In New York State, the division of marital property and marital debt, in connection with an action for divorce, is called equitable distribution. New York equitable distribution is not automatically an equal division of property and debt, but a determination of the fairest allocation of same. Often, equitable distribution of property does result in equal distribution. However, equitable distribution may also result in an unequal allocation of property or debt. Under the law, the facts of the marriage and nature of the property dictate the equitable distribution determination.
Underlying the concept of property division is the premise that a marriage is an economic partnership, and that assets acquired during the marriage will be divided between the parties regardless of whose name the asset is titled and regardless of whether one party worked in the labor force while the other party was a stay-at-home spouse.
This concept is to be distinguished from the “title concept”, which under the old law resulted in property being awarded to the person to whom the asset was titled, (i.e., whose name was on the property) with the other party not having any claim to the property.
The law now views marriage as a partnership with each party contributing in his/her way to the partnership – whatever it be, to wit: the well-being of the family and/or the acquisition of money and/or property. Accordingly, if it is decided that the partnership should cease, dissolution of the partnership must be achieved by judicial determination or by agreement of the parties.
Thus the assets acquired during the marriage must be “marshaled” or identified, valued and distributed.
For purposes of equitable distribution, property is divided into two basic categories: marital property and separate property.
In New York, marital property is any property acquired by either or both spouses during the marriage, from the date of marriage prior to the date of commencement of an action for divorce or upon the execution of a separation agreement. The manner in which title is held is irrelevant. Such property includes conventional assets such as real property, retirement accounts/benefits, bank accounts, stocks, mutual funds, collectibles and vehicles. It may also include less conventional property such as businesses, licenses and educational degrees.
Equitable distribution issues arise in nearly every New York divorce. Awareness, education, and careful planning, will ensure that your rights are fully protected, and you obtain the optimum property disposition due to you in connection with your divorce.
Marital Property is Subject to Equitable Distribution
Contrasted with marital property, defined above as all property acquired during the marriage regardless of whose name the asset is titled, is the concept of separate property. Separate property is not subject to equitable distribution and includes property acquired:
- Prior to marriage or after commencement of a divorce action;
- By inheritance or gift from someone other than the spouse;
- As compensation for personal injuries; and/or
- Assets acquired with separate property, or the increase in value of separate property not attributable to marital contributions or efforts.
Separate property is construed narrowly, while martial property is construed broadly. Identification of property as marital is critical to a determination of equitable distribution. Unfortunately, such determination, even if seemingly straightforward, is often complex. Consider the following example:
- Is the residence still separate property, or has the character and nature of the property changed?
- What credits or entitlements are now due each party in connection with the distribution of this asset?
- How are such credits or entitlements determined/calculated?
- Prior to the parties’ marriage, one spouse exclusively owns a three bedroom, one bathroom home, subject to a fifteen year mortgage.
- The parties marry and reside in the titled spouse’s home.
- Clearly, according to the definitions above, at the time of marriage, the homeowner’s residence constitutes his/her separate property at the time of marriage. However, what if:
- After twelve years of marriage, one spouse files for divorce;
- Several years after the marriage, the titled spouse added the non-titled spouse’s name to the deed;
- During the marriage, joint monies were used to pay down the mortgage associated with the residence; and/or
- During the marriage, the parties pay for a renovation of the residence which includes expanding it to a four bedroom, 2½ bathroom residence, with a new kitchen and an in-ground pool.
This example illustrates how complex equitable distribution can be.
Following the classification of property, an equitable disposition of assets can proceed. New York Domestic Relations Law establishes factors to be considered in making such a determination. Those factors include:
- The income and property of each spouse 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;
- The loss of health insurance benefits on dissolution of marriage;
- 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 spouse;
- The impossibility or difficulty 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.
Each factor is considered and relevant, as is whether equitable distribution of a particular asset is practical under the circumstances. In certain instances, the sale or liquidation of an asset may be unduly burdensome, or nonsensical, in which case discretion exists to provide alternative methods of distribution to appropriately compensate the other spouse.
Conversion of Separate to Marital Property
Separate property can be converted to marital property, thus becoming subject to property distribution in the matrimonial proceeding.
Money which is separate property, used to purchase an asset to which both names are then placed in title, may very well transmute or convert the money to a marital asset. For example, if Mary withdraws her separate money to purchase a home and title to the home is in the names of Mary and her husband, the money that was separate may be considered marital property, or may still be separate property, depending on a variety of factors.
There is a possibility that Mary may receive a credit for the separate money that was used to purchase the house, but the issue of credit for the separate property is decided on a case-by-case basis.
Appreciation of Separate Property
Another concept in property distribution is that of appreciation of a separate asset. This concept can best be explained by the following illustration:
Jack works with his father in a one man auto repair shop. Jack’s father eventually passes away and bequeaths the auto repair shop to Jack. Two years after Jack receives the auto repair shop by the way of inheritance, Jack marries Sally and they live together as man and wife for the next twenty years. During this twenty year period, Jack devoted all of his marital work effort to his auto repair business, and eventually increases the operation of the business from a one man operation to a shop that grosses over one million dollars a year and employs fifteen mechanics.
Obviously the value of the business has increased substantially from the time Jack acquired it prior to the marriage. The business increases as a result of Jack’s direct efforts in working the business.
Jack’s wife Sally was a homemaker during the twenty years of marriage, raised four children, and provided for their care and needs as well as the care and needs of the home.
As a result of Jack’s active efforts in the appreciation of what was separate property and Mary’s contribution to the marriage i.e.: by raising the children and maintaining the home, Mary will have an interest in the appreciation of the value of Jack’s business.
All liabilities incurred during the marriage, with certain exceptions, are marital liabilities, and must be taken into consideration along with the distribution of marital property.
Some situations make it impossible to truly share liabilities, and adjustments must be made.
For example, Mary and Joe decide to divorce at a time when Mary is home with three minor children and does not work. Joe has been the sole wage earner in the home and is the only person who has an income with which to continue to satisfy marital liabilities. In this case, Mary may be awarded a share of marital assets, while Joe assumes most of the marital liabilities. Mary’s share of assets may be reduced to account for her obligation as and for the marital debt.
Another situation which may affect the sharing of marital liabilities, would be where one party incurs liabilities which are the result of wasteful dissipation of a marital asset: the wanton loss of money or property for non-marital purposes. Only one party may be responsible for that loss of money and/or the resulting debt.
The Marital Home
Perhaps the most common marital asset is the marital home.
Depending on the age of the children living in the home, the courts may not order the marital home sold immediately. The custodial parent may be permitted to remain in the home with the minor children until the youngest child graduates high school, at which time the marital residence is sold. The rationale underlying this principal is that the children’s lives will be disrupted by the divorce, and that to relocate the children from their community, friends, and home, would be an additional trauma that should be avoided. In addition, it may be cheaper for the custodial parent and the children to remain in the home than to sell the home and purchase another, or rent an apartment.
Where the continued residence in the home of the custodial parent and the children would be impracticable, notwithstanding the presence of children, the home may be sold.
For example, where parties live in a home that is worth a substantial amount of money, the mortgage payment may be substantial and require an inordinate amount of maintenance and/or child support to be used to pay the mortgage. There may be a direction that the home be sold in order to relieve the parties of the continued burden of an excessive mortgage payment.
If the home was acquired during the marriage, with marital monies, then as a general proposition, the parties should share the equity (the amount left after payment of mortgage and closing costs) in the home at the time of sale.
Pension and/or Retirement Benefits
Another common asset in matrimonial proceedings is a pension, or other retirement benefit (such as an IRA or 401K).
A pension or a retirement benefit acquired during the marriage as a result of one person’s employment is a marital asset. The employed spouse who earns this benefit will have only his or her name on the retirement plan. As discussed earlier, title is immaterial in matrimonial law, and the retirement benefit will be subject to distribution.
With regard to the disposition of a pension, we must look at two factors: first, the value of the pension (valued as of the commencement of the matrimonial proceeding) sometimes called present day value; and second, what the pension benefit will pay or yield at the time the employed spouse becomes eligible to receive the pension benefits.
Valuation of a pension or retirement benefit during a marriage generally means, the value of the benefit accrued, from the time the parties were married and the employed spouse participated in the retirement plan, up to the time of commencement of the matrimonial proceedings. In other words, both the value of the retirement benefit prior to the marriage and contributions made after the commencement of the matrimonial action is excluded in the valuation as it constitutes separate property.
Most matrimonial practitioners use the services of an actuary to compute the present day value of a pension. The present day value of a pension tells us the value of the pension in dollars at the time of the commencement of the matrimonial proceeding, although the pension may not be in pay status, may not be vested, and may never pay a cash value, but only a monthly benefit, at the time it goes into pay status.
The actuary will also project what the pension will pay at the time the pension goes into pay status, i.e. on a monthly basis. For example, the actuary may tell us that after a twenty year marriage Mr. Jones, who is a fireman, may have a pension with a present day value of three hundred and fifty thousand dollars, and that the pension, in pay status, will pay two thousand dollars per month.
There are basically two ways to deal with the distribution of the pension: Pay Status Sharing or Exchange.
In Pay Status Sharing, the parties agree or the court may order, that upon retirement and at such time as the pension is in pay status, the monthly pension payment will be shared by the parties equally, or in some other ratio, i.e. sixty-forty or seventy-thirty. This means that subsequent to the divorce and until the employed spouse retires or is eligible for retirement, the nonemployed spouse will not receive any benefit from the pension whatsoever, but will await actual retirement, or the earliest retirement age of the employed spouse, to receive his/her monthly pension benefit.
In order to secure the non-titled person’s interest in the pension plan, a special court order commonly referred to as a Qualified Domestic Relations Order (QDRO), is obtained which is served upon the pension administrator, and directs the administrator to pay to the nonemployed spouse, sometimes called the “alternate payee”, a certain percent, or an amount of money each month when the pension goes into pay status, or at such time as the employed spouse is eligible to receive pension benefits.
For example, if the actuary advises that the pension will pay two thousand dollars per month upon retirement, the court order may provide that Mrs. Jones will receive fifty percent of the pension benefit at the time Mr. Jones retires, or at such time as Mr. Jones is eligible to retire but does not actually retire (if the plan permits) if Mrs. Jones exercises her option to receive her share of the pension at that time.
Thus, Mrs. Jones will receive her share of the pension at one of the occasions mentioned above, and will receive monthly pension checks directly from the pension administrator.
Several safeguards must be followed in connection with pension matters. One primary concern is that the Qualified Domestic Relations Order provides that the employed spouse must elect a survivor benefit option to the pension. This ensures that if the employed spouse dies before the pension reaches pay status, or during the time the pension is in pay status, that the nonemployed spouse will still receive his or her share. If the survivor option is not elected, and the employed spouse passes away prior to or during retirement, the nonemployed (alternate payee) spouse’s interest in the pension may also “die” and he/she may no longer receive an interest in the pension.
If the nonsurvivorship election is made prior to the time the parties become involved in their matrimonial matter, the election is in all probability irreversible. In such cases, it is recommended that life insurance on the life of the employed spouse be secured to guarantee the alternate payee’s interest in the plan.
The survivorship option results in a lower monthly payment when the pension goes into pay status. In cases where the parties want to receive the maximum amount of monthly benefit payable by the pension, the nonsurvivor option may be the preferred choice, providing life insurance can be secured and paid for at a reasonable cost to guarantee payment to the alternate payee in the event of death of the other spouse.
Another area of concern occurs when the employed spouse is a participant in a governmental pension which is not subject to the federal pension law, known as ERISA. State and local governments are not obligated to honor a Qualified Domestic Relations Order. Governmental agencies can however elect to recognize a Domestic Relations Order, or a comparable order. Care must be given to inquire specifically as to the rules and regulations governing your and/or your spouse’s pension plan.
Qualified Domestic Relations Orders are complicated instruments and should be drafted by the actuary or the attorney, with the preapproval of the pension administrator of the pension plan.
Other retirement benefits such as IRAs, 401 K plans, and KEOGH plans are much easier to value (look at the balance on deposit). Some plans permit the transferring or rolling over from one spouse’s individual name of a portion of the monies to the other spouse’s IRA, or retirement vehicle.
The second method to provide for the distribution of a pension or IRA, etc. is to trade or exchange the value of the pension for another asset.
For example, assume that the marital home is worth two hundred thousand dollars and has a mortgage of one hundred thousand dollars. The difference between the mortgage and the fair market value of the home is one hundred thousand dollars. We call this the equity in the home.
Assume that the employed spouse is the husband and that the actuarial report provides that the present day value of the pension is one hundred and fifty thousand dollars (subject to tax impacting).
The parties may agree, or the court may direct, that the pension be retained by the husband for his benefit, while the home becomes the sole and separate property of the wife for her benefit. Thus, the sharing of marital assets of almost equal values will have been accomplished. Note that the pension will be subject to taxes and we must tax impact the pension when we compare it’s value to the equity in the home.
There are other ramifications to exchanging the pension for the home which are not the subject of this work, but which should be considered when discussing distribution of such an asset. Tax considerations and liquidity are two major issues which might best be discussed with your attorney.
The License or Enhanced Earnings as a Marital Asset
As of 2016 New York State no longer recognizes a license and educational credits that one earns during the marriage (or the enhanced earning capacity that the license or educational credits generate), to be a marital asset. However, attaining a degree of license is a factor the Court may consider in the distribution of other assets.
The license and credits can be in medicine, law, accounting, teaching and in other venues.
The principle behind this concept is as follows:
If one party to the marriage earns a license and/or educational credits during the marriage, then the license and/or educational credits are considered to have enhanced a party’s ability to earn a living.
The Business as an Asset
A business that was started during the marriage is a marital asset. In addition, even a business that was acquired prior to the marriage but which appreciated in value during the marriage due to the active efforts of either spouse, is a marital asset with regard to the appreciation. A business should be valued by a forensic accountant for purposes of determining marital value.
A business, in regards to marital law, may be any form: a one person operation, a partnership, or a corporation-small or large.
The Distributive Award
The non-titled party of a business, for example, is not going to become a partner in the business, and, in most cases, a business will not be sold as a result of the divorce. How, then, does a spouse receive his or her interest in a business? The answer is that the spouse who is not active in the business will receive other assets, i.e.: house, savings, etc. in exchange for his or her interest. When these other assets are not sufficient to achieve an equitable exchange, the court may order or the parties may agree to the payment of the interest via a distributive award. This means that the person who owns the business, will pay to the other party a certain amount of money over a period of time. The payment of this money is independent of the payment of maintenance and is paid with or without interest depending on a variety of circumstances.
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