By Sherri Donovan, Esq.
Equitable Distribution of Marital Assets after Divorce
Once a divorce is granted the Equitable Distribution Law requires a winding up of the economic affairs of the marriage through equitable distribution of the marital property. The Equitable Distribution Law is applicable to all marital actions after July 19, 1980.
The premise underlying the Equitable Distribution Law is that marriage is among other things, an “economic partnership” to which both parties contribute as spouse, parent, wage earner and/or homemaker. The process of equitable distribution has three parts: 1) categorizing property as marital or separate; 2) evaluating the property and; 3) distribution.
Identifying, classifying and valuing the assets and debts of a marriage can be straightforward or complex, depending on the case. A useful way to prepare for financial settlement is to catalogue your property using a technique to which I’ve ascribed the acronym ICE-T: Identification, Classification, Evaluation and Tax Implication. Here’s how it works:
Identification: Make a list of each asset and debt that you and/or your spouse have, regardless of whose name the property or loan may be in.
Classification: Distinguish marital property from separate property (defined below).
Evaluation: Determine the monetary value of each property. Create a wish list of the assets you would receive and the debts you would assume in an ideal financial settlement, ranking the items you are least willing and most willing to relinquish.
Tax Implication: Consider how receiving each asset and assuming each debt on your wish list in a settlement will impact your tax liability.
How property is held or titled is no longer relevant to how it will be distributed upon divorce. What is important with regard to distribution of property is the date that a particular item of property was acquired and the source of funds used to acquire it. Marital property is defined as all property acquired by either or both spouses during the marriage from the date of the marriage through the commencement of a matrimonial action or the execution of a separation agreement, regardless of the form in which title is held. Courts generally interpret the term marital property broadly so as to increase the size of the marital estate subject to equitable distribution and to effectuate the policy behind the Equitable Distribution Law.
While the term “equitable distribution” does not dictate “equal” distribution of marital assets, courts are generally distributing property on an equal basis between spouses in marriage of long duration in which there are children.
Separate property is an exception to marital property and is defined as follows:
- Property acquired before marriage or property acquired by bequest, devise, descent or gift from a person other than your spouse;
- Compensation for personal injuries;
- Property acquired in exchange for or the increase in value of separate property, except to the extent that such appreciation is due in part to the contributions or efforts of the other spouse; or
- Property described as separate property by a written agreement of the parties.
Separate property can be considered marital property if it has been co-mingled with marital assets or if it has appreciated in value during the marriage due to the efforts of the spouses.
Under the Equitable distribution Law both parties to the divorce are required to disclose their respective financial circumstances so that the court will be in the best position to determine the most fair and equitable distribution of marital property, as well as appropriate levels of support and maintenance. To ensure this financial disclosure, the law requires that the parties exchange sworn Statements of Net Worth which must be accompanied by a current and representative paycheck stub and the most recently filed State and Federal income tax returns. If a party to the divorce fails to comply with this mandatory financial disclosure, they may be subject to penalties or sanctions ordered by the court.
Once a divorce has been granted, the court determines how the marital property will be equitably distributed in accordance with thirteen enumerated factors under the law. They are as follows:
- The income and property of each party at the time of marriage, and at the time of the commencement of the action;
- The duration of the marriage and the age and health of both parties;
- The need of a custodial parent to occupy or own the marital residence and to use or own its household effects;
- The loss of inheritance and pension rights upon dissolution of the marriage as of the date of dissolution;
- Any award of maintenance;
- Any equitable claim to, interest in, or direct or indirect contribution made to the acquisition of such marital property by the party not having title including joint efforts or expenditures and contributions and services as a spouse, parent, wage earner and homemaker, and to the career or career potential of the other party;
- The liquid or non-liquid character of all marital property;
- The probable future financial circumstances of each party;
- The impossibility of evaluating any component asset or any interest in a business, corporation or profession, and the economic desirability of retaining such asset or interest intact and free from any claim or interference by the other party;
- The tax consequences to each party;
- The wasteful dissipation of assets by either spouse;
- Any transfer or encumbrance made in contemplation of a matrimonial action without fair consideration;
- Any other factor which the court shall expressly find to be just and proper.
SOME PROBLEM AREAS IN VALUATION OF MARITAL PROPERTY
Spousal Contribution to the Acquisition of Marital Property or Increase in Value of Separate Property: Section 236 8(d) (6) of the Domestic Relations Law reads:
“… Any equitable claim to, interest in or direct of indirect contribution made to the acquisition of such marital property by the party not having title, including joint efforts or expenditures and contributions and services as a spouse, parent, wage earner and homemaker, to the career or career potential of the party …”
Spousal contribution is a particularly important area for homemakers because they tend to underestimate their economic contribution to the marriage, as well as what their financial needs will be once the marriage has ended.
An elaboration and enumeration that a spouse’s efforts, expenditures, contributions and services as a spouse, parent, wage earner, and homemaker made to the acquisition of marital property and to their spouse’s career or career potential and/or their loss of career or career potential because of their devotion to home and family is essential to a determination of how marital property will be equitably distributed. Such contribution and efforts may range from supporting a spouse in professional school, entertaining friends and business associates, patients, etc. at home, to being primary child care provider. Each case is unique and the spousal contribution must be determined based on the particular facts.
Valuation of Businesses: No single approach to the valuation of businesses is mandated by the courts. The value of a corporation (including but not limited to professional corporations) can be calculated in several ways depending upon the facts in the situation. Factors that should be considered include: nature of the business; general economic outlook; book value of stock/financial condition of business; earning capacity of the company; dividend paying capacity; goodwill/intangible value; sales of stock/size of block of stock to be valued; market price of similar corporations.
Three accepted methods for the valuation of businesses include: 1) asset valuation (assets minus liabilities); 2) capitalization of earnings (multiplying true pre-tax earnings-derived by adjusting net income to account for personal expenses) by a capitalization factor derived after considering risk, past performance, future history and nature of the business; 3) excess earnings: net income is adjusted for personal items, unusual or nonbusiness items, unreported income or deposits, credit is given for reasonable compensation and taxes, the net excess earnings are then averaged and capitalized to arrive at goodwill. Goodwill plus tangible assets will give the fair market value.
DISTRIBUTION OF ASSETS
Depending upon the marital assets involved and the financial position of the parties, courts will apply various methods to the distribution of marital property. A one time settlement may be ordered, or payments over a period of years upon the sale or disposition of various assets. Courts will be mindful of such issues as tax consequences in determining how marital property will be distributed. Each case is unique and will depend upon the circumstances of the parties involved.
For further information contact Sherri Donovan, Esq. at (212) 431-9076.