Property Division
Class #3
Property Division upon divorce
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All states provide for division of assets and
assignment of liabilities upon marital
dissolution
Systems of Marital Property
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Equitable distribution (f/k/a common law)
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Majority of states, including FL
Community Property
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8 states mostly in West and Southwest (AZ, CA,
ID, LA, NV, NM, TX, and WA)
Community Property
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Each spouse has an immediate interest in
all property acquired during the marriage,
with a few exceptions
Upon divorce, operates almost identically to
equitable distribution
Definition of “community property” parallels
the definition of “marital property” in equitable
distribution states
Equitable Distribution
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During marriage - spouse that holds title can
freely buy, sell, or otherwise dispose of
property in his/her sole name
Only at time of divorce does the concept of
“marital property”, essentially synonymous
with concept of “community property”,
become relevant.
What is Marital or Community Property
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Property acquired by either spouse during
the marriage, no matter how titled.
This rule has many exceptions
Exceptions to Marital Property (UMDA)
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Property owned before the marriage
Gifts or inheritances received during marriage,
including gifts from one spouse to the other
Property acquired during marriage in exchange for
premarital or separate property
Property acquired after legal separation
Property excluded from the marital estate by valid
agreement
Appreciation of separate property (with some
exceptions)
When is appreciation of separate
property “marital”? (Middendorf)
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Where appreciation is “active”, not “passive”,
in that it required efforts by owner-spouse
during marriage
Non-owner spouse made contributions
(sweat equity)
Marital asset or income contributions, such
as paying property taxes on premarital
property with income earned during marriage
Changing the classification of property
(typically separate to marital)
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Transmutation
Commingling
Transmutation
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Converting property from separate to marital,
intentionally or not, by placing it in joint
names or some other act
Example: Refinancing separate home, but
doing so in joint names (states differ on this
one)
This creates a presumption of “gift” to the
marital estate that can be rebutted by
evidence of intent to keep separate
Commingling
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Mixing separate property with marital
property can convert it, in whole or part, into
marital property
Example: Investing separate funds to
improve marital home
Creates presumption that intent was to
create marital property, but can be rebutted.
Rebuttal usually requires documentation to
clearly “trace” the source of the funds
Trends in Property Division, 1970’s to
present
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Recognition of non-economic contributions to
the marital estate (DeCastro)
Push for roughly equal division of marital
property (some states have a presumption of
equal division)
Recognition of new forms of property, often
intangible property
New forms of marital property in last
few decades
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Pensions
Goodwill of a business or profession
Professional or advanced degree
Stock options and other employment benefits
Pensions – may be largest marital
asset other than real estate
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Pension benefits accrued during marriage
deemed marital, if vested
Unvested benefits also included if just and
equitable to do so (important in old-style “cliff
vesting” plans)
May even consider premarital or post-divorce
pension accruals under some circumstances
Types of pensions
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Defined contribution (account balance)
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401k
Profit-sharing trusts, etc.
Increasingly common
Defined benefit
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No determinable account balance at a given time
Promise to pay a certain monthly dollar benefit
upon a certain retirement age
Becoming less popular
Division of pensions upon divorce
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Offset – assign a present value to the stream of
future payments, discount for mortality, then award to
pension holder and give property of equivalent value
to other spouse (often equity in marital home)
Deferred division – Use a deferred division order
such as a Qualified Domestic Relations Order
(QDRO) to require pension administrator to divide
payments between the spouses when pension
reaches pay status
Offset division of pension
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Pro
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Clean break, no need for future contact
No need for third-party administration
Con
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Often inequitable because pension holder may
get little or no other assets
Can’t predict the future, what if pension holder
dies before or just after retiring? Has effect of
grossly overstating value of pension to the holder
Deferred division of pension
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Pro
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Tends to be more equitable, less guess work
Equalizes the tax burden, each party pays taxes
only on share they receive
Con
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Requires cooperation from third-party plan
administrator
Many complex requirements, QDRO’s hard to
draft, expensive, and high malpractice risk for
lawyers who draft them
Valuation of business interests
(Bowen)
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Area of great contention for closely held businesses
and professional practices
“Experts” often give widely divergent opinions of
value depending on which party hired them
Theory of value based on IRS Revenue Ruling 5960
Buy-Sell agreements and book value generally not
binding on court in determining value
IRS Revenue Ruling 59-60
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Goal: arrive at a FMV for stock which has no market
Consider:
– History of firm
– Nature of the company
– Outlook for the industry
– Book value of the stock
– Whether the interest valued is a controlling
interest
– Existence of “goodwill” or other intangible assets
(good name and reputation of the company or
owner) (Yoon)
Capitalization of Earnings – Key
Valuation Method Today
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Take annual earnings and “capitalize” it
depending in large part on the risk
associated with that business or industry
In other words, what rate of return would an
investor in the business expect in order to
make that investment.
Riskier the business, the higher the rate of
return to lure an investor
Determine earnings
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Look to a multi-year average (often 5 years)
Give more weight to more recent years
Don’t ignore other factors, such as general economic
conditions and prospects for that industry or
individual company in predicting whether earnings
history will continue into future
Divide earnings by ownership percentage if there is
more than one stockholder
Often need to determine “excess
earnings”
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In professional practices and some other
types of closely-held service businesses,
valuation method is typically thought of as
“capitalization of excess earnings”
Excess earnings: Annual earnings minus
reasonable compensation for the owner if
that owner were a non-owner employee hired
to run the business or professional practice
(essentially fair value for his/her services)
Determine the capitalization rate
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Cap rate depends on risk factors
What annual rate of return would a
disinterested investor require in order to be
induced to invest in that business or
professional practice?
Most closely held business are fairly risky, so
rates tend to start at 20% and go up from
there.
Apply capitalization rate to earnings
(or excess earnings)
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Divide the earnings by the capitalization rate
Example: If earnings are $100,000 and the
cap rate is 20%, the value will be $500,000
This is alternatively referred to as an
“earnings multiple” of 5
Many professional practices and closely held
corporations have earnings multiples in the
range of 2 to 5 (cap rates of 50% to 20%)
Final valuation steps
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Add value of assets on books (except
perhaps loan receivables owed by
owner/operator which may never be repaid)
Subtract debt of the business (except
perhaps debt owed to owner/operator that
may never be repaid)
Consider discounts if the owner/stockholder
has minority (non-controlling) interest
Professional or advanced degrees
(Olar)
States take a variety of approaches:
 Present value of increased earning capacity
over working career (tends to be high value)
 Restitution to spouse who supported other
through medical, or law school (often through
an alimony award)
 Blended approach to reward expectancy or
investment interest in other spouse’s career
Stock options – widely used during the
“.com” boom years (Short/MS case)
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Awarded and vested during marriage are
generally marital, even if not yet exercised
Awarded during marriage but not yet vested
may be marital
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Depends on whether award was for past services
or incentive to remain an employee in the future
Time rule for determining what portion
of stock options are marital or
separate
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Uses a fraction
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The numerator is the period of time (in months or
years) from the commencement of employment
until the parties’ separation or divorce
The denominator is the period of time (also in
months or years) from the commencement of
employment to the date the options are first
exercisable (become vested)
Similar rule - often called “coverture
fraction” - can be used to determine
marital portion of a pension (Kelm)
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Numerator: Years of employment during
marriage
Denominator: Years of total employment,
including premarital
Can be used (per Kelm) to grant interest in
post-divorce pension accruals as well
Florida property division law
P.E.A.C.E – Keeping Things in Order
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Parental Responsibility
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Child Custody and Visitation
Equitable Distribution of Property
Alimony
Child Support
Everything Else
Equitable Distribution AFTER
Consideration of Parental Issues
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Fla. Stat. § 61.075(1)(h) directs the court, before
equitably distributing the parties' marital assets, to
consider “[t]he desirability of retaining the marital
home as a residence for any dependent child of the
marriage, or any other party, when it would be
equitable to do so, it is in the best interest of the
child or that party, and it is financially feasible for the
parties to maintain the residence until the child is
emancipated or until exclusive possession is
otherwise terminated by a court of competent
jurisdiction."
Four Major Steps In Every Equitable
Distribution Case
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Identification of Assets and Liabilities
Classification of Assets and Liabilities as
Marital or Non-Marital
Valuation of Marital Assets and Liabilities
Equitable Distribution of Marital Assets and
Liabilities
Marital Assets and Liabilities
Fla. Stat. 61.075(5)(a)
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Assets acquired and liabilities incurred during
the marriage, individually by either spouse or
jointly by them
The enhancement in value and appreciation
of non-marital assets resulting either from the
efforts of either party during the marriage or
from the contribution to or expenditure
thereon of marital funds or other forms of
marital assets, or both
Also Marital
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Inter-spousal gifts during the marriage
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Contrary to majority rule that inter-spousal gifts
during marriage create separate property
All vested and non-vested benefits, rights
and funds accrued during the marriage in
retirement, pension, profit sharing, annuity,
deferred compensation and insurance plans
and programs
And finally…
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All real property held by the parties as tenants by the
entireties, whether acquired prior to or during the
marriage, shall be presumed to be a marital asset
If, in any case, a party makes a claim to the contrary,
the burden of proof shall be on the party asserting
the claim for a special equity (treating an asset that
is technically marital as a separate asset or awarding
one party a disproportionate share based on that
party’s contributions, etc.)
Non-Marital Assets
Fla. Stat. 61.075(5)(b)
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Assets acquired and liabilities incurred by
either party prior to the marriage and assets
acquired and liabilities incurred in exchange
for such assets and liabilities
Assets acquired separately by either party by
non-interspousal gift, bequest, devise or
descent and assets acquired in exchange for
such assets
And…
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All income derived from non-marital assets
during the marriage, unless the asset was
treated, used or relied upon by the parties as
a marital asset (commingled)
Assets and liabilities excluded from marital
assets and liabilities by a valid written
agreement of the parties and assets acquired
and liabilities incurred in exchange for such
assets and liabilities.
Marital presumption
Fla. Stat. 61.075(7)
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All assets acquired and liabilities incurred by
either spouse subsequent to the date of the
marriage and not specifically established as
non-marital assets or liabilities are presumed
to be marital assets and liabilities
The presumption is rebutted by a showing
that the assets and liabilities are non-marital
Commingled assets
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Commingling of marital and non marital
assets within the same account can establish
the entire account as marital.
However, the use of non marital assets as
collateral for marital loans does not convert
the underlying asset to a marital asset.
Farrior v. Farrior, 736 So. 2d 1177 (Fla.
1999).
Date of valuation of marital assets
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Earliest date the parties enter into a valid separation
agreement
Such other date as may be expressly established by
such agreement
Date of filing of a petition for dissolution of marriage
Date the judge determines are just and equitable
under the circumstances
Different assets may be valued as of different dates,
in the judge's discretion
Special Circumstances in Valuation
Dates
The trial court's determination of the value of
the husband's business as of the date of
filing was remanded because of the
tremendous increase in its value between the
date of filing and the date of trial.
- Perlmutter v. Perlmutter, 523 So.2d 594
(Fla. 4th DCA 1987).
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Establishing Value of Assets
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Testimony of the owner of property. Crockett
v. Crockett, 708 So. 2d 329 (Fla. 1st DCA
1998)
Expert testimony (accountants, appraisers,
economists, dealers). However, trial court is
not bound by the expert testimony, and may
base valuation on the testimony of a party.
Misdraji v. Misdraji, 702 So. 2d 1292 (Fla.
3d DCA 1997)
Stay within the range of values
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When a court assigns a value outside the
range of testimony presented by the experts
or parties, it will be reversed (no matter how
deeply the court may disagree with the range
of values presented). Ingle v. Ingle, 689 So.
2d 314 (Fla. 5th DCA 1997)
What is Equitable Division of Assets?
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The starting point is usually equal, absent
specific facts relating to the statutory factors.
Robbie v. Robbie, 788 So. 2d 290 (Fla. 4th
DCA 2000).
Fla. Stat. § 61.075 contains factors to
consider when deviating from equal division.
Factors affecting property allocation
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The contribution to the marriage by each
spouse, including contributions to the care
and education of the children and services as
a homemaker.
The economic circumstances of the parties.
The duration of the marriage.
Any interruption of personal careers or
education opportunities of either party.
…and
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The contribution of one spouse to the personal
career or educational opportunity of the other
spouse.
The desirability of retaining any asset, including an
interest in a business, corporation, or professional
practice, intact and free from any claim or
interference by the other party.
The contribution of each spouse to the acquisition,
enhancement and production of income or the
improvement of, or the incurring of liabilities to both
the marital assets and the non marital assets of the
parties.
…and more
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The desirability of retaining the marital home as a residence
for any dependent child of the marriage, or any other party,
when it would be equitable to do so, it is in the best interest
of the child of that party, and it is financially feasible for the
parties to maintain the residence until the child is
emancipated or until exclusive possession is otherwise
terminated by a court of competent jurisdiction. In making
this determination, the court shall first determine if it would
be in the best interest of the dependent child to remain in
the marital home; and if not, whether other equities would
be served by giving any other party exclusive use and
possession of the marital home.
…finally
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The intentional dissipation, waste, depletion
or destruction of marital assets after the filing
of the petition or within 2 years prior to filing
of the petition.
Any other factors necessary to do equity and
justice between the parties.
What about marital debts?
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Analyze and allocated using the same
factors used for assets.
Take into account possible bankruptcy
discharge issues of debts are joint.
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Discharge by spouse assigned debt in divorce
could allow creditor to come after other spouse.
Creditors and other third parties not bound by
terms of divorce.
Finding of Fact Required
Any distribution of marital assets or marital
liabilities shall be supported with factual
findings in the judgment or order based on
competent and substantial evidence with
reference to the factors previously
enumerated.
- Fla. Stat. § 61.075(3)
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Findings on…
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Clear identification of non-marital assets and
ownership interest;
Identification of marital assets, including the
individual valuation of significant assets, and
designation of which spouse shall be entitled to each
asset;
Identification of marital liabilities and designation of
which spouse shall be responsible for each liability;
Any other findings necessary to advise the parties or
the reviewing court of the trial court's rationale for the
distribution of marital assets and allocation of
liabilities.
Inadequate findings
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Absence of specific findings on asset
distribution compels reversal. Miller v. Miller,
589 So. 2d 317 (Fla. 1st DCA 1991)
Using a valuation date other than date of
petition requires specific findings that the
alternate date is just and equitable. Bauzon
v. Bauzon, 588 So. 2d 660 (Fla. 1st DCA
1991)
When deviating from equal
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Court must make ample findings of fact
justifying its deviation from an equal division.
Escudero v. Escudero, 739 So. 2d (688
(Fla. 5th DCA 1999)
Property before alimony
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P.E.A.C.E mandates “equitable distribution”
before determination of “alimony”.
Fla. Stat.§ 61.075(8): "The court may provide
for equitable distribution of the marital assets
and liabilities without regard to alimony for
either party. After the determination of an
equitable distribution of the marital assets
and liabilities, the court shall consider
whether a judgment for alimony shall be
made."