party to such an agreement and have any questions as to what you’re supposed to do or what the other party is supposed to do under the agreement, consult with an attorney immediately. As the Deeter case demonstrates, if you do not act within four years of the breach, you can eventually lose your right to enforce the terms of the contract.
April 15th
Each year I get phone calls from clients around the tax filing deadline asking for advice regarding tax filings. First of all, your attorney likely is not an accountant and certain tax issues need to be discussed directly with an accountant. However, there are some important things to consider when doing your taxes during a separation and/or divorce proceeding.
The first question is how are you going to be filing - married filing jointly, married filing separately, etc. If you are still married on the last day of the tax year then you can file married filing jointly. If you are filing separately, the second question becomes, who will be claiming the children? Typically, the parent who has the children the majority of the time gets to claim the dependency exemption. However, the court has discretion to allocate the dependency exemption to the non-custodial parent wherein it would result in a higher net income to that party. Of course, the parties can always agree to share the dependency exemption, and to do so, they would have to fill out, sign, and file the appropriate federal tax form.
It is important to note that if one party's income is not documented you should be cautious about signing and filing a tax return with that person. An attorney can prepare an indemnification form to help prevent financial liability, but the Court could possibly hold your spouse to the income reported on the tax return for purposes of support because you signed off on the "income" - meaning your support award could be less.
COMMON LAW MARRIAGE, ANYONE?
We recently had an inquiry with respect to the status of common law marriage in Pennsylvania. The quick answer is that this doctrine was long abandoned in other states but survived in Pennsylvania until this century. The more correct answer is that common law marriage is still alive in a diminished form and will survive in that form for many years to come.
First, what is a common law marriage? There are two terms involved. The common law is defined by statute in Pennsylvania. It is the law that was in existence at the time America declared its independence in 1776. The leading source for what was the common law in 1776 is the 1765 four volume compilation by Sir William Blackstone titled Commentaries on the Law of England. Blackstone’s influence on American law was so great that his Commentaries were published in the United States well into the 20th century.
In 1700 any boy 14 years of age could lawfully marry a girl of 12. By statute a man who married a girl under 15 without parental consent could be fined or imprisoned. In the early 18th century another statute was passed that made marriages voidable by parents except where the children were over 21 or parents consented.
Typically marriage involves either a member of the clergy or a public official conducting a ceremony intended to confirm the public assent of the couple being joined in marriage. But a common law marriage was one intended to solemnize marriage for people who were not formally churched or too distant from places where public officials could be found. It required only the capacity to marry (i.e., sufficient age and mental capacity) and the intent to marry. Lord Hardwicke’s Marriage Act of 1753 sought to change this and tighten the requirements. But that Act exempted Jews, Quakers and did not affect colonists in America.
So in America and, particularly in Quaker Pennsylvania, marriage could be recognized whenever the celebrants were of age and expressed words of present intention to be married. The Philadelphia Yearly Meeting calls these “promises” and they are made by one intended spouse to the other without benefit of clergy.
In America this evolved into acceptance of marriage without clergy and without the requirement of a license or a public ceremony. As time passed, these common law relationships were often viewed as instruments of fraud. A woman living with a man who died could step forward and claim a common law marriage and thereby make tort or worker’s compensation claims for the death of her husband. Over time many states passed legislation abandoning these types of marriage.
Pennsylvania retained this doctrine until 2003 when the Commonwealth Court issued its ruling in PNC Bank Corp. v. Worker’s Compensation Appeal Board (Stamos)
831 A.2d 1269 ( Pa. Commnwlth., 2003). The ruling was that courts in the commonwealth would no longer recognize marriages formed after the court decision. This was adopted as a statute effective January 2, 2005.
The key is in the language. If the claim is that the common law marriage was formed before January 2, 2005, the right to assert the marriage exists.
But the standard established in a 1988 Pennsylvania Supreme Court case Staudenmayer v. Staudenmayer, remains quite high. As Justice Newman wrote in that case, “We have allowed, as a remedial measure, a rebuttable presumption in favor of a common law marriage based on sufficient proof of cohabitation and reputation of marriage where the parties are otherwise disabled from testifying regarding verba in praesenti (words of present intent). However, where the parties are available to testify regarding verba in praesenti , the burden rests with the party claiming a common law marriage to produce clear and convincing evidence of the exchange of words in the present tense spoken with the purpose of establishing the relationship of husband and wife, in other words, the marriage contract. In those situations, the rebuttable presumption in favor of a common law marriage upon sufficient proof of constant cohabitation and reputation for marriage, does not arise.” 714 A.2d 1016 (Pa. Supreme 1988).
In a nutshell, unless one of the parties is deceased, proof of a common law marriage does not come from living together or owning bank or brokerage accounts together or even filing tax returns as married individuals. It does not come from exchange of rings or carrying the intended over the threshold. It comes from an exchange of vows or other words clearly meant to establish that a couple has assumed the bonds of marriage. Note also that an invitation to marry or even a plan to marry does not a marriage make.
This is a fact driven area of the law, and no one should abandon what they think may be a claim of common law marriage without having those facts evaluated by someone familiar with case law that goes back more than a century. But the quick tests that people think make people married (living together for seven years is the most common one we hear about) do not comport with the state of the law.
I'm Leaving! But What Should I Do First?
Many times people come into my office or call wondering what they should do to prepare for separating from their spouse or the parent of their children. Understandably, it is a difficult decision and each person wants to position themselves to best handle the potential “fall-out” of the separation. They want to take the best steps to protect themselves and their children. One of the most important things a person can do is copy important financial documents and documentation regarding their children. On the financial side it is important to have the financial records (i.e. tax returns and financial and retirement account statements) to establish the marital assets and debts. Sometimes financial information is difficult (but not impossible) to get after a separation or divorce complaint filing. It is important to have the children’s documentation to ensure the safety and well-being of your children.
It is important to consult with an attorney to determine what steps should be taken in order to move forward with a separation and/or divorce. Each separation and/or divorce is unique. Depending upon the parties and the level of difficulties/animosity between the parties, an attorney can best advise as to the next and best steps for a separation and/or divorce.
Co-habitation Discount on Alimony Pendente Lite Award
The common understanding of an alimony pendete lite (or “APL”) award is that it is a relatively strict economic analysis based on incomes. Due in large part to the prominent reference to “alimony” in this term, it is commonly assumed that APL is treated like alimony in the sense that it is taxable income to the recipient (true) and terminable based on co-habitation (false).
The Pennsylvania Superior Court highlighted this latter fact in a recent ruling in the Childress v. Bogosian case. In that case, the Wife was awarded APL though she was “partially” cohabitating with her boyfriend. The hearing master made a recommendation that Husband be awarded 55% of the marital estate and 60% of the real property that he acquired. The master also applied a retroactive 20% downward deviation in APL due to Wife’s cohabitation and terminated Wife’s APL award that year.
Wife filed exceptions to the Master’s decision and the trial court granted her exception related to the termination of the APL award, reinstating the award for an additional two years until the Decree was finally entered. Husband then appealed the case and that issue, among others, to the Superior Court.
The Superior Court’s perspective on this issue is that APL is designed to “maintain the standard of living enjoyed during the marriage, so that both parties have equal financial resources to pursue the divorce even though one party has the major assets.” Citing precedence, the Court also noted that “APL may not be denied on the basis that a spouse is cohabitating with another.”
In upholding the trial court’s decision to extend APL payments two years and not take into consider Wife’s cohabitation as grounds for terminating APL, but justifying the downward deviation. The court also recognized the element of husband’s direct impairment of wife’s finances by his willful failure to pay APL payments during the pendency of the divorce.
Unlike in an alimony award co-habitation by an APL recipient will not result in a termination of the support award, but one could expect the facts related to the contribution by the recipient’s paramour will be taken into consideration.
Fox Rothschild Attorney, Jennifer Millner, Scores a Victory in New Jersey for the Valuation of Her Client's Military Pension
I would like to highlight a recent victory by one of our outstanding New Jersey family law attorneys; Jennifer Millner, Esquire, a partner in our Princeton office, won an appeal to New Jersey’s Appellate division over an issue arising from valuation of a military pension.
Because the Husband’s Air Force pension was based upon an accumulation of points based on his rank, there is an identifiable difference between the marital component of his pension at the time they entered into their Marital Settlement Agreement and the benefit he received based on the years of post-divorce employment and point accumulation he had due to subsequent promotions and post-divorce efforts.
The trial court applied a very straightforward coverture fraction to value the pension, however, on appeal, Ms. Millner, with the assistance of Robert Epstein, Esquire and Eliana Baer, Esquire, successfully argued for the application of a coverture fraction that recognizes the distinction between the marital and post-marital impact of the Husband’s employment. The Appellate Division “[agreed] with the [husband’s] statement that the active duty and reservist components of his earnings are discernable, as one can not only calculate the points earned through the two distinct periods of military service, but also obtain the demarcated salary for each rank held.”
(UPDATE) LAW FIRM ASKS COURT FOR GUIDANCE AS TO WHETHER PARENTS OR DOMESTIC PARTNER SHOULD RECEIVE BENEFITS OF A PROFIT SHARING PLAN
We previously blogged about Philadelphia based law firm Cozen O’Conner’s efforts to obtain a guidance as to how to pay-out the profit sharing plan of one of their partners who was in a same-sex marriage. Cozen was presented with a beneficiary designation form which appears to grant the partner’s parents the benefit.
Muddying the issue was that Ms. Farley’s marriage to Ms. Tobitz occurred in Toronto in 2006; a marriage that was not recognized by her home state of Illinois or Cozen’s home state of Pennsylvania.
But no longer – today, Illinois’s governor signs into law the legal recognition of civil unions. Beginning in June 2011, the state will begin issuing licenses to both heterosexual and homosexual partners.
How this will impact the beneficiary issue is unclear since even if the type of union Ms. Farley and Ms. Tobitz had is now recognized by the state, Ms. Farley’s death may preclude a legal recognition of its existence. On the other hand, it is possible that Ms. Tobitz may seek validation of her Canadian marriage under Illinois law, thereby establishing herself as Ms. Farley’s legal heir - to the exclusion of Ms. Farley's parents.
Recent Updates to Decedent's Estates and Fiduciary Law Reflects the Divorce Code
In October, 2010, Governor Rendell signed into law Act No. 85 which amended Title 15 and 20 of the Pennsylvania Code to address the death of a party during divorce proceedings. Previously, the Divorce Code was amended to reflect the fact that if a party to a divorce dies after grounds have been established, then equitable distribution is to proceed as normal with the decedent’s estate stepping into the shoes of the deceased party and that the Court should apply the normal equitable distribution factors in deciding the case.
In updating the Decedent’s Estate and Fiduciary’s Code, not only is this area of law reflective of the current Divorce Code, but it also spells out more specifically for estate purposes the manner in which a divorcing party’s estate is to be distributed during litigation. Specifically, Title 20 was amended to reflect the fact that a spouse will have no right or interest in the real or personal estate of the other spouse if they die during the course of the divorce proceedings and after grounds have been established for the divorce. Furthermore, Section 2507 now reflects that any provision in a party’s Will that favors or relates to that party’s spouse shall “become ineffective for all purposes unless it appears from the Will that the provision was intended to survive a divorce…” This Section goes on to give exceptions to this rule, including situations in which the parties are divorced prior to the creation of the Will (which would reflect specific intent to allow the benefit to pass to the ex-spouse) or if the provision was specifically intended to survive the divorce.
Furthermore, if there is a conveyance that is revocable by a conveyor at the time of that person’s death that favors or relates to the conveyor’s spouse, this conveyance will become ineffective if the conveyor dies during the course of the divorce proceedings, no Divorce Decree has been entered, and grounds have been established. In other words, if a spouse dies and has designated the other spouse as the beneficiary of a life insurance policy, retirement plan, or other type of asset, that spouse may not receive the proceeds from those accounts if a Decree of Divorce has been entered or the divorce proceedings are pending. The exception, as with previous sections, is that there must be language to indicate that the payments were intended to survive the divorce. The practical application of this provision is that a codicil to a Will or revised benefit designation form is no longer necessary to preserve this benefit from being distributed to an estranged spouse; the Code now severs the passing of that benefit to the estranged spouse, unless the conveying spouse specifies otherwise. As such, a spouse who has beneficiary designations will find them nullified if the other party dies while the divorce is pending. The beneficiary designation will be declared ineffective unless specifically intended to survive the divorce.
Though the estate code may offer safeguards against assets being passed to an estranged spouse, it does not diminish the importance of changing the beneficiary designation early in the divorce proceeding, particularly if grounds for divorce – the triggering event for the Divorce and Estate Codes – have not yet been established. Consult with an attorney to determine what can be done to ensure that your benefits pass to those heirs who reflect your present intentions rather than past intentions.
LAW FIRM ASKS COURT FOR GUIDANCE AS TO WHETHER PARENTS OR DOMESTIC PARTNER SHOULD RECEIVE BENEFITS OF A PROFIT SHARING PLAN
Philadelphia based law firm, Cozen O’Connor, has asked the Eastern District of Pennsylvania for guidance as to the validity of a beneficiary designation form submitted by the parents of a deceased partner in their Chicago office. The parents of Ms. Sara Ellyn Farley, Esquire are seeking to receive the proceeds due to their daughter from the firm’s Profit Sharing Plan. Complicating this issue is that Ms. Farley was married to Ms. Jennifer Tobits in Toronto in 2006 and Ms. Tobits has asked that the proceeds be distributed to her as the plan holder’s surviving spouse.
Many plans of this nature have a default distribution provision in that if there is not a named beneficiary, then the proceeds from the plan pass to the surviving spouse, then parents, etc. In this instance, Ms. Farley’s parents presented Cozen with a beneficiary form dated one day before Ms. Farley’s September 2010 death which identifies themselves as the beneficiaries of the Profit Sharing Plan and identifying Ms. Farley as “single”. This designation form is unsigned by Ms. Farley but purportedly has Ms. Tobits’ signature relinquishing her role as beneficiary.
Under most insurance or retirement/investment plans in which a beneficiary may be designated, it requires the signature of the named beneficiary before beneficiary designations can be changed to another party. The reason for this is, essentially, that the named beneficiary has certain property rights in the asset and cannot knowingly have them removed without their authorization. Much of this restriction is based upon the rules of the Plan, ERISA law, and other state and federal statutes.
What makes this situation interesting is that it appears that Ms. Farley had not filed a valid designation form with Cozen O’Connor prior to her death. The subsequent form which was provided by her parents, contained conflicting information of Ms. Farley being “single” but also purportedly has the signature of Ms. Tobits relinquishing her claim as beneficiary. Finally, we have the parents’ position, as articulated by their counsel, that under the Defense of Marriage Act, Ms. Farley and Ms. Tobit’s marriage is not valid. The Defense of Marriage Act essentially permits states to refuse to offer a legal same-sex marriage in one state the “full faith and credit” of validity in another state. Worth noting, however, is that in July 2010 a U.S. District Court Judge found that Section 3 of the Defense of Marriage Act, which defines “marriage” and “spouse”, violated the Equal Protection Laws guaranteed by the Fifth Amendment of the U. S. Constitution. This ruling was appealed by the U.S. Department of Justice in October 2010 and the appeal will eventually be heard by the First U.S. Circuit Court of Appeals located in Boston, Massachusetts.
For Cozen O’Connor’s part, they are not asking the Eastern District to determine whether or not Ms. Tobits’ and Ms. Farley’s marriage was valid, but for Ms. Tobits and Ms. Farley’s parents to be compelled to litigate their dispute between each other and that Cozen undertake to distribute the Profit Sharing Plan proceeds to the appropriate party.
When you consider the facts thus far presented, you have Ms. Farley’s parents offering an unsigned designation form identifying her as “single,” pre-dates her death by a day, and lists her same-sex spouse as agreeing to relinquish a right in the plan which she may not have based on a Federal law currently under appeal. This is shaping up to be quite a case.
Although it is unlikely the Eastern District of Pennsylvania will touch the marriage issue, issues such as the right to designate a same sex spouse as beneficiary or for a same-sex spouse to claim default spousal benefits under the terms of the plan may ultimately be the context in which same sex marriage is dealt with judicially and legislatively in Pennsylvania. Having already seen some Pennsylvania municipalities such as Allentown extend medical benefits to same sex partners, the extension of employment benefits may be the vanguard issue for addressing same sex marriage in Pennsylvania.
If you are interested in reading the full article, it can be found in the January 7, 2011 issue of the Legal Intelligencer, Vol. 243, No. 5, and is written by Gina Passarella.
OVERPAYMENT IN ONE ASPECT OF DIVORCE WILL NOT PREVENT FEE ASSESSMENT IN ANOTHER
Most people familiar with family law realize that “divorce” is usually a catch-all term for multiple “cases within the case” such as child support, spousal support, custody, or equity actions. One Divorce Complaint can open up any number of actions within it which must be adjudicated and addressed in order for the overall divorce to move toward a conclusion. In the case of economic issues (equitable distribution and support), an Order must exist before a Decree can be entered.
Due to the fact that there can be strict divisions among the various causes of action, it can be difficult, if not impossible, for the Court to address an inequity in one area with a remedy from another.
To illustrate this point, the Court in Centre County recently issued a holding in the case of Allen v. Allen, 110 PDDRR 71 (Pa.C.P. 2010) which acknowledged the Court’s authority to assess attorneys and lost income to Wife due to Husband’s failure to obtain a Qualified Domestic Relations Order. The Court did not find that Husband’s overpayment in another aspect of the case precluded them from assessing him with these penalties.
I can only imagine the frustration the Husband felt in not having his credit applied to this deficiency, or in not getting similar satisfaction in recapturing that credit, but this case illustrates the fact that the courts will treat each aspect of the case on its own merits. In this instance, if Wife’s loss of income and attorney’s fees was a result of delay tactics, allowing the Court to simply redistribute a credit from another area will not have the same deterring effect as levying the costs and fees against him in this instance.
Furthermore, there are often policy restrictions in dealing with credits, particularly as it applies to child support. Domestic Relation Offices and the Pennsylvania State Collection and Disbursement Unit often preclude a payor from taking reduced support payments, and they will not issue a refund. The credit usually carries until some intervening event occurs or the subject child is emancipated.
Be sure to discuss with your attorney how the different aspects of your divorce influence the other. You may find that what looks advantageous in your equitable distribution case, may be detrimental to your support case. Furthermore, understanding the financial restrictions between various causes of action, such as support and equitable distribution, will allow you to get a better grasp of your overall case. As always, if you have questions or don’t understand something, ask your lawyer; it is his or her job to make sure you understand what is going on in your case.
INTER SPOUSAL GIFTS
L. Elizabeth F. Hanbidge, Esquire, an attorney in our Blue Bell office and a new contributor to our blog, writes:
An issue which comes up frequently between divorcing couples is the disposition of jewelry, and whether it is marital property subject to equitable distribution. While the rule of thumb remains that items belonging to one spouse prior to marriage belong to that spouse following divorce, the disposition of jewelry given after the parties marry can be a tricky issue because seminal case law and the Pennsylvania statutes appear to contradict one another.
At the root of the question of how jewelry should be classified for equitable distribution purposes is the issue of how inter-spousal gifts should be distributed. For instance, which spouse owns the expensive watch that was given as a birthday present between the spouses? Recall that the issue of whether a party retains a particular item is a different question than whether the value of such an item should be included for equitable distribution purposes. While a close reading of the Pennsylvania statutes gives one answer, seminal case law gives another.
Historically, gifts between spouses were seen as gifts to the recipient without regard to the spousal relationship. This reasoning is somewhat flawed to the degree that marital assets, otherwise subject to equitable distribution, were used to purchase the gift. The seminal case on this issue is Semasek v. Semasek, 509 Pa. 282 (1985). In Semasek, the Pennsylvania Supreme Court held that the lower court had made an error of law in determining that the wife’s rings were marital property subject to equitable distribution. At the time Semasek was decided, the governing law with regard to equitable distribution stated that gifts to one spouse were not subject to equitable distribution. The Semasek court reasoned that because the legislature had not created a provision excluding inter-spousal gifts from the general gift provision, such gifts were not marital property and were to be considered the sole property of the recipient spouse. This analysis was based on 23 Pa. Stat. Ann. § 401(e)(3) (1980). While this case has not been explicitly overturned, subsequent legislation has nullified this decision.
The current statutory provision regarding the classification of marital property is 23 Pa. C.S. § 3501(a)(3) which states, in relevant part: “As used in this chapter, ‘marital property’ means all property acquired by either party during the marriage. However, marital property does not include: …Property acquired by gift, except between spouses, bequest, devise or descent or property acquired in exchange for such property…" (emphasis added). The default provision under 23 Pa. C.S. § 3501 is that all property acquired during a marriage is marital property. While gifts are generally excluded from marital property under §3501(a)(3), gifts between spouses are explicitly excluded. Therefore, gifts between spouses are marital property and should be subject to equitable distribution. While the value of such gifts should be included as martial property for equitable distribution purposes, commonly the recipient spouse inevitably retains the item. In some instances, for example where a gift was a family heirloom, items will be returned to the gift-giving spouse, however, the value of such property should be included as a marital asset subject to distribution.
Given the language of 23 Pa. C.S. § 3501(a)(3), and the reasoning upon which the Semasek court based it decision, inter-spousal gifts are subject to equitable distribution. However, it is not unusual for attorneys, and even for courts, to find that such gifts are the sole property of the recipient spouse. For instance, in In Re: Gregorchik, 311 B.R. 52 (2004), despite the language of § 3501(a)(3), the bankruptcy court followed the holding rendered five years earlier in Semasek and stated that the Semasek ruling, “…is preserved by the present Divorce Code, which provides that a gift from one spouse to the other is not marital property.” Id. at 56, citing, 23 Pa. C.S.A. § 3501(a)(3).
Parties and their attorneys should be cognizant of the issues surrounding the disposition of inter-spousal gifts. Regardless of which party retains physical possession of the gift, the value of the gift should be included as an asset of the marriage for equitable distribution purposes. Of course, how to value such items frequently becomes an issue and one best reserved for a later blog entry.
SIZING UP THE LITIGATION; AN EXAMINATION OF COST VS. BENEFIT
For some segments of our society litigation is part of everyday life. Insurance adjusters make their living out of measuring damages and assessing the risk and cost of doing battle over insurance claims. As such, they make judgments every day as to whether a particular claim is something they want to fight over. In so doing, they take into consideration the damage the claimant incurred, the cost of contesting the claim and the likelihood they will prevail over the claimant (or otherwise reduce the claim recovery).
Businessmen are not as immersed in litigation as those in the insurance industry, but businesses deal with various kinds of legal claims every day. Employees sue for wage claims or discrimination claims. Developers battle municipal authorities over home many homes they can build on a parcel. Again, each of these matters involves assessment of risk and benefits associated with potential litigation.
Family law litigants, even those who assess commercial risks and rewards every day tend to lose sight of the fact that they have a role in deciding when to fight versus when to switch. Tell someone that a planned vacation with his/her children for the summer has been abruptly “cancelled” by a former spouse and many will tell you they do not care what it costs to enforce their rights as parents. That may be true until the bill comes in.
In family law, many clients tell us that they are fighting for principle. Principle does have its place and there are times when a matter must be litigated simply to “send the message” that a client takes his or her rights very seriously and will invest in the principle of the matter even when a dollar recovery is remote. But even in these cases, it is worthwhile to ask, how likely is it that the principle I am promoting will be validated by the Court. And what will I invest for that validation.
A classic example involves child support. Even in a world where there are support guidelines with explicit definitions there is still room for battle. Husband loses his job in the current economic environment. Wife says he quit. Husband says he was laid off. Wife wants to assert that support should be based not on his unemployment but his earning capacity. There is a triable issue of fact. But what is the likelihood that each side will prevail? And what is the cost of the hearing or trial.
Let us say that unemployment is $2,000 a month. Husband formerly earned $7,000 a month. Assume spousal support only is in issue. Further assume that Wife is working and making $2,000 a month. Husband’s best case is no support at all as wages are equal while he is unemployed. Wife’s best case scenario is that Husband owes her $2,000 a month in support based on his earning capacity. Now we have a range of outcomes. Let’s assume that Wife’s attorney estimates his chance of a total win at 50%. The value of the claim is no longer his best case of $2,000 a month but half of that amount. Now how long can he expect to collect the support if he prevails. If it is estimated at two years the value of the claim is 24 months multiplied by $1,000 representing the value of the claim. Now the question becomes what are the litigants willing to spend to enforce an outcome that centers around $24,000. If they try the case for a day before a judge or hearing officer they will each invest probably 30 hours between the various preliminary proceedings. At $300 an hour, each will invest $9,000. Now we see an $18,000 investment pursuing a probably $24,000 outcome. Now, bear in mind, each party will only be putting up half but most would agree that $9,000 is a fairly pricey expense where $24,000 is the probably value of the claim.
Take equitable distribution of a case involving $500,000 in assets. The best outcome for a dependent spouse is probably no greater than 60% or $300,000. The primary breadwinner argues that the spouse can make as much as he can and he proposes 50/50. That means Wife gets $250,000; a discount of $50,000 from her goal. The “spread” buys roughly 165 hours of legal time. That may seem like a lot but spread it over the 18-24 months that most divorces take in Pennsylvania and we are now looking at each side devoting 4 hours a month to preparation and litigation of the case.
The point is to use your attorney and pick your fights wisely. Remember that a $100,000 claim where you have an 80% chance of a win is only an $80,000 claim in reality. Meanwhile, the cost is certain to occur. Even when the most important of principles is involved; cost and likelihood of winning are two factors that cannot be sensibly ignored.
WHEN IT COMES TO ERISA, FOLLOW THE RULES
It is a common scenario. When a couple divorces, one or both spouses may have a retirement plan governed by the Employee Retirement Income Security Act of 1974 (ERISA). The most common ERISA retirement plan is the 401(k). As with other assets, those ERISA retirement plans must be divided and/or distributed between the spouses. It is easy to assume that the distribution of an ERISA retirement plan is addressed in a property settlement agreement or divorce decree, no further action is needed. However, ERISA contains strict rules regarding how a participant can change a beneficiary, and includes a strict “anti-alienation” provision that prohibits benefits under a plan from being “assigned” or “alienated.” ERISA sets forth specific requirements that must be followed when changing a beneficiary or during the one exception to the anti-alienation provision: divorce.
The Supreme Court of the United States issued an Opinion on January 26, 2009 addressing this issue. In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan et al., 555 U.S. ___ (2009), a husband named his wife as the beneficiary to his employer’s savings and investment plan (SIP) during the parties’ marriage. The parties later separated and the divorce decree stated that the wife was “divested of all right, title, interest, and claim in and to . . . any and all sums . . . the proceeds [from], and any other rights related to and . . . retirement plan, pension plan, or like benefit program existing by reason of [the husband’s] past, present or future employment.” The husband never executed a form to remove the wife as his beneficiary of the plan.
The husband passed away and the parties’ daughter asked the husband’s employer to pay the benefits to the husband’s estate. The employer refused, citing the beneficiary designation form completed by the husband, and paid the benefits to the wife. The daughter sued the employer. The District Court found for the daughter. The Fifth Circuit reversed. The Supreme Court affirmed the holding of the Fifth Circuit, albeit using different reasoning than the Fifth Circuit.
The Supreme Court’s rationale was essentially that the plan documents set forth explicit directions regarding how to set and change a beneficiary. The husband followed the procedures to list the wife as his beneficiary, but neither the husband nor the wife followed the proper protocol to change the beneficiary to the husband’s estate. The language contained in the divorce decree did not follow the requirements of the plan and was, therefore, not an effective change of beneficiary.
The moral of this story is that when a retirement plan is being divided, the rules of the plan itself as well as the requirements of ERISA must be followed very carefully. In the Kennedy matter, the husband’s pension benefit was awarded to his ex-wife despite an order of court because of a failure to follow plan rules. Other possible implications include unintended tax consequences and penalties, waiver of benefits. So when in doubt, call the plan administrator to ensure you are following all of the rules correctly.
PROPERTY SETTLEMENT AGREEMENTS: BE CAREFUL WHAT YOU SIGN UP FOR
Most of us do not spend our spare time reviewing recent amendments to the US Bankruptcy Code. But if you are contemplating or going through a divorce a bit of attention is warranted because the 2005 amendments to the law change the landscape of what occurs when bad times come about.
A little history tells the story. Twenty years ago the prevailing bankruptcy law distinguished between equitable distribution and alimony obligations. An obligation to make a payment or asset transfer as part of an equitable distribution payment or order was dischargeable. An alimony obligation could not be avoided because it was seen as a form of support. In the mid-1990s the statute was amended which called for a balancing of the hardship of enforcing the order against the consequence to the spouse or family member. This balancing test was applied to both alimony and property distribution obligations.
In 2005 the Bankruptcy Code was amended again with lots of pressure from the credit card industry to limit the power of consumers to avoid obligations of all kinds. Congress was bitten by the bug and one of the collateral effects was amendment of Section 523 to provide that any form of Domestic Relations Obligation was no longer eligible for discharge. Section 101 states that a Domestic Relations Obligation includes debts to spouses, former spouses or children in the nature of alimony or support. Except in Chapter 13 cases any obligation contained in a Property Settlement Agreement may not be discharged. Chapter 13 cases are essentially personal “reorganization” cases. The new statute will allow discharge of a property settlement obligation so long as it is part of a reorganization plan and is not a support obligation.
Failure to pay support obligations can also thwart a bankruptcy. The statute permits federal courts to dismiss Chapter 13 cases or to deny discharge from debt premised upon an obligor’s failure to comply with a support obligation. The spouse who is owed the money can even ask that your Chapter 13 plan (essentially a work-out of debt) be converted to a Chapter 7 (a forced liquidation of your assets to pay creditors) premised upon failure to pay support on a timely basis.
What does this mean in practical terms? It means that you have to watch out what you sign up for. You can sign leases, promissory notes, guaranties and credit card agreements by the bushel. At the end of the day you can pretty much avoid those obligations by filing a Chapter 7 bankruptcy or establish a work out plan through Chapter 13. But if your obligation is to a spouse or your kids, the rules are different and those obligations are going to survive your bankruptcy. For high income individuals, there is a tendency to overcommit because the person has a long history of significant earnings. We commonly have client’s tell us: “I know it’s a lot of money to pay but I have always been able to make money and I will find a way to do it this time. “ Historically, we have tried to structure these deals with a heavy emphasis that the obligation is a property based one and not support with the understanding that property based obligations could be eligible for bankruptcy protection. Since October, 2005 that technique has lost its vitality. So let the promisor beware.
SO WHY IS IT NOT 50/50?
At most initial interviews we listen to what clients tell us to be the history of the marriage and the asset pool we are addressing and attempt to predict an equitable distribution result. Sometimes our predictions are very accurate; sometimes they are not. Perhaps because they are bashful, many clients do not stop to ask us, why is it that the marital estate is not being equally divided in an equitable distribution proceeding in Pennsylvania. A very fair question indeed since a lot of money can compose the difference between an equal (50/50) split and the seemingly extreme 60/40 split.
Pennsylvania adopted equitable distribution of marital property in 1980. Before that, all property was divided based upon title. If I owned something it was mine and you had no claim. If it was in your name, it was yours even if I paid for it, built it, played in it or whatever else. If property was jointly held, that property was to be divided equally.
The 1980 amendments (which remain the law today) were intended to make for an “equitable distribution”. Title to property no longer really mattered. If it was acquired during the marriage, the property was marital without regard to who held title. The 1980 law also set forth approximately 10 factors that the Court was to consider in deciding how to divide the property between spouses. This is in contrast to the law in community property states (mostly in the Southwestern US) where property is always divided equally.
The factors have been amended in 1988 and again in 2005. But some are more important than others. The two biggest factors are ordinarily the length of the marriage and the earnings disparity between the parties. The longer the marriage, the more the earnings disparity comes into play.
Most people today are married when they are young and there is not a large disparity in incomes. As the marriage progresses, it is fairly common for one party to put a focus on family while the other sustains a focus on career. The result is often that after several years of marriage one spouse out-earns the other by a factor of 1.5-4x. Often the family oriented spouse comes through the divorce with a history of no employment for several years.
The disparity in the division of assets ordinarily favors the spouse who is at the economic disadvantage from an income viewpoint. In a 20 year marriage if one spouse is earning $125,000 a year because the focus remained on career while the other is earning $30,000 a year, a court will look at this and focus on the fact that coming out of the lengthy marriage, the advantaged spouse has 3x the ability to accumulate future assets before retirement and, often, the most productive years are behind both of them. If the couple is 50 years of age, the spouse with the $120,000 earnings can reasonable anticipate on another $1,800,000 in income before retirement on a pre-tax basis. The spouse making $30,000 is looking at an earnings potential more in the $450,000 range. That is a pretty large spread and, in the minds of most hearing officers and judges, it more than justifies a split in favor of the disadvantaged spouse. Typically, folks with this kind of earnings history might have a marital estate of $350-500,000. The difference in affording a 60/40 split rather than 50/50 would be $35-50,000 in terms of the shift in equitable distribution, an amount that the advantaged spouse can make up by reason of the earnings disparity in a little more than 1 year. Historically, this kind of case has not resulted in any significant alimony award. But that trend is changing as we are seeing Courts look more favorably upon alimony as a supplemental remedy. Court ordered alimony is modifiable and terminates upon remarriage or cohabitation. Our impression is that alimony is being viewed with more favor because of its modifiability. In the past, a 50 year old with a solid earnings record in the 100,000+ range was viewed as having reliable earnings for the rest of his or her career. Today, that is no longer a certainty as employers tend to thin the herds of employees by resort first to the most expensive ones. If the payor spouse loses a job the alimony can be modified or extinguished. We are seeing more conservative distributions (not as disparate) but they appear to come coupled with lengthier and greater alimony awards.
In most cases, equitable distribution awards actually reference all of the factors found in the Divorce Code. But length of marriage and relative earnings are the big two followed by a sizable non-marital estate and/or the role of a parent as primary caretaker. The other factors are in play but they tend to be the tail and not the dog in the process of dividing a marital estate.
DID THE "INCREASE IN VALUE" CASE JUST SINK INTO THE SWAMP?
We are litigating several cases currently where much of the value that is subject to equitable distribution comes from an increase in the value of assets that were in the hands of one spouse prior to marriage or gifted to one spouse only during the marriage. In contrast to the view of most other states (including New Jersey and Delaware) Pennsylvania includes the value of this any increase in value of non-marital property that came about during the marriage. Assuming that you were married on January 1, 2000 or inherited property on that date, as of December 31, 2007 chances are that there was a pretty heft increase in the value of that asset if was invested in real estate or equities. In some situations, the increase might even outstrip the value of the underlying gift. A fair example would be if you had inherited shares of the retailer Target in late 2000. The stock was worth $33 a share. If you separated in late 2007 the stock was up almost one-third to $50. If you inherited 1,000 shares, the underlying $33,000 would be your non-marital estate and would not be subject to division in equitable distribution. But the $17,000 increase in the stock would be “in” the marital pot and could be divided either in value or in kind.
When the market last crashed (November 2000-September 2001) many litigants who separated before the tumble found themselves in trouble because the statute referred only to the increase between the date of the gift or marriage (in the case of pre-marital property). Any subsequent decrease was not referenced in the statute. So a part could find him or herself subject to an order dividing gain that no longer was around to divide. The 2005 amendments to the Divorce Code addressed that with Section 3501(a.1). That Section stated that the increase subject to distribution was the lesser of (a) the increase from date of marriage or gift to date of separation or (b) the increase from marriage or gift to the date of distribution.
Target offers a great example. Mr. X inherits or marries already holding his $33,000 of Target stock. The couple separates when the price is $50 and Mrs. X lays claim to half or more of the $17,000 increase. But, alas, the case did not settle on the date of separation and today (11/10/08) Target closed at $36 a share. If they are dividing the estate tomorrow, the “increase “ is 1,000 shares x $3 a share ($36-33). The increase in value case is no more. Need a more extreme example. If the Chairman of Lehman Brothers married on January 1, 2004 and owned a million shares he had $40,000,000 in premarital assets. By January 1, 2007 he had doubled his net worth and risked an equitable division of another $40,000,000 in value. Today his 1,000,000 shares are worth $60,000. Can he ask his bride to share in his loss? Not the way the statute reads today. Of course, had he margined his stock to buy a $10,000,000 unit at Trump Tower in Manhattan, we may have some marital debt to divide once the property is sold.
With the markets being as volatile as they are, it is tough to settle cases. But today it pays to watch the ticker while your in the room dividing.
COVER YOUR BUMPER
In the scheme of things, worrying about car insurance while n the process of divorce may seem unimportant. You likely have other, more pressing issues to address, such as who is getting the house, or the pension, or Thanksgiving with the kids. So long as the existing policy is being paid, it is easy to assume you are covered.
Unfortunately, it may not be so simple. In fact it is imperative that you confirm you are sufficiently covered, especially in certain situations. A quick call to you agent may save a lifetime of expense and aggravation in the event of an accident.
First, if either you or your spouse moves and takes a car, make certain your auto insurance carrier is notified. Most policies list the home address for each car. If the car is no longer garaged at the address listed on the policy, the policy may be canceled or any claims you incur may be denied.
Along the same lines, you will want to ensure that your policy does not require that you and your spouse remain residents of the same household. Many policies provide discounts for married couples, but require that the spouses are living together. If you are no longer living together, as required by the discounted policy, the policy may again be cancelled.
In addition, it may be a good time to review whether you need the same level of coverage as you did when you married. It’s likely that the coverage amounts you chose when married were based on joint assets. You may have different assets now and different coverage needs. It may make sense to raise your deductibles and/or eliminate comprehensive and collision coverage on the car you took from the marriage. Now that you are single or separated, the cost may outweigh the benefit.
One should also look at how to cover children who can drive. The most important consideration is honesty with your insurer. It may be less expensive to list the child’s car as primarily at one party’s home or the other. But you do not want to end up with the child’s car listed as garaged at your home for cost reasons when in reality it is garaged at the other parent’s home. Again, this may create a situation where the policy is cancelled or a claim is not covered. Your insurance agent can help you work through the realities of your particular situation so that you are not at risk of being uncovered but are not paying unnecessarily high premiums either.
Finally, it is a good time to get cars re-titled and separately insured. If there is a battle over what that car is worth agree to change title without prejudice. That preserves your right to assert that the autos should be values differently when divided by a Court.
THE PERSONAL PROPERTY ROADSHOW
Although the Bible tells us we should not covet property, the plain truth is that we do and we spend lots of time acquiring what lawyers call personalty. Most of us like to own things and nothing makes us happier than to acquire things that are rare, handsome or both. When couples divorce it often happens that dividing the household contents becomes an enormous side show under the big top called equitable distribution of property. For those inclined to have such battles here is some free advice.
Most of what we own is pretty close to worthless. Buy a sofa for $2,000 and take it home. Put it on your front lawn and you might get $800 for it if it’s still wrapped in plastic. Let your kids jump up and down on it a few times and you can halve the price again. Want is appraised? Plan to spend $100-200 an hour so that you have something to fight about.
Having said that, there are valuable things in life. If there weren’t we would not be able to watch Antiques Roadshow on public television. Just about everyone owns a collectible piece of something. But we also tend to misunderstand value and just how volatile the market is.
The good news is that we are not alone. Even people who profess to be experts on personal property often are wildly wrong. This is especially true if the article in mind is rare or unique. The cleanest way to decide value is at public auction. But public auctions are useful but can have their own limitations.
Take the case of the two major auction houses: Christie’s and Sotheby’s. America’s finest collectibles whether tall case clocks or vintage wines are sold weekly by these houses. They have expert staffs to assist sellers in marketing the consigned items and in helping to determine the appropriate price at which an item will sell. Open their catalogues either in person or on line and they will give you an estimate of what any given item is expected to fetch based upon their century or more of experience.
Usually the pre-sale estimates are close to what the object sells for although in times like these you will see the range of possible sale prices broaden. But even the experts can be left dumbfounded on some of the lots. In January, 2007 Sotheby’s had its annual “big” sale of American Antiques. In January, 2007 one such lot was a New Hampshire tea table estimated to bring $7,000-10,000. It was knocked down at $36,000 even though it had been extensively restored. Also stunning was another New Hampshire piece; a fairly conventional bow front chest of drawers that was estimated by Sotheby’s to bring $3,000-5,000. The hammer did not fall until the piece reached $70,000 and that meant $84,000 by the time the auction house was paid. The surprise of the auction was a fairly important dressing table made for a prominent Philadelphia family in 1765. The estimate was not shabby at $300,000 to $600,000. Bidding stopped at just over $4.4 million. It’s not all uphill either. Another Philadelphia piece, a tilt top tea table was expected to fetch $15,000 to $30,000. The bidding never made it to $10,000 and the reserve was not met.
Chances are you don’t have much stuff of this caliber in your household. But the lesson is that appraisers are often as baffled as we are. If you are trying to figure out value, a good first step is to see what you can learn from Ebay by looking for items similar to yours. If you are an Antiques Roadshow fanatic listen carefully to when the appraiser says what an item could or would expect to obtain at auction and what they describe to be the insurance value. The difference is like that between wholesale and retail. A good portion of the buyers at auction are antique dealers. They don’t pay $5,000 for a piece of silver with the expectation of selling it for the same price. They pay $5,000, polish it, put it in a shop they rent, hire sales people to show it off and ask $12,000 for it while you are roaming through the shops in Carmel or Nantucket. That’s how they make their living. Unless you are willing to do what they do; don’t expect that something is “worth” what you see it for in a retail setting. These principles apply in the free market and in valuing assets in a divorce proceeding as well.
Who Gets the Family Photos?
In a recent case, I saw a Judge direct his sheriff to handcuff a mother and send her to jail for failing to give the father the family photographs so he could make copies. Prior to that hearing, there was a Court Order requiring the mother to do so, and she refused to follow it. Mother thought Father would destroy or lose them, because she didn’t trust him. Father thought Mother was being vindictive and purposely preventing him from sharing in the family memories when their children were young. The Judge felt someone wasn’t following his Court Order – and there were serious consequences.
One of the most sensitive and costly issues to deal with in a divorce is the family photographs, videos and all the other personal property to be divided. Who gets the dining room? The kid’s beds? The pots and pans? The patio furniture? It can cost more to litigate who gets what then to replace the "stuff" – but that’s just not fair.
In the case of Bair v. Bair, decided in May 2007 in Lycoming County, the parties spent a considerable amount of time, which equals money, to litigate personal property. The issue was heard by a Master, then a Judge, then the husband was given a date to retrieve items designated as his. The husband went to the marital residence where he picked up most items, but discovered that some were missing. The husband then filed a petition, the lawyers had a conference with the Judge, and then there was a final hearing. At that hearing, both parties testified about all of the items the husband blamed the wife for taking or destroying. At the end of the day, the wife had to return the following:
- Shop manuals and tool books
- A 4-drawer steel file cabinet
- A 30 ft. chain – or $20.00 if she could not find it
- Missing drawers for a wooden cabinet
- A log splitter – or $425.00 if she could not find it
By my estimation, the litigation fees to obtain these items cost ten times more than the value of them. A better way to deal with personal property division is to hire an arbitrator to make a binding decision. The parties make a list of all items and select the ones they want. The lists are submitted to an arbitrator and there may be a brief meeting to discuss items of disagreement. The arbitrator then makes a decision, that cannot be appealed, as to who gets what. The arbitrator can be a lawyer or a court-appointed master and the costs are significantly less than the litigation in the Bair case.
And, once the decision is final – hand over all of the stuff! It is not worth spending one minute in jail for failing to make copies of the family photographs or losing your spouse’s box of tools.
Editor's Note: In one case the other lawyer and I actually went to one party's home to retrieve and safeguard an oriental rug - Imagine the cost of our two hourly rates just because these former spouses wouldn't (or couldn't) trust each other.
Money Matters! And Even More So in A Slow Economy.
How people managed their money during the marriage often effects their respective views on how they should resolve their economic differences during the divorce. If one party controlled the money during the marriage, then he or she is likely to want to control its disposition in the divorce.
For example, if a Husband views himself as the bread winner during the marriage and views Wife as “only” the custodian of the children or the “keeper of the house” (and, therefore, undeserving), he may want to retain control of the monies in the divorce and view the Wife as an unentitled or undeserving partner.
Another scenario is where a Wife who had substantial monies from an inheritance or gifts from her parents and who supported her Husband and “their” lifestyle during the marriage – why, in a divorce, should she share any of her monies with “HIM”.
It is always about the money!
If not, it’s about control. And, control often involves “who holds the purse strings”.
It is possible that our economy is headed into a recession. No one knows how severe it may be. However, divorce lawyers know that when economic times get bad, it is much more difficult to resolve economic issues. Why? Because, while it always is more expensive to support two households after a divorce, in economically depressed times there are even less resources available to smooth out the economic fissures in a marriage where money was plentiful and covered over the cracks in the relationship.
Further, this may be compounded when there is a business involved, since the valuation of the business will be depressed in a economy like the one we are experiencingnow.
Who gets what and how much is central stage. Money does matter.
THINKING ABOUT METAL
Historically, we have often been asked about the valuation of jewelry and coins as part of the equitable distribution process. This has never been a very interesting topic over the years as, in most cases, the mark-up on these personal effects is so high that there is often very little value left after the appraiser finishes charging his or her fee. In particular, with the average $500-$1000 piece of jewelry, it is not uncommon for the mark-up to be 10x the wholesale price of the piece involved. This is reflected in a classic dilemma. Take grandpa’s pocket watch to the appraiser for an insurance appraisal and it may be valued at $1,500. Ask the same jeweler for a quote to buy it, and the number could be one-third or less of the insurance value.
This general conclusion is shifting beneath us and merits some further consideration because of recent trends in commodity prices. Gold as a commodity has historically traded in the $300-$400 per ounce range. It remained in that window from January, 2000 pretty much through July, 2004. Since that date the rise in the price of the commodity started upward marching to $600 an ounce by July, 2006. For the next year, it traded in the $600-700 range. But since that date it has taken off to where it trades at more than $1,000 per ounce as this article is written.
Silver and platinum have risen even more precipitously. Silver was the stepchild of the commodities business since the 1980s when the Hunt Family in Texas tried to corner the market and failed. It remained in the $6.00 per ounce range for almost 20 years. But January, 2004 marked a turning point. Silver shifted into a $6.00-8.00 commodity. And two years later in January, 2006, it began a long steep rise that takes it to its current value of $20.42 (3/14/08). Platinum worked in a $400-600 an ounce range from the early 1990s through 2002. But with the arrival to 2003 it rose very steadily to $1300 an ounce by the third quarter of 2007. Since that time, the metal has rocketed off the chart to $2,150 today. That would yield an annual return of 160% if sustained.
So what does this mean to those of us who have granny’s collection of silver service for 12 or $100 worth of pre-1964 coins. It means that these objects may have real value even without considering the artistic consideration of whether the pattern is Williamsburg Shell or something else. If you bought a sterling golf tankard for $100 ten years ago, its smelting value might have been $40 (8oz x $5.00 an ounce). Today that same tankard is worth $152 even if the scrap dealer just throws it in the smelter to melt and sell. As noted above, these kinds of goods have high mark-ups and usually trade at a fraction of retail. But because the metal used is now so valuable, it may be very worthwhile to consider making the investment in an appraisal.
Bear in mind a couple of details that make all the difference. Gold found in retail goods in the US it typically 10, 14, or 18 carat. Gold is usually marked with its composition. This means it is 42%-75% gold and otherwise a composite of other hard metals. Sterling silver is 92.5% raw material so it is typically close to the commodity price. But, one needs to know the difference between silver and silverplate, as the latter is really another metal (typically copper or brass) plated with a microscopic coating of silver. So, unless the piece has hallmarks or otherwise has the word “sterling” embossed in the metal, chances are you are holding a piece of copper or brass, dressed up to look like sterling. It could still be valuable but that would be as art and not metal.
WE DECIDED TO DIVORCE; DO I WANT THE HOUSE?
Divorce results not only in severing a personal relationship, but also terminates an economic one. The division of marital property, or “equitable distribution,” is part of the divorce process in Pennsylvania and results in the distribution of all marital property acquired by one or both parties during the marriage. It is often at that time that a party is first faced with the dilemma of establishing a priority of assets, because they must determine which they wish to take away from the marriage. The economic realities then set in. The future may be wide open, but the party must close the door on tough economic decisions, such as: “Should I try to keep the marital residence, or do I want the pension? Do I want the 401K, or is the vacation home better?” Of course, both spouses may want the same assets and that competition may have to be resolved in a courtroom, but consideration of sound economics before entering that fray is clearly needed.
The dramatic climb in property values over recent years often made it an appealing option to trade the liquid accounts and assets for the investment, both monetary and emotional, represented by the family home. That, however, may now be changing drastically, and the decision may be much tougher than before.
The November 2007 issue of Fortune magazine reflects that home prices in most markets will “fall by double digits over the next five years.” That is a new development in America that may not have been seen since the Great Depression. That decline in value is daunting, especially when compared to the slow, but steady, growth achievable in a conservatively invested and tax-advantaged 401K or IRA.
A party must now give even more careful thought to short and long-term goals and objectives. Examples may include:
- Is the desire to keep the home based on (i) personal shelter, comfort, and pleasure, (ii) immediate rental income, or (iii) long-term investment potential?
- What is the availability and price of alternative housing?
- Will there be capital gains and taxes, and what impact will the basis have?
- If there are minor children, what effect does the home location have on the custody scheme?
- How does the cost of remaining in a prime school district compare to private school options?
- Is the cost to maintain the home offset sufficiently by the tax benefits, especially when compared with renting a comparable property?
- Is a comparable property still needed?
- Is cash immediately required to cover liabilities and, if so, would refinancing be more effective than withdrawal penalties or interest associated with getting money out of a tax-advantaged retirement vehicle or from life insurance cash values.
- What is the effect of the new, post-divorce tax status going to be on the whole decision-making process, and will the divorce, support, and custody determinations create an entirely new cash flow situation than existed before?
Identifying and addressing all of these issues and finding the answers to these questions as they apply to a given person’s circumstances will lead to wise choices for asset allocation. Planning and realistic appraisal of the economic and legal issues will lead to the best possible outcome from a financial point of view.
And The Client Asks: Do I Have To Disclose All Of My Assets?
We often get calls regarding "divorce planning", a/k/a "How do I hide assets?"
First, plainly and clearly: You can't hide assets for a myriad of reasons.
If the misrepresentation takes place in a litigation setting, the failure to disclose assets brings to bear many different consequences, ranging from incurring the ire of the Court to potentially (but not usually) perjury charges.
In negotiating a pre-nuptial agreement or a property settlement agreement, Pennsylvania law requires parties to make full and fair disclosure of their assets. Stoner v. Stoner, 819 A.2d 529 (Pa. 2003); Simeone v. Simeone, 581 A.2d 162 (Pa. 1990).
So what does that mean? "Full and fair disclosure" is case specific, but each party to a marital agreement must disclose in full his or her respective assets to enable the other party to make an “intelligent decision” concerning the rights that they will give up under the terms of the agreement. Nitkiewicz v. Nitkiewicz, 535 A.2d 664, 667 (Pa. Super. 1988); Paroly v. Paroly, 876 A.2d 1061, 1066 (Pa. Super. 2005).
As a practice tip, the courts likely will not invalidate a pre-nuptial agreement where you have overstated your assets, so err on the side of caution when disclosing your assets for a pre-nuptial agreement.
The consequences for failing to disclose your assets in full? Worst case -- costly litigation, time, damages (compensatory and punitive), and counsel fees (your own and, maybe, your spouse’s). So, to avoid extensive litigation in the future, make sure that you fully disclose your assets in court and/or in the context of the execution of a marital contract.Inheritances: Can I Keep My Money??
We are often asked by clients how to protect an inheritance received during the marriage in the event of a divorce? In Pennsylvania, marital assets typically include any asset received by either spouse during the course of the marriage. Inheritances are one exception to this general rule.
If a spouse receives an inheritance during the marriage, the inheritance is not automatically marital property. However, any increase in value of the inheritance between the date of receipt of the inheritance and the date of separation would be marital property.
There are a few ways that you can protect your inheritance from a divorce.
First, when you receive an inheritance, you should place it in a separate account or asset in your name only. Make sure that you keep documentation to show where the money came from to open the account or purchase the asset, and keep the first statement for the account or proof of purchase price for the asset to prove that you did not use any marital monies for the asset. By keeping the money in your name alone, you protect it from being divided in a divorce. If you put the inheritance into a joint asset such as a house boat, or bank account, you risk the inheritance being treated as a gift from you to the marriage.
Another option is to ask an attorney to draft a postnuptial agreement for you and your spouse to sign. This is similar to a prenuptial agreement, except that it would signed after you are already married. If done properly, the agreement will make sure that any increase in value of the inheritance is protected as well as the underlying inheritance.
Protecting your inheritance requires proper advance planning. If you wait until a marriage sours, you may be too late to protect your inheritance from the divorce action.
Social Security Set-Offs
In Rimel v. Rimel, 913 A.2d 289 (Pa. Super. 2006), the Superior Court addressed an issue of first impression: whether husband was entitled to a social security set-off against the value of his Federal CSRS pension where he had worked not only for the federal government, but also in jobs through which he did contribute to the social security system.
The Court decided that Husband was entitled to such a set-off, but remanded the matter for additional testimony, as the facts had not been developed which would allow for the determination of what amounted to be a "partial set-off".
The Court cited the following cases:
Cornbleth, 580 A.2d 369 (Pa. Super. 1990)
Twilla, 664 A.2d 1020 (Pa. Super. 1995)
The Court distinguished the following cases:
Elhajj, 605 A.2d 1268 (Pa. Super. 1992)
McClain, 693 A.2d 1355 (Pa. Super. 1997)
