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EQUITABLE DISTRIBUTION
by
Michael R. Magaril, Esq. and Claudia A. Luecke, Esq.[1]

 

I.  INTRODUCTION

In the last twenty years the focus of divorce proceedings appears to have shifted away from moral issues and laying blame on one party or another, to something that more closely resembles the dissolution of a partnership.  The discussions over what property falls into the marital estate have become more important to the final outcome. 

The magnitude of property division on divorce is exemplified by the fact that marital property may include almost anything of value such as tangible personalty; real estate, pensions and retirement plans; family businesses or medical or legal practices; professional good will; intellectual property; tax credits; stocks and bonds; and legal awards.  Consequently, the practitioner must pay careful attention to reviewing and preparing disclosure documents and to determining methods of valuation. 

II.  HISTORY

Under English Common law principles, a husband and wife were considered a single legal entity.  It was the husband who had control and ownership of all of the parties’ assets both real and personal and included property acquired by the wife before marriage or by inheritance. This was the situation throughout the United States until the end of the nineteenth century, when states began to pass what became known as the Married Women’s Property Acts.  These Acts allowed a married woman the right 1) to acquire, own and transfer many kinds of real and personal property as though she were unmarried; 2) to make and enforce contracts in her own name; 3) to work and retain her own earnings; 4) to sue and be sued; and 5) to be responsible for her tortuous and criminal conduct. 

Even with the Married Women’s Property Acts in place, in most non-community property[2] states there was a rebuttable presumption that the wage earner (usually the husband) owned most of the property acquired during the marriage.  In the 1970’s, a succession of cases came before the US Supreme Court challenging the constitutional validity of gender-based laws under the Equal Protection Clause of the 14th Amendment.  Many of these challenges were outside the family law arena, but state legislatures took the hint and most of them amended statutes dealing with property rights and spousal support to be gender neutral.  At about the same time the Uniform Marriage and Divorce Act was introduced.  Its equitable distribution provisions became the model for many states, including New Jersey where it was enacted as the Divorce Reform Act of 1971 (“DRA”).

In its original form, the DRA did not set out criteria for equitable distribution, leaving Courts wide latitude to apply the law.  The first effort to guide the Courts occurred in 1980, when the legislature passed an amendment providing that property granted to a spouse by gift, devise or bequest of a third party would not be subject to equitable distribution.  Following the Court’s ruling in Sleeper v. Sleeper, 184 NJ Super 544 (App. Div. 1982) the legislature expanded this amendment to include property acquired by intestate succession.

In 1988, the legislature addressed the need for further guidance by codifying equitable distribution standards established by case law and adding additional elements for the Court’s consideration.  These criteria are in force today as NJSA 2A:34-23.1[3], which reads as follows.

NJSA 2A:34-23.1. Equitable distribution of property; factors to be considered

In making an equitable distribution of property, the court shall consider, but not be limited to, the following factors:

a. The duration of the marriage;

b. The age and physical and emotional health of the parties;

c. The income or property brought to the marriage by each party;

d. The standard of living established during the marriage;

e. Any written agreement made by the parties before or during the marriage concerning an arrangement of property distribution;

f. The economic circumstances of each party at the time the division of property becomes effective;

g. The income and earning capacity of each party, including educational background, training, employment skills, work experience, length of absence from the job market, custodial responsibilities for children, and the time and expense necessary to acquire sufficient education or training to enable the party to become self-supporting at a standard of living reasonably comparable to that enjoyed during the marriage;

h. The contribution by each party to the education, training or earning power of the other;

i. The contribution of each party to the acquisition, dissipation, preservation, depreciation or appreciation in the amount or value of the marital property, as well as the contribution of a party as a homemaker;

j. The tax consequences of the proposed distribution to each party;

k. The present value of the property;

l.The need of a parent who has physical custody of a child to own or occupy the marital residence and to use or own the household effects;

m. The debts and liabilities of the parties;

n. The need for creation, now or in the future, of a trust fund to secure reasonably foreseeable medical or educational costs for a spouse or children;

o. The extent to which a party deferred achieving their career goals; and

p. Any other factors which the court may deem relevant.

In every case, the court shall make specific findings of fact on the evidence relevant to all issues pertaining to asset eligibility or ineligibility, asset valuation, and equitable distribution, including specifically, but not limited to, the factors set forth in this section.

It shall be a rebuttable presumption that each party made a substantial financial or nonfinancial contribution to the acquisition of income and property while the party was married.

III.  THEORY

Unlike community property[4], equitable distribution does not assume that each spouse holds an undivided fifty percent (50%) share of all marital property.  There is no assumption of a fifty-fifty split; equitable distribution is not necessarily equal distribution.  The idea is to award marital property in a manner that reflects the contributions the parties made towards accumulating the marital assets.  This results in 50-50 divisions, 0-100 divisions and everything in between.  The elements set forth in NJSA 2A: 34-23.1 call upon Courts to examine the totality of the parties’ circumstances with an eye towards doing justice under the particular facts of each case. In this regard, the New Jersey legislature has opted for flexibility in the interest of justice at the expense of the certainty provided by the more mechanistic approach favored by community property jurisdictions.

The concept of equitable distribution relies on the assumption that marriage is a partnership.  Martial property is therefore the product of the labor of both parties and the division should reflect this, rather than merely which spouse holds title to particular items.  The Court in Gibbons v. Gibbons, 174 N.J. Super 104 at 113 (App. Div. 1980) sets forth a clearly defines equitable distribution when it states:     

As we understand the concept of equitable distribution, it is a corollary of the principal concept that marriage is a joint enterprise whose vitality, success and endurance is dependent upon the conjunction of multiple components, only one of which is financial. The nonremunerated efforts of raising children, making a home, performing a myriad of personal services and providing physical and emotional support are, among other noneconomic ingredients of the marital relationship, at least as essential to its nature and maintenance as are the economic factors, and their worth is consequently entitled to substantial recognition. Thus, the extent to which each of the parties contributes to the marriage is not measurable only by the amount of money contributed to it during the period of its endurance but rather by the whole complex of financial and nonfinancial components contributed. The function of equitable distribution is to recognize that when the marriage ends, each of the spouses, based on the totality of the contribution made to it, has a stake in and right to a share of the family assets accumulated while it endured, not because that share is needed but because those assets represent the capital product of what was essentially a partnership entity.

The Court’s analysis is important not only because it discusses non-financial contributions to the marital estate, but also because it makes it clear that entitlement to equitable distribution is not based solely or even significantly upon need.  Unlike alimony and support payments, equitable distribution is about slicing up an existing pie in a manner that allows each party to benefit in proportion to his or her contributions.  Whether he or she needs those assets should not drive the proportion of distribution. 

IV.  PRACTICE

To determine the appropriate distribution of marital property the Court must follow a three step process articulated in Rothman v. Rothman, 65 NJ 219 at 232 (Ch. Div. 1974):  the Court must 1) decide what specific property of each spouse is eligible for distribution, 2) value the property for purposes of such distribution, and 3) determine how such allocation can most equitably be made.  In other words, the Court must determine the contents of the marital estate, value those contents and then divide them fairly. 

V.  MARITAL ASSETS

Before an equitable distribution division can take place, the parties (or the Court) must determine what assets comprise the martial estate. The parties are bound by statute, specifically NJSA 2A:34-23(h), in determining what assets should be included in equitable distribution.   NJSA 2A:34-23(h) states:

In all actions where a judgment of divorce or divorce from bed and board is entered the court may make such award or awards to the parties, in addition to alimony and maintenance, to effectuate an equitable distribution of the property, both real and personal, which was legally and beneficially acquired by them or either of them during the marriage.  However, all such property, real, personal or otherwise, legally or beneficially acquired during the marriage by either party by way of gift, devise, or intestate succession shall not be subject to equitable distribution, except that interspousal gifts shall be subject to equitable distribution.

The marital estate is compromised of all property the parties obtained individually or together during the marriage except for third party gifts or inheritance made to one of the parties.  Up to this point the statute seems to suggest that drawing the division will be one with bright lines.  However, the situation becomes far less absolute as the statue goes on to say that gifts from one spouse to the other become part of the estate to be divided.  Therefore, assets that at one time might have been outside of the marital estate may become part of it depending on how the parties treated those assets during the marriage.

A.  DURING THE MARRIAGE

In order to determine whether an asset belongs in the marital estate, the Court first must ascertain the duration of the marital estate.  When did it begin and when did it end?   The answer may seem obvious, but for equitable distribution purposes it may be less than clear.  The parties may begin accruing property to the martial estate prior to the actual marriage and the end of the marriage may be deemed to take place upon the happening of a variety of contingencies.

1.  BEGINNING OF THE MARRIAGE

Clearly a marriage has started once a marriage ceremony has taken place.  Painter v. Painter, 54 N.J. 196, 217 (1974); Weiss v. Weiss 226 N.J. Super 281, 287 (App. Div. 1988) cert. den. 114 NJ 287 (1988); Berrie v. Berrie 252 N.J. Super 635, 642 (App. Div. 1991). Property acquired during the marriage is almost always a part of the marital estate unless it is a third party gift.  Generally, property that the parities acquire before the marriage is not part of the marital estate[5], but there are exceptions.  Property acquired in anticipation of marriage or in furtherance of the marital enterprise is frequently considered part of the marital estate even if the asset came into a party’s possession prior to the marriage ceremony. (See sectionV(B)(1) infra)

2.END OF THE MARRIAGE

A marriage is certainly over when the Court enters a Final Judgment of Divorce, but courts have determined that generally a better date to bracket the end of the marriage for equitable distribution is the date of the filing of the Complaint for Divorce[6].    Other dates also may be acceptable.  For example if the parties execute a support and separation agreement and following the agreement actually separate, the date of the agreement will control as the end date of the marriage for equitable distribution purposes, even if the agreement does not contain provisions for property division.  Smith v. Smith, 72 N.J. 350 (1977) and Carlsen v. Carlsen 72 N.J. 363 (1977).  A written agreement may not be necessary to assert a de facto marriage end date.  In Lee v. Lee, 180 N.J. Super 90 (Ch. Div. 1981), the Court found that an oral agreement between the parties plus an actual distribution of property was a sufficient basis to establish an end date for inclusion of property in the marital estate. 

However, in Sleeper v. Sleeper, 184 N.J. Super 544 (App. Div. 1982), the Court found that when husband gave wife sole access to the parties’ bank accounts immediately prior to leaving the marital residence, such transfer was not sufficient evidence to establish the marriage was over.  The Court in Brandenburg v. Brandenburg, 83 N.J. 198 (1980) came to a similar conclusion.  It found that the parties’ separation and husband’s support payments were not sufficient to establish the end of the marriage.      

Given the Court’s mixed messages on this point, the practitioner would be wise to take a conservative approach and prepare written agreements for separating couples.

B.  INCLUDED ASSETS

As discussed above, essentially all assets of the parties, amassed by either party individually or the parties as a couple during the marriage, are presumed to be part of the marital estate and therefore subject to equitable distribution.  As the Court in Scavone v. Scavone 230 N.J.482, 490 (1988), put it, an asset acquired “specifically for family use subjects the asset to equitable distribution.”  NJSA 2A:34-23 and NJSA 2A:34-23.1 carve out particular types of assets – pre-marital assets, inheritance, gifts, and assets subject to prior agreements – and these exceptions must be asserted.  Even when asserted and proven by the owner spouse to be non-marital property, the non-owner spouse may raise issues that will result in some or all of the property returning to the marital estate.   

1. ANTICIPATION OF MARRIAGE

For example, property purchased in anticipation of marriage often is considered a marital asset.  In Weiss, 226 N.J. Super 281, the Court determined that a house purchased in Husband’s name six months prior to marriage with the intent to make it the parties’ marital residence was a marital asset and subject to equitable distribution.  The Court, “rejected a literal interpretation of the phrase ‘during the marriage’ in NJSA 2A:34-23 in favor of an interpretation which is administratively workable and yet also in furtherance of the underlying policies of equitable distribution.”  Citing Smith, 72 N.J. Super at 351 and Rothman, 65 N.J. at 219, the Weiss Court went on to say that it was important to recognize marriage as “a shared enterprise, a joint undertaking, that in many ways is akin to a partnership” and consequently a “date prior to the marriage ceremony can, in appropriate circumstances, qualify as the date of commencement of the marriage for the purpose of deciding whether property is a marital asset subject to equitable distribution.”

The Appellate Division took Weiss a step further in Berrie v. Berrie 252 NJ Super 635 (App. Div. 1991).  The Court applied the Weiss principles -- 1) the parties expressed an intent to form a pre-marital partnership and 2) the parties acquired assets in specific contemplation of their marriage -- to determine if the parties intended to form a marital partnership prior to the marriage ceremony.  The Court found that Mr. and Mrs. Berrie had indeed created such a relationship and determined that passive appreciation in stock[7]owned by husband was a martial asset subject to equitable distribution.  It is important to note that the for the purposes of determining a time frame for the stock appreciation, the Court found the Berrie’s premarital partnership began four years before they were married.  Prior to Berrie, Courts tended to limit pre-marital assets subject to equitable distribution to real estate, particularly marital residences.

2.  TRANSMUTATION

Transmutation or commingling occurs when the parties use their individual assets in a manner that causes those assets to loose their distinction as a separate asset.  When funds become so intertwined that they loose their distinction as separate and/or become impossible to trace, they are almost certainly marital property.  In other words, if the parties treat property as martial, it is likely to be viewed this way by the Court regardless of the source.  The Court in Coney v. Coney, 207 N.J. Super 63, 75 (Ch. Div. 1985) defined transmutation as a, “judicially created doctrine where the courts are willing to go beyond the basic stricture of statutory classification of separate and marital property, where the strictures would lead to inequitable results. According to this theory, property that once was classified as separate or non-marital can be transmuted into marital property when the spouse with title represents to the other spouse that the property will be shared.”

3.  MARITAL GIFTS

Marital gifts are another way immune assets may become martial.  Adding a spouse’s name to a deed or title to property demonstrates intent to treat the property as marital. The Courts are particularly likely to interpret transfers of pre-marital real estateto both parties as marital gifts.  See Perkins v. Perkins, 159 NJ Super 243 (App. Div. 1978); Pascarella v. Pascarella 165 NJ Super 558 (App. Div. 1979); Canova v. Canova 146 NJ Super 58 (Ch. Div. 1976).

In Canova at 61 the Court reviewed the requirements of a gift: 1) donative intent by the donor, 2) actual or symbolic delivery of the gift, and 3) donor’s absolute relinquishment of ownership and dominion over the subject matter of the gift to the extent practical depending on the nature of the gift.  The Court found that Mr. Canova’s creation of a tenancy by the entirety was sufficient to determine that he made a gift of the marital residence to his wife.  In Pascale the Court refused to allow the Wife to trace out $35,000 she deposited into a parties’ joint brokerage account and intended to be used for the purchase of a home.  The trial judge evenly divided the proceeds from the sale of the home.  The Appellate Division affirmed on the basis that the until their marital discord they had shard all income and liabilities, had made the decision to deposit the $35,000 and purchase the house together, and until the divorce proceedings neither made any affirmative steps to demonstrate that the stock was anything other than an interspousal gift.   

C.  EXCLUDED ASSETS

The marital estate may not contain all of the assets of both parties.  In fact, certain categories, generally fall outside of the martial estate and are not subject to equitable distribution.

1.  PREMARITAL ASSETS

Property either party owed before they married that still exists in the same state at the conclusion of the marriage is outside of the marital estate.  Even though husband briefly[8] deposited a gift from his father in the parties’ joint bank account, the Court in Dotsko v. Dotsko, 224 N.J. Super 668 (App. Div. 1990) the Court found that the gift was not marital property.  Of course the facts of the case may have helped the Dotsko Court make that decision.  The husband’s father’s total gift was $20,000 which the parties divided on receipt.  It was the husband’s $10,000 share that he deposited into the parties’ joint account.  The Wife sought to retain her $10,000 portion of the gift and subject the husband’s portion to equitable distribution.

In Wadlow v. Wadlow 200 N.J. Super 372 (App. Div. 1985), the Court exempted $20,000 dollars worth of savings, gifts and inheritance the wife obtained before the marriage even though they had been commingled during the parties’ premarital co-habitation.  In this instance the husband had executed a document that stated that he understood that the money belonged to wife or her family.  The husband’s will indicated that he would return the $20,000 to wife’s brother.[9]  The Wadlow Court also exempted securities that wife’s parents gave to her before her marriage and her father managed for her before and during her marriage[10].  This account was never commingled with marital assets. 

Pre-marital property purchase in anticipation of marriage is considered part of the marital estate and is not immune from equitable distribution; see section IV(B)(1) supra.

2.  INHERITANCE, GIFTS AND BEQUESTS

As stated in NJSA 2A:34-23(h), all property, “real, personal or otherwise, legally or beneficially acquired during the marriage by either party by way of gift, devise, or intestate succession shall not be subject to equitable distribution, except that interspousal gifts shall be subject to equitable distribution.”   The statute refers to gifts made by third parties and not from one spouse to another.  Primarily the statute was enacted primarily to protect the inheritance rights of individuals, but testamentary bequests are not the only sheltered gifts.  Virtually any gift made specifically to one spouse by a third party will not be subject to equitable distribution so long as the recipient spouse maintains clear title to the asset.   

The statute creates another situation where an asset that belongs to one spouse alone and should not be subject to equitable distribution may become subject to it by the actions of the owner spouse.  Like pre-marital property, if the owner spouse, co-mingles a gift with marital assets, allows his/her spouse to improve the asset, or makes a gift to his/her spouse of the asset, the gift is likely to become subject to equitable distribution. See section V(B)(3) supra.    

3.  PRIOR AGREEMENT

The Parties may agree to exclude items from equitable distribution.  Most commonly this occurs in the form of a pre-nuptial agreement or a martial property settlement agreement, but the parties are free to make agreements regarding the disposition of their property at time prior to equitable distribution.  Such agreements must satisfy the requirements necessary to be valid – comply with the Statute of Frauds, freely entered into, etc.

The Uniform Premarital Agreement Act, NJSA 37:2-31 et seq. sets forth the requirements of prenuptial agreements.  If the parties meet the statutory requirements and the agreements are equitable and just courts will enforce them. D’Onofrio v. D’Onofrio, 200 N.J. Super 361, 366 (App. Div. 1985).  Courts also will enforce separation agreements when the parties actually separate, see section V(A)(2).  And Courts will enforce agreements made in contemplation of divorce, so long as the agreement is “fair and equitable”.  Lepis v. Lepis 83 N.J. 139, 148 (1980).  However, Courts can be more skeptical of mid-marriage agreements. 

In Pacelli v. Pacelli, 319 N.J. Super 185 (App. Div. 1999), the Court refused to enforce a mid marriage agreement that purported to resolve issues of alimony and equitable distribution upon divorce. The parties executed the agreement sixteen years after their marriage and eight years prior to the commencement of divorce proceedings at a time “before the marriage lost all of its vitality and when at least one of the parties, without reservation, wanted the marriage to survive.”  Pacelli, 319 N.J. Super at 190. The Court found that it was because of wife’s desire to preserve the marriage that the husband’s demand that she sign the mid-marriage agreement was “inherently coercive.” Id. at 191. 

The Pacelli Court also differentiated mid-marriage agreements from reconciliation agreements[11], which it indicated were enforceable if they met a seven part test.  The Court determined that a reconciliation agreement must 1) be fair and equitable; 2) be made when the marital rift was substantial; 3) comply with the Statute of Frauds; 4) be fair to the party charged, under the circumstances at the time the parties entered into the agreement; 5) be conscionable at the time entered; 6) have been entered into in good faith by the party seeking to enforce it; and 7) be literally enforceable even under changed circumstances.  Id at 191-192.

4.  TRANSFER OF STATUS

The person who asserts immunity from equitable distribution based on its pre-marital status bears the burden of proof.  Painter 65 N.J. at 214, Brown v. Brown 348 N.J. Super 466, 480-481 (App. Div. 2002) cert. den. 174 N.J. 193 (2002).  Once that party proves immunity any passive increase in value will also be immune[12], unless the non-owner spouse can demonstrate that the increase in value was due to the efforts of the non-owner spouse. Sculler v. Sculler 348 N.J. Super 374, 380.   If the non-owner spouse successfully rebuts the presumption, then the amount of the increase in value shall become part of the marital estate and subject to equitable distribution Sculler, 348 N.J. Super at 381. 

This assumes that increase in value comes through the efforts of the owner spouse or by passive appreciation, an increase in value due to market forces rather than the actions of either party.  Scavone, 230 N.J. Super 482 is the case that defines passive assets and their place in equitable distribution.  Paraphrasing Painter, the Scavone court defined passive assets as, “those assets that whose value fluctuations are based exclusively on market conditions” and went on to determine that “ passive, immune assets, in one name and their incremental values are viewed as separate property and are thus not subject to distribution.” Scavone, supra 230 N.J. Super at 486. 

D.  SPECIFIC ASSETS

Courts have considered and made determinations about the eligibility status of certain types of assets, such as advances degrees, lottery winnings, personal injury awards, and illegally obtained assets. 

In Landwehr v. Landwehr, 111 N.J. 491 (1988) the Court determined that the wife was entitled to a portion of husband’s personal injury award that was intended to cover her loss of consortium damages as well as equitable distribution of the portion of the award intended to cover husband’s lost wages and medical benefits.

In Lynn v. Lynn, 91 N.J. 510 (1982) and Mahoney v. Mahoney, 91 N.J. 488 (1982) both held that professional degrees are not property for purposes of equitable distribution.  However, in Piscopo v. Piscopo, 281 N.J. Super 575 (Ch. Div. 1988) aff’d 232 N.J. Super 559 (App. Div. 1989) the Court found that celebrity good will is not akin to a professional degree or certification and can be distributed upon divorce so long as it was acquired during the marriage.

The Court in Sheridan v. Sheridan, 247 N.J. Super 552 (Ch. Div. 1990) determined that it was the improper forum for division of marital assets purchased with funds from illegal activities. Both parties agreed that they paid for marital assets from cash taken from various hiding places, but they did not agree upon the source of the money.  The plaintiff-wife testified that defendant-husband conspired with his employer to skim oil from large deliveries and sell it to third parties. Defendant-husband claimed that his father made him a large cash gift upon his mother’s death.  The parties also agreed that they never paid taxes on any of the funds.  The Court determine that the funds were ill-gotten and refused to “reward wrongdoers” [13] by dividing tainted assets.  

VI.  VALUATION

Once the contents of the marital estate have been established the next step is to value those assets.  Each asset will have its own indicia of value and some assets may have more than one.  Valuation methods must be particular to the item valued.  In a large estate this may present many challenges for the parties and the Court as well as the competing experts who will submit their opinions.  In order to facilitate this process, all parties and their attorneys have a duty to cooperate with the Court as it strives for fair property valuation.  Lavene v. Lavene, 148 N.J. Super 267 (App. Div 1977) cert denied 75 NJ 28 (1977).

A.  VALUATION DATE

Traditionally, the valuation date is the date of the filing of the Complaint for Divorce which is also the date used to determine the contents of the martial estate for equitable distribution purposes.  However, Courts have been flexible about valuation dates when circumstances show it is necessary.  In Bednar v. Bednar 193 N.J. Super 330, the Court found that “There is no absolutely iron-clad rule for determining the date for evaluation but use of a consistent date is preferable such as the filing of the complaint,… or perhaps the time of the hearing, depending on the nature of the asset and any compelling equitable considerations.” (citations omitted)  Court accommodation on the valuation date is particularly helpful when the asset is one that fluctuates in value rapidly over a short period of time, like stock, or is difficult to value such as a closely held business.

When an asset value changes between the dates of valuation and distribution, the Court must determine or the parties must agree upon a method of distributing the accretion or loss.  Generally, Courts have found that when an increase or decrease in value is the result of inflation or market forces -- passive appreciation or depreciation -- then the parties should share equally in the profit or loss.  See Bednar 193 N.J. Super at 333.  When the change in value is the result of the efforts of one party, equity demands that that party benefit or suffer in proportion to his or her action

The date of valuation was a big issue in Scavone, 230 N.J. Super 482.  The parties disagreed over whether the asset, one-half interest in a seat on the New York Stock Exchange the husband purchased during the marriage, should be valued as of the date of the filing of the complaint in August 1985 or at the time of distribution in 1988.  The Court discusses active and passive assets acquired by various means and comes to a number of conclusions.  A passive[14] immune[15] asset and any incremental value accrued during the marriage will not be subject to equitable distribution.[16]  An active[17] immune asset held throughout the marriage in one party’s name will not be subject to equitable distribution however, appreciation may be, if the increase in value is “derived, in part or whole, from efforts of the non-owner.”  The appreciation would be valued as of the date of distribution.[18]  Assets acquired in contemplation of marriage whether active or passive are subject to equitable distribution so long as the parties intended the asset be used for family purposes.  However, and active asset should be valued as of the date of the complaint while a passive asset would be valued as of the time of distribution.[19]  A passive joint asset acquired during the marriage is subject to equitable distribution and valued at the time of distribution.[20]  An active asset acquired during the marriage in the name of one spouse only may be distributable, but any appreciation in value due to the attention of the sole owner will be subject to equitable distribution and valued at the time of the complaint.[21]  A passive asset acquired during the marriage in the name of only one spouse is distributable and the increase in value shall be determined at distribution.[22]

B.  VALUATION METHODS

The method and criteria for evaluating an asset is depending on the nature of the asset itself.  Assets, like securities, that are regularly traded will obviously be easier to value and if the valuation is as simple as looking in the newspaper, there will be no need for an expert appraiser.  Because of the day to day fluctuations in the value of securities, experts suggest that they be divided in kind giving each party his or her appropriate share of the total portfolio.  This allows each party to bear the risk of the investment and to determine whether and how to best continue you with it.  It also avoids the need for liquidation and may obviate the need to argue over valuation dates.

Real estate may be valued using any of the following: 1) comparable sales/ market value; 2) face value of effective insurance; 3) tax assessment value; 4) income; or 5) reconstruction cost[23].  There is some preference for market valuation as is it is probably the most reliable.  Similar criteria can be use to value personalty such as art, antiques, furniture, and jewelry.  Because these types of valuations are somewhat subjective, they have the potential to become battles for dueling experts.

The most subjective and therefore most hotly contested area of valuation is in business valuation, particularly small, closely held businesses.  “There are probably few assets whose valuation imposes as difficult intricate and sophisticated a task as interest in close corporations.”  Lavene 148 N.J. Super at 275.  Furthermore, “‘fair value’ is not defined within the confines of the statute and there is no inflexible test for determining fair value." Torres v. Schripps, 342 N.J. Super 419 at 434, quotations omitted.Accordingly, case law on this topic abounds. 

The necessity of particular circumstances limits much of the case law to the facts of the individual cases.  Close corporations “cannot be realistically evaluated by a simplistic approach which is based solely on book value, which fails to deal with the realities of the good will concept, which does not consider investment value of a business in terms of actual profit, and which does not deal with the question of discounting the value of a minority interest.” Lavene, 148 N.J. Super at 275.  Unfortunately, the Courts do not give a lot of guidance on how to do this.  “Generally, in determining fair value, the judge should consider proof of value by any techniques or methods which are generally acceptable in the financial community and otherwise admissible in court….The judge may use any acceptable method to calculate the value, but he must determine that the chosen method yields the fair value...” Torres 342 N.J. Super at 424.

IRS Revenue Ruling 59-60 proposes guidelines, but warns in §3.01 that “a determination of fair market value, being a question of fact, will depend on the circumstances in each case.”  Nevertheless, in §4 the IRS offers the following helpful suggestions.

It is advisable to emphasize that in the valuation of the stock of closely held corporations or the stock of corporations where market quotations are either lacking or too scarce to be recognized, all available financial data, as well as all relevant factors affecting the fair market value, should be considered. The following factors, although not all-inclusive are fundamental and require careful analysis in each case:

(a) The nature of the business and the history of the enterprise from its inception.
(b) The economic outlook in general and the condition and outlook of the specific industry in particular.
(c) The book value of the stock and the financial condition of the business.
(d) The earning capacity of the company.
(e) The dividend-paying capacity.
(f) Whether or not the enterprise has goodwill or other intangible value.
(g) Sales of the stock and the size of the block of stock to be valued.
(h) The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter.

In Brown, supra 348 N.J. Super 476-490 the Court spends considerable space valuing the husband’s 47.5% share in a closely held wholesale floral business.   The Court relying on New Jersey Supreme Court rulings in Balsamides v. Protamine Chemicals, Inc., 160 N.J. 352 and Lawson Mardon Wheaton v. Smith 160 N.J. 383 rejects much of the IRS recommendations and adopts ALI Principals which do not allow marketability or minority discounts on shares in a closely held corporation.[24]  The Court states that such discounts have the potential to deprive minority shareholders of the full value of their interest.[25]

VII.  PROPERTY DIVISON

Now that contents of the marital estate are established and valued the Court must determine how to divide them.  As discussed in Section III supra, equitable distribution does not mean that the marital estate with be divided in half.  It must be divided in a manner that is fair to both parties. 

A.  STATUTORY MARITAL FACTORS

To determine a just division, the Court must at least consider the factors set forth in NJSA 2A: 34-23.1 (see statute set forth in section II supra.)  However, these factors are should be not considered an exhaustive list.  Courts are still free to apply additional or substitute factors they deem necessary and appropriate. 

1.  LENGTH

There seems to be a loose proportional correlation between the length of the marriage and the amount of equitable distribution when you contrast cases such as Globman v. Globman, 158 N.J. Super 338 (App. Div. 1978)[26], and Esposito v. Esposito, 158 NJ Super 285 (App. Div. 1978)[27], but there are no Appellate Division or Supreme Court decision that deal with this factor head on. 

2.  QUALITY

While there are cases that discuss the quality of marriages, for example, Esposito, 158 NJ Super at 289, there are no cases that set forth exactly how this factor should be part of the Court’s calculus.

3.  AGE AND HEALTH OF PARTIES

These factors are often taken together because they both go to the ability of the parties to move on with their lives and make their ways as unmarried individuals or to re-marry.  One of the more pointed examples of the use of age and health as factors is in Sanders v. Saunders, 118 NJ Super 327.  In that case, the Court weighed the age and poor health of the 67-year-old husband against the good health of the younger, 47 year old wife, to equitably distribute the marital residence entirely to the husband.   

4.  RESPECTIVE EARNING ABILITIES

Like age and heath, the parties’ respective earning abilities should be considered to determine the ability of each to move forward with their lives. 

a.  CURRENT EARNINGS

In Sanders, 118 NJ Super at 329, the Court considered the husband’s social security income as a factor in its decision.  The Esposito Court considered the fact that wife did not work and had not been employed outside the home for most of the 29 year marriage and decided that she had little ability to provider herself with an independent income.[28]  This determination was important to the Court’s equitable distribution.

b.  EDUCATION

Education becomes important not only to determine what the parties individual incomes will or should be following divorce  In Stern v. Stern 66 NJ 340 as well as the cases discussed in section V(D), the Court determined that a spouse’s educational degree and license to practice a profession are not martial property.  However, because the other spouse may have supported the family during the spouse’s education, he or she may be eligible for reimbursement alimony or a greater portion of assets in equitable distribution.  

c.   IMPUTING INCOME

Like many of the other factors the Courts may consider imputing income to one or both parties to determine how they are likely to fair financially post divorce.  It should be noted, that this occurs far more often in determining support obligations.

5.  CHILDREN

The age and number of children or the lack of them[29] is considered by the Courts.  However, there is a lack of case law demonstrating exactly what role children play in equitable distribution.  It is probably safe to assume that a lack of children renders the parties more independent following divorce and binds them to fewer ongoing obligations.  Courts consider this as well.  

6.  GROUNDS OF DIVORCE

Courts have held over and over that the fault grounds of the divorce are not relevant to a determination of equitable distribution.  For example, abandonment does not entitle the abandoned spouse to a greater portion of the martial residence[30].  However, in special circumstances such as in D’Arc, 164 NJ Super at 241, where “a spouse has committed an act that is so evil and outrageous that it must shock the conscience of everyone, it is inconceivable that this court should not consider his conduct when distributing the marital assets equitably.”  Mr. D’Arc’s shocking act was an attempt to murder his wife.    

B.  CONTRIBUTIONS OF THE PARTIES

The contributions of the parties is a consideration in equitable distribution, but as discussed in section IV supra, unless financial contributions can be clearly traced out and attributed to immune sources, Courts pay little attention to them.  On the other hand, Courts give a great deal of weight to non-financial contributions finding the contributions as homemaker, mother and traditional wife to be important in determining equitable distribution[31].  It is important to note that the statute does not differentiate the nature of marital contributions.  In Gibbons at 112, the Court finds that the success of a marriage is dependent upon many things, not the least of which are the “non-renumerated efforts of raising children, making a home, performing a myriad of personal services and providing physical and emotional support.”

C.  SOURCE OF ACQUISITION

There is opposing case law as to whether the source of a particular item in the marital estate should determine its equitable distribution.  In Gibbons at 114 the Court stated that, “Direct contributions to acquisition of assets is [not] in any measure a dispositive factor.”  In McGee v. McGee, 277 NJ Super 1 (App. Div. 1994), however the court found the facts that the wife was the original owner of the marital residence and that she had designed and built the house more than six years before the parties met to be an important consideration when it reversed and remanded the trial court’s determination on equitable distribution.      

D.  FINANCIAL CONDITIONS

According to the statute, the Court must consider the parties’ standard of living in making a determination of equitable distribution.

1.  STANDARD OF LIVING

The parties’ standard of living is part of the determining the parties’ financial condition.  Cases have made note of the martial standard of living (see Esposito at 299), but have not clearly defined how this factor should be used in determining equitable distribution.

2.  DEBTS AND LIABILITIES

Debts are also a part of the Court’s determination of equitable distribution and Marilyn J. Canda, Esq, will discuss this in greater detail.

E.  AGREEMENTS BETWEEN THE PARTIES

Please see section IV(A)(3) supra.

F.  TAX CONSEQUENCES

The Court in Painter, 65 N.J. at 212 suggested that Courts should pay attention to tax considerations and consequences when determining equitable distribution.   Michael R. Magaril, Esq, will cover this topic in greater depth.

V.  METHODS OF DISTRIBUTION

The parties are always free to agree upon methods and timing of distribution, but if they cannot do so, Courts have wide latitude to determine the means of equitable distribution.  In other words the Court controls the how and the when as well as the what.    

A.  CASH PAYMENT

Cash payments are most appropriate when the there is a distributable asset solely owned by one party or there is a jointly owned asset that one party wishes to buy the other out of.  In Lavene, 148 N.J. Super at 202, the Court ordered the husband to make a lump-sum payment to the wife as her share of husband’s business.  The Court’s order followed an analysis of the husband’s financial liquidity and gave him a four-month period within which to raise the cash.  

Cash payments are also a common way to divide retirement assets.  The amount of the cash payment is the amount allocated to the non-employed spouse as a percentage of present value.  Such payments do not always take the form of cash per se, but rather paper transfers from the account of one spouse to another.  There may be consequence to alimony calculations if the parties choose this method.

B.  DEFERRED PAYMENT/BENEFIT SHARING

Deferred payment plans which allow both parties to share the benefits of an assets’ increase in value are particularly common in the division of the parties’ interest in a marital residence.  For example in Pascale, the Appellate Division up held a trial Court order requiring the wife to buy the husband’s interest in the marital residence from him and setting a price for her to do so. The Court also set the timing of the buy-out for five years following the Order. 

C.  DIVISION OF EMPLOYMENT RELATED BENEFITS – QDRO

In order to divide an ERISA qualified pension, Courts must follow federal law, specifically the Employee Retirement Income Security Program, 29 USCA § 1001 et seq.  The law requires that a Court enter a Domestic Relation Order (“DRO”) allowing for an in kind division of the pensioner’s rights at the time of the divorce even though the parties may not receive the actual benefits for some time.  The DRO must contain certain information as specified in 29 USCA §§1056 (d)(3)(c) including:

1. the name and the last known mailing address (if any) of the participant and the name and mailing address of each alternate payee covered by the order;

2.  the amount or percentage of the participant's benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined,

3.  the number of payments or period to which such order applies, and

4.  each plan to which such order applies.

A DRO must be in strict compliance with the requirements of 29 USCA §§1056 (d)(3)(c), Ross v. Ross 308 N.J. Super 132, 152-153.  Ross makes it clear that it is imperative that the DRO meet with all requirements of the federal statute.  

Following the entry of the DRO, the party obtaining assets submits it to the plan administrator who then reviews it to determine that it complies with the law and the terms of the pension plan.  Once the administrator accepts the DRO it becomes a Qualified Domestic Relations Order (“QDRO”).  29 USCA §§1056(d)(3)(B)(i) and (ii) define the term "qualified domestic relations order" as a domestic relations order--

1)which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan, and

2)with respect to which the requirements of subparagraphs (C) and (D) are met, and

(ii) the term "domestic relations order" means any judgment, decree, or order (including approval of a property settlement agreement) which--

1)  relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a participant, and

2) is made pursuant to a State domestic relations law (including a community property law).

Some plan administrators will allow the parties to submit a proposed form of DRO in order to obtain pre-qualification.  This has the advantage of allowing the drafting attorney to make corrections, if necessary, before the order is entered.  It is helpful to know that many plans will supply their own form to you upon request.  Using the plan’s form can speed the approval process. Pre-qualification allows the DRO to be entered simultaneously with the final judgment of divorce thus avoiding qualification delay. 

Using a QDRO to divide a marital asset allows both spouses to 1) obtain the same tax deferred appreciation; 2) be independently responsible for the related income taxes payable upon receipt of the benefit; 3) avoid a pressured payout of other immediate assets; and 4) avoid the difficulty of determining a present value for a future benefit.  The downside is that the parties must co-operate to implement the QDRO and this may take multiple contacts at a time when the parties may wish to have as little to do with one another as possible.    

D.  DISTRIBUTION IN KIND

Distributions in kind are common when the asset is difficult to value because of rapid changes in value, e.g. stock in a publicly traded company, or insufficient independent information, e.g. stock in a closely held corporation.  Distributions in kind also occur when a liquidation and division of the asset or a buy out would result in inequity to one or both parties. 

However, such distributions are not always appropriate.  In Borodinsky v. Borodinsky, 162 N.J. Super 437, the trial court attempted to compensate for information the husband failed to present at trial concerning the value of his closely held business.  The trial court awarded the wife half of husband’s stock ownership in kind.  Husband did not object to the amount of the award, but he did object to the manner of distribution, because he feared that it would allow the parties contentious relationship to continue to the possible detriment of the business.  The Appellate Division agreed with husband finding that the trial court’s “solution most certainly lays the seeds for further disputations and litigation which should and may be avoided” Borodinsky 162 N.J. Super at 443 and remanded the case back to the trial court. 

E.  OFFSETS

Offsets are widely used, both by Court Order and agreement of the parties.  They allow the parties to avoid a liquidation that might result in disadvantageous tax consequences or a lower value for the asset.  Offsets frequently occur when dealing with retirement plans[32]  or to allow the parties to trade their respective interests in the marital residence for interest in a business[33].  When structuring an offset it is important to consider the tax implications and whether the parties will need to qualify for refinancing.  If the spouse acquiring an asset cannot obtain financing which requires the other spouse to remain an obligor on a mortgage or other loan, the acquiring spouse should execute an indemnity and hold harmless clause as part of the settlement agreement.[34]   

F.  LIQUIDATION

The Court always has the power to liquidate assets.  The parties can also agree to do so.  In a very contentious divorce this may be the only alternative that will allow the parties to quickly and completely sever their ties.   Before choosing this option it is important to determine if such liquidation would have adverse tax consequences.

VI.  ENFORCEMENT

Once the Court has ordered or the parties have agreed upon a distribution, it may be necessary to enforce the agreement.  Courts can do so through a variety of mechanisms such as requiring security for performance, awarding interest on delayed payments, selling assets, or appointing a receiver.  Essentially, the Superior Court of New Jersey, Chancery Division, Family Part has the same authority as any court of equity to enforce its orders.  If the practitioner has reason to believe that an opposing party might delay his or her performance, it is possible to build incentives or penalties into a settlement agreement that would avoid the need for Court enforcement.

VII.  POST JUDGEMENT CHANGES IN CIRCUMSTANCES

Like most court orders, final judgments of divorce and equitable distribution orders may be subject to change under compelling circumstance.  A Court may modify its Order or grant relief from judgment.   In Linek v. Korbeil 333 NJ Super 464 (App. Div. 2000) cert. den. 165 NJ 676 (2000), the Court granted Wife’s application seeking relief from the parties 1981 judgment of divorce in the form of immediate payment of her share of former husband's pension after former husband took advantage of early retirement.  The Court found that developments in the law, specifically the Retirement Equity Act of 1984 and changes in circumstances necessitated a recalculation of Wife’s benefits. 

X.  CONCLUSION

Equitable distribution rightfully occupies a significant portion of the Court and the practitioner’s attention during a divorce proceeding.  Fortunately, the trend in the law is away from the emotion of fault grounds and towards basing the division rational criteria such as the contributions of the parties, whether financial or otherwise, and to structure the distribution of the assets in a way that meets the parties’ financial planning needs.  While surely there are pitfalls, a careful and thorough analysis of the martial assets will lead to a truly equitable distribution of those assets.



 

[1] Michael R. Magaril and Claudia Luecke practice at the Law Offices of Michael R. Magaril in Westfield, New Jersey. His practice is primarily devoted to matrimonial and Family law matters. The views expressed in this article are the views of the Law Offices of Michael R. Magaril, are not the views of any specific client. Nor are the statements set forth herein intended to be any form of legal advice.

[2] Community Property is and has been the model for dividing property in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington.  The Community Property system and its underlying principal of equality regardless of gender greatly influenced the drafters of the Uniform Marriage and Divorce Act.

[3] The elements set forth in NJSA 2A:34-23.1 closely parallel the factors set forth for alimony and child support in NJSA 2A:34-23.

[4] Community property is not and never has been the standard for property division upon divorce in New Jersey. (see Painter v. Painter, 65 NJ 196, dicta at 214-215  (Ch. Div. 1974))

[5] Painter, supra 65 N.J. at 214; Pascale v. Pascale 274 N.J. Super 429, 434 (App. Div. 1994) aff’d in part reversed in part 140 N.J. 583 (1995) Berrie supra 252 NJ Super at 642

[6] Painter at 217-218

[7] The Stock was in a business owned by Husband and taken public during the pre-marital period.  Wife began working for the business during the pre-marital period.

[8] 2 weeks

[9] Wadlow supra 200 N.J. Super at 381

[10] Id.

[11] The Pacelli Court defined reconciliation agreements as a “promise that induces reconciliation.” Pacelli, supra 319 N.J. Super at 191.

[12] Painter, supra 65 N.J. at 213; Brown supra 348 N.J. Super at 489.

[13] Sheridan, supra 247 N.J. Super at 561.

[14] A passive asset is one which increases or decreases in value due exclusively to market conditions, Scavone, supra 230 N.J. Super at 468.

[15] Asset that acquired by gift or inheritance or was the pre-marital property of one of the parties.

[16] Scavone, supra at 486.

[17] An active asset involves “contributions and efforts towards [its] growth and development which directly increases [its] value.” Id. at 487.

[18] Id. at 488.

[19] Id at 490-491.

[20] Id.

[21] Id at 492.

[22] Id at 492- 493.

[23] Winters and Baldwin, New Jersey Practice, Vol. 11, §35.26

[24] Brown, supra at 484.

[25] Id.

[26] A 10 year marriage with a 4 year separation.

[27] A 29 year marriage with a 2year separation.

[28] Esposito, at 298.

[29] Pascarella at 562 notes the absences of children as a factor in its decision.

[30] Wadlow v. Wadlow 200 NJ Super 372 (App. Div. 1985)

[31] See Rothman at 228 and Weiss at 289.

[32] Di Pietro v. Di Pietro 183 N.J. Super 69, 78 (Ch. Div. 1982); Pascale, 274 N.J. Super. 433

[33] Dworkin v. Dworkin, 217 N.J. Super 518 (App. Div. 1987)

[34] Id. at 521.

 




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