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PLACING A PRICE TAG ON MARITAL ASSETS
One of the major issues
that will be encountered is how to divide the property acquired during the
marital relationship. This process is defined by the courts as "equitable
distribution." Equitable distribution is a statutory provision that
contains procedures for dividing marital assets between the spouses. However">
One of the major issues
that will be encountered is how to divide the property acquired during the
marital relationship. This process is defined by the courts as "equitable
distribution." Equitable distribution is a statutory provision that
contains procedures for dividing marital assets between the spouses. However, in
order to apply these procedures it is very useful if the parties employ some
preliminary investigatory techniques which can be easily remembered by using the
acronym ICE-T.
It is important to IDENTIFY the assets and debts
derived from the marriage, regardless of whose name the property is in.
Secondly, you should CLASSIFY the property as either marital or separate
property. Thirdly, you need to EVALUATE each asset and debt. Finally, you should
consider the TAX implications of acquiring each asset and debt in a settlement.
After performing this analysis, it is critical to step back and perform a
cost-benefit analysis to determine if, economically, it is better to settle this
case with your spouse or if you should bring the case to trial. When the marital
assets are small and the marriage is of a short duration, negotiation and
settlement may be more beneficial, for the cost of a trial may eliminate the
small pool of assets that the couple has. Conversely, where there are many
assets, tangible property as well as business’s and professional degrees that
were acquired during the marriage, it is more likely that the action will be
contested or perhaps a trial will be
necessary to determine how the property will be distributed among the parties.
The Distinction Between Marital and Separate Property
Upon divorce, property that is subject to equitable
distribution is property which the court deems "marital property."
Marital property is any property that is acquired or accumulated by either
spouse during the marital relationship and before the commencement of a
matrimonial action or the execution of a separation agreement. Property acquired
after commencement of the action may also be considered marital property if the
source of the funds, labor, and/or other assets used to acquire the property can
be traced to marital assets. To determine if a specified item is deemed marital
property and thus entitled to equitable distribution, the manner in which the
property is held is not dispositive. This means that if title to property is
held in one spouse’s name, but was acquired by the parties during the
marriage, this property is characterized as marital property and subject to
equitable distribution. Although the manner in which the property is held is not
particularly relevant, it is important to note that there is a distinction
between marital property and "separate property." Marital property does not
include "separate property," unless the appreciation
in the value of separate property is a result of the non-titled spouses’ contributions or
if the separate property has been "co-mingled" with marital property.
Marital property is defined as "things of value arising out
of the marital relationship." This means that marital property is anything
that has an economic value that results from the efforts of either one or both
spouses during the marital relationship. Tangible and non tangible property which the court has
deemed marital property in New York State include but is not limited to: licenses to practice a profession,
degrees, certifications, career paths, reputable interests in a business,
corporation, or partnership, real property, investment accounts, bank accounts,
wedding gifts, personal property such as artwork and home furnishings, pension
plans, retirement funds, stock options, whole life insurance policies, and gifts
among spouses.
Conversely, separate property, which is not subject to equitable
distribution, is property that is acquired before the marriage or Under Domestic
Relations Law Section
236 (B)(1)(d) separate property is also defined as inheritances,
income from separate property, gifts to only one spouse, and compensation for
personal injuries during the marriage. Separate property does not include property acquired after
the commencement of a matrimonial action or the execution of a separation
agreement unless the source of funds, labor, or other asset used to obtain that
asset is considered separate property.
Generally, there are three exceptions to the rule that separate
property is not considered marital property and thus not subject to equitable
distribution: Separate property becomes martial property when the separate
property is sold or transferred; when the separate property appreciates in
value; and when separate property is co-mingled with marital property.
In the first situation, complications often arise when a spouse
either sells or transfers separate property during the marriage. The
determination of whether this property is deemed marital property and thus
subject to equitable distribution, or separate property is governed by statute.
Under New York law, when separate property is sold and other property is
acquired in exchange for the separate property, this new property becomes a
marital asset and is subject to equitable distribution. For example, if a spouse
owns a home prior to the marriage this would ordinarily be considered separate
property. However, if the spouse sold this property during the marital
relationship and bought another home with the proceeds of the sale of the first
property, this new home is marital property and will be distributed between the
spouses.
Secondly, under New York statutory law, any increase in the
value of separate property is separate property, except if the increase in value
is due to the contributions or efforts of the spouses. Spousal contributions
which contribute to an appreciation in separate property, can be in the form of
actual monetary and tangible contributions or intangible, non-monetary
contributions. For instance, if one spouse bought the marital residence before
the marriage, the house could be defined as separate property. However, if the
marital residence increased in value during the marriage and the parties
contributed to the mortgage payments, taxes, insurance, maintenance, and/or
repair of the premises, the appreciation would be considered marital property.
Similarly, if one spouse owned a business before the marriage
and the business appreciated in value during the marriage, the appreciation
would be considered marital property if the spouses contributed to that
appreciation. If the parties worked for the business, or even if one spouse
performed the role of homemaker and child-rearer so that the other spouse could
focus on the business, this would be considered an active contribution, making
the appreciation of the business during the marriage marital property.
However, if appreciation is considered passive, then the
appreciation is separate property. For instance, if one spouse had a stock fund
before the marriage and the only reason the fund increased in value during the
marriage was due to market forces, rather than investment decisions by either
spouse, then the entire stock fund remains separate property.
Thirdly, the co-mingling of separate and marital property may
transform separate property into marital property subject to equitable
distribution. For example, inheritances by either spouse are considered separate
property. However, if the proceeds from the inheritance are invested by the non
titled spouse or if the inheritance is placed into an account with that spouse’s
earnings which are acquired during the marriage (earnings acquired during the
marriage are marital property), the co-mingling of the separate property with
marital property may transform the separate property into a marital asset.
After determining what assets are marital property and which are
separate, the next step is to determine the value of each of these items, so
that the pool of marital assets can be divided among the parties. The process
known as valuation is a process whereby each asset that was acquired during the
marital partnership is given a monetary value. In some cases, this procedure may
be easy, as in cases where the couple has not acquired many assets. However, in
many cases, this process will be very complicated and proof as to the value of a
particular item, such as a business interest or a professional practice, will
require expert reports and possibly expert testimony if there is a trial. After
the value of the marital asset is determined, the court will analyze, or the
lawyers will negotiate for, what percentage of that asset the spouse is entitled
to. Factors to be considered in making this determination include the length of
the marriage, contributions to the marriage, and the loss of employment and
educational opportunities by the non-titled spouse. Contributions include but
are not limited to the areas of homemaking, childrearing, financial and direct
assistance in helping the other spouse obtain an education, degree, license,
career, or to build a business.
Determining the Valuation Date For Marital Property
As a general matter, the date at which assets are valued is
usually determined under the "active-passive approach." However, this
approach is not an immutable rule, but is rather a test which serves as a
guidepost.
Active assets are those assets which increase or decrease in
value due to the conduct of the spouse which has title to that asset. An example
of an active asset would be a business or professional practice where the spouse
has direct involvement. Active assets are typically valued at the date of the
commencement of the matrimonial action. The idea is that since the marriage is
over when the matrimonial action is commenced, such that the other spouse is no
longer contributing to the value of the asset and so should not share in any
increased value which results from the other spouse's labor. Alternatively,
passive assets are those assets that increase or decrease in value due to market
conditions or the efforts of third parties. An example of a passive asset is
real estate. Passive assets are usually valued at the date of trial, so that the
titled spouse does not receive a windfall if the asset increases in value during
the divorce proceeding. Although recent caselaw have allowed equitable
distribution windfall on a case-by-case basis.
Valuing A Business
In cases where a business is considered a marital asset and
one spouse is going to retain all of the interest in that business following a
divorce, the other spouse is entitled to either a monetary or a property award
in exchange for the other spouse’s corporate interest. Generally, in a
matrimonial action, a forensic accountant should be utilized to determine the
value of the business. Since the value of a business either increases or
decreases due to the efforts of the titled spouse, this asset is usually deemed
active and the date of valuation is typically the commencement of the
matrimonial action, since the other spouse is no longer contributing to the
value of the business and should not share in the increase in value due to the
other spouse's activities. Considerations in determining the value of a business
for purposes of equitable distribution include: the nature and history of the
business, tangible assets of the business, earning capacity, fair market value,
good will, or any other intangible value of the business.
In most cases, the value of a business will be determined by
"fair market value." Fair market value is the price at which property
would change hands between a willing seller and a willing buyer, both having
reasonable knowledge of the relevant facts. Factors that are traditionally
considered in arriving at "fair market value" include: the nature of
the business, the economic outlook of the business itself and the outlook of the
particular industry, the financial condition of the business, earning capacity
of the business, and whether the business has goodwill or any other form of
intangible value.
In addition to using the "fair market value" method to
determine the value of a business, several other methods are available. These
include the excess earnings method, capitalization of earnings method, the
liquidation method, and the adjusted book value method. The excess earnings
method determines the fair market value by adding tangible assets and goodwill.
Goodwill consists of the reputation of the business, ownership of a brand or
trade name, and the record of successful operation over an extended period of
time. The capitalization of earnings method is a good method for valuing product
or service related businesses. This method considers the business’s past
earnings as an indication of future earnings; these future earnings being
converted in present value (what they are worth to the individual today). The
liquidation method of valuation is useful primarily when the business has
considerable assets which can be liquidated (sold), such as real estate. The
adjusted book value is a good method of valuation where the business owns income
producing assets, such as securities, which are not imperative to operating the
business. The book value of a business is the business’s assets minus
liabilities, but adjusted for depreciation and the market value of the inventory
of the business.
Valuing A Professional Practice
Various professional practices, such as law, dental, and
accounting practices, are marital property subject to equitable distribution if
they are established during the marital relationship. Also, the appreciation in
the value of a business that was started before the marriage, if this
appreciation is a result of the other spouses' contributions to the business,
are also considered marital property and are subject to equitable distribution.
Once the value of the practice is determined by a forensic accountant, the other
spouse will receive either a lump sum payment representing his/ her
interest or the interest will be offset against a different asset. The parties
may also agree to installment payments.
Generally, a professional practice has two separate components:
tangible and intangible assets. Tangible assets include essentially anything
that can be converted into money, such as office furnishings, library, and any
office equipment. Intangible assets include good will. Good will is an intangible
asset that results from a name, reputation, consumer patronage, location, which
generate an economic benefit to the owner. It is within this category that the
value of a professional practice is found. There are several ways in which this
can be valued, including determining the fair market value of the business, the
book value, or liquidated value.
The fair market value is the amount at which the business would
change hands between a willing buyer and a willing seller when the circumstances
are such that neither is under a compulsion to buy or sell and when both have
reasonable knowledge of the facts concerning the transaction.
The book value is the value that is found on the company's
financial statement. However, this method of valuation may be misleading in that
these financial statements often estimate items such as depreciation and ignores
appreciation of underlying assets.
A liquidation model of valuation appraises the value of all
assets and liabilities to determine a value available to the ownes if they were
to sell the business. This method does not recognize any good will to the
business but only establishes values for tangible assets.
Valuation Of A Professional License\Degree\Career Path And
Enhanced Earning Capacity
In the case of O'Brien the New York Court of Appeals
determined that a license to practice in a particular profession, such as law,
which was acquired during the marital relationship, is marital property that is
subject to equitable distribution. This license to practice is viewed by the
court as an asset, a valuable property right to be equally distributed between
the parties. The value in this asset is derived from the increased earning
capacity due to the acquisition of the license.
The value of a party's professional license or degree is
generally the difference between the lifetime earning potential of an individual
with such a license or degree and the lifetime earning capacity of one without
such a license or degree, with an adjustment for factors as inflation and taxes.
However, when there is a precise history of actual earnings attributed to the
license, this trend of actual earnings is used to predict future earnings of the
individual with the professional license. To determine the increased earning
capacity of a spouse with a professional degree, the earning capacity at the
date of marriage is compared to the earning capacity at the commencement of the
divorce proceeding, trial date, or settlement date. The difference between these
two numbers is multiplied by the total number of years the individual with the
degree is expected to reap the benefit of their professional degree. Since the
spouse is only entitled to that portion of the benefit resulting from the
marriage, the above figure is divided into a marital and separate portion; the
spouse receiving a share of the value attributed to the marital portion.
In a case where a professional license and a professional
practice is involved, there are complex valuation issues in that the practice
has a value and the enhanced earning potential from the license has a distinct
and additional value. Both of these assets, the value of the practice and the
increased earning capacity derived from the license, are marital property and
subject to equitable distribution if they were acquired during the marital
relationship. These assets are distinguishable in that the latter concerns the
value of the bare professional license or degree and the former refers to the
professional work experience, special training, skills, and contacts developed
during an individual's career.
The leading case governing this analysis is McSparren v.
McSparren. In this case the court stated that a husband's law license and
his law practice were separate and distinct assets, each subject to equitable
distribution; that the professional license has "ongoing independent
vitality" even after the professional practice has been in operation for
several years. Thus, the license itself is valued and the spouses increased
earning potential created by the license is considered an additional asset. As
the court stated in Rochelle G, "in the case of the holder of a
professional license, the professional upon graduation from school, and entry
into the profession, obtains two assets: the license and the increased earning
potential that entry into the profession provides."
When the court is calculating the increased earning capacity of
the spouse with a professional degree or license, the future earnings of that
spouse determine the value of this asset. Additionally, when the court awards
maintenance, the amount of maintenance is determined by the future earnings of
the spouse. Since the same income stream is being used to determine both the
maintenance award and the asset of the enhanced earning capacity, the court may
reduce either the maintenance or equitable distribution award in light of the
fact that the same income stream is being used to determine two distinct judgments
to the other spouse.
Additionally, in many cases, "enhanced earning capacity," even without an academic degree or professional license, will be
subject to equitable distribution. The court has stated that the skills or
career path of an artisan, actor, professional athlete, investment banker, or
any person whose expertise in his/her career has enabled them to become an
exceptional wage earner should be valued as marital property subject to
equitable distribution. This means that even if a particular career does not
require a professional license, the individual’s increased earning capacity
resulting from the skills, expertise, reputation, or career path acquired during
the marriage is marital property and thus subject to equitable distribution.
Valuing Pension And Other Retirement Benefits
Retirement funds acquired from the date of marriage until
the date of the commencement of the matrimonial action are marital assets. The
only type of retirement plan that is separate property is a disability pension.
Retirement funds may include such instruments as IRA's, annuities, 401 (K)
plans, 403 (B) plans, profit sharing pension plans, Keogh plans, and money
purchase pension plans. Providers of the retirement funds may include all
current and former employers, unions, your spouse, or yourself. The funds may be
invested and held with a financial institution or a broker. Even a non-vested
retirement fund has been held by the courts to be marital property.
When a spouse has a pension, a Qualified Domestic Relations
Order is usually necessary. A "QDRO" is any judgment, decree, or
order made in accordance with that state's domestic relations law that relates
to the provision of child support, alimony payments or marital property rights
of a spouse, former spouse, child or other dependant of the participant, and
creates or recognizes the right of another to receive all or a portion of the
benefits payable under the retirement plan.
The "QDRO" must be submitted to the Judge for
signature along with the divorce judgement. The "QDRO" should be
approved by the pension administrator before it is submitted to the court.
Valuing Stocks, Bonds, and Stock Options
A party's interest in an ongoing business, such as a
corporation or partnership, is considered a marital asset if this interest was
acquired during the marriage. This type of asset is usually in the form of
corporate stock, securities, bonds, or a partnership interest in the company. A
partnership interest is gained when one is a founder in the particular business,
while bonds and securities are acquired usually when a corporation grants stocks
or securities as a reward for exceptional work performance. Additionally, when a
spouse purchases stocks and/or bonds on the open market with marital funds the
value of these stocks and/or bonds are subject to equitable distribution. Since
these assets usually increase and decrease in value due to market conditions and
not the direct contributions of a particular spouse, these assets are deemed
passive and usually valued at the date of trial.
When attempting to value a particular stock, the initial inquiry
is whether the business is publically traded or privately held. A publically
traded business is one that is registered under the Securities Act. A stock must
be registered under this Act when it is a publically traded stock (one traded on
an established securities market), if the company has more than $3 million in
total assets, or when there are more than 500 shareholders. A privately held
company is one in which management and ownership of the company are the same.
The stock in the company is held by a small number of individuals and the stock
is not registered under the Securities Act.
When valuing any type of property, the general standard that is
applied is the fair market value of the item. Fair market value is the amount at
which property would be sold by a willing seller and be bought by a willing
buyer, when neither is acting under a compulsion to buy or sell, and each is
fully aware of all of the facts concerning the item. In order for an item to
have a fair market value, there must be a market for the item. This means that
one must be able to go out into the market and acquire a comparable item to the
one seeking to be valued.
When a stock is traded on an established securities market, such
as the New York Stock Exchange, the value of the stock will be easily
determined. The fair market value will be the amount at which each share of that
particular stock is being traded. Although the quoted price, the price at
which each stock is valued, is usually the fair market value of the stock, this
number will not be deemed the fair market value when only a small number of
shares were traded on the valuation day or when abnormal conditions dictate the
stock exchange quote. In these cases, other methods of valuation are applied.
Regulations implemented by the Treasury Department specify appropriate methods
for valuing stocks and bonds, each listed in order of acceptability in that a
subsequent method should be used only if a previous method is not appropriate.
The first method is to use the mean, the average, between the
highest and lowest selling price on the day of valuation. The second method, to
be applied when the highest and lowest selling prices for the date of valuation
are unavailable, is to obtain the average between the closing price of the stock
on the date of valuation and the closing price on the last trading day before
the valuation or for earlier sales that occurred within a reasonable period.
When there is no selling price available either for the date of valuation or
within a reasonable period before or after this valuation date, the fair market
value is determined by the mean between the bid and asking price on the date of
valuation.
In situations where shares of stock are not registered under the
Securities Act, so that they are part of a privately held company, valuation is
based on various factors. The various factors that are considered include: the
type of business, the growth and stability of the company, the economic outlook
of the company including the financial condition of the business, any prior
sales of stock in the company, and good will.
An interest in a stock option plan that is provided by the
spouse's employer may be marital property and thus subject to equitable
distribution when the plan began during the marriage and is contingent on the
spouse's continued employment with the company after the divorce. If the stock
options were granted to the spouse for compensation for past services they are
subject to equitable distribution. However, if they were an incentive for the
spouse's future services they are not deemed marital property and this is not
subject to equitable distribution.
To determine the value of a stock option one should obtain the
plan documents, such as a copy of the Options Statement and the Stock Options
Plan. These documents discuss how the company will treat options under various
circumstances, such as divorce, and also contain information such as the number
and type of options, exercise price, and expiration dates. Additionally, these
documents will outline the purpose under which the company issued the options.
There are two main types of options: Investment Stock Options
and Non-Qualified Stock Options. The primary distinction is that the former are
exercisable or transferable only by the employee, while the latter may be
assigned to a spouse, but this income will be taxed to the employee.
Valuing Real Estate
The value of real estate may be obtained through the use of
a licensed appraiser. The appraiser will estimate the fair market value of the
specified property by analyzing past market activity and current conditions.
Factors considered in making this determination include size, location, physical
condition, improvements, amenities, and comparable listings of the property.
However, when a client cannot afford an appraiser several
alternatives methods to value a property exist. The husband and wife may agree
on a value and render an opinion as to the value of the property by frequenting
open houses of comparable property, reading real estate sales notices, and by
looking at records concerning sales and offer prices of similar property.
Additionally, a client could value real estate by obtaining a market value from
realtors; this method of valuation being particularity useful in cases where the
property will be sold upon the dissolution of the marriage or for negotiation
purposes.
Valuation Of Personal Property Such As Household Furnishings And
Artwork
Generally, issues concerning the distribution of personal
property are resolved among the parties through negotiation or a lottery type
process. If necessary, the court or the attorneys of the parties will intervene
to resolve this issue by consulting an appraiser to determine the value of the
specified property. The value of this property is usually determined by the fair
market value, the price at which the property would change hands between a
willing buyer and a willing seller, neither one being under any compulsion to
buy or sell, and both having reasonable knowledge of the relevant facts.
All articles, except where noted, are written
and copyrighted by Sherri Dovovan For info, email:
donovassoc@aol.com
Sherri Donovan
& Associates, P.C. Webmaster:
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