Complex Assets in Divorce - Melvin
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Complex Assets in Divorce

by Melvin Cook

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The following is an outline from a presentation I gave at a Continuing Legal Education (CLE) seminar in October, 2016.

A. Stock Options (ESOs and ISOs)
B. Restrict Stock Units – Vested and Unvested
C. Deferred Compensation Schemes
D. Fringe Benefits, Frequent Flyer Points, etc.
E. Liquidity in Divorce
F. Disability/Personal Injury Awards: Past/Future Lost Wages and Pain and Suffering

Stock option: A contract between two parties in which the stock option buyer (holder) purchases the right (but not the obligation) to buy/sell shares of an underlying stock (in blocks of 100) at a pre-determined price from/to the option seller (writer) within a fixed period of time.

American options can be exercised anytime between the date of purchase and the expiration date. European options may only be redeemed at the expiration date. Most exchange-traded stock options are American.

https://www.investopedia.com/terms/s/stockoption.asp (Visited April 29, 2016).

(Much of the information in the stock option section below is compiled from the websites Investopedia.com and Fidelity.com).

Equity compensation is a way for companies to align the interests of employees with the goals of management. The idea is to give employees an ownership interest in the company, which will in theory incentivize them to put forth their best efforts to increase the value of the company. Equity compensation can take the form of restricted stock units, incentive stock options (ISOs) and Employee Stock Options (ESOs).

An Employee Stock Option (ESO) is a stock option granted to specified employees of a company. ESO’s carry the right, but not the obligation, to buy a certain amount of shares in the company at a predetermined price.

ESOs give the holder the right to purchase the company stock at a specified price (the strike price, or exercise price) for a limited duration of time in quantities spelled out in the options agreement.

ESOs are the most common form of equity compensation.

ESOs do not have any marketable value (since they do not trade in a secondary market – such as the NYSE, NASDAQ, or Chicago Board of Options Exchange).

Equity compensation, such as ESOs, is often used by startup companies in order to attract top-notch employees and executives. Startup companies are usually riskier than corporations with a long track record of profitability.

Stock options have theoretical value which is derived from options pricing models such as the Black-Scholes model, or binomial pricing approach. The pricing models are beyond the scope of this presentation. The Black Scholes model is accepted by most experts as a valid form of options valuation. It meets Financial Accounting Standards Board (FASB) standards, assuming that the options do not pay dividends. But even if the company does pay dividends, there is a dividend-paying version of the Black Scholes model that can incorporate the dividend stream into the pricing of stock options.

A common form of management by employees to reduce the risk of stock options and lock in gains is the early (or premature) exercise of the options. Ultimately, this decision depends on an individual’s personal risk tolerance and specific financial needs, both in the short and long term.

However, early exercise exposes the holder to a large tax bite (at ordinary income tax rates). On the other hand, early exercise locks in some appreciation in value on the ESO (intrinsic value). Extrinsic value, or time value, is real value. It represents a value that is proportional to the probability of gaining more intrinsic value.

Equity compensation is one way to attract and retain employees to a startup company. New companies tend to be riskier than corporations with a lengthy track record, so they often use stock options as a means to attract long-term employees. Equity compensation is a form of non-cash compensation that represents ownership interest in a company. Due to the complexity of implementing an equity compensation program, companies must plan and use proper legal, accounting, and tax advice and planning.

As indicated above, stock options give holders the right to purchase shares of the companies’ stock at a predetermined price, also referred to as the exercise price, or strike price. This right “vests” with time, so an employee gains control of this option after working for the company for a certain period of time. When the option vests, the employee gains the right to sell or transfer the option. In theory, the vesting schedule will incentivize the employee to stay with the company for a long period of time.

There are different tax consequences to options that are vested versus those that are not, so it is necessary for employees to look into which tax rules apply to their particular situation.

ESOs have certain restrictions. One of the most important of these is vesting. The vesting period is the time that an employee must wait in order to be able to exercise ESOs. Vesting means that the stock will retain its full value even if the employee is no longer with the company.

Exercise of ESOs.

Vesting

It is important to read carefully what is known as the company’s stock options plan and the options agreement to determine the rights and key restrictions available to employees. The options agreement will provide the most important details, such as the vesting schedule, the shares represented by the grant, and the exercise or strike price.

The vesting schedule is set forth in the options agreement. ESOs will typically vest at predetermined dates. For example, you may have 25% vest in one year (from the grant date), another 25% may vest in two years, and so on until you are “fully vested.”

Let’s supposed in the above example that your ESO granted you 1,000 shares, with a vesting schedule of 25% per year until you are fully vested. After the first year, you would get 250 shares, after the second year another 250 shares, and so forth until you are fully vested.

The grantee of an ESO is often referred to as the “optionee.” Exercise of ESOs allows the optionee to buy the referenced shares at the strike price (or exercise price) indicated in the ESO options agreement. The acquired stock can then be immediately sold at the next best market price. The higher the market price from the exercise or strike price, the larger the “spread”, or compensation that the employee earns. This triggers a tax event whereby the “spread” is taxed as ordinary income.

Example: Suppose ESOs have a strike price of $50. The holder will be able to purchase the company’s stock at $50 per share. If the next best market price is $100 per share, the holder can immediately sell the shares for a profit of $50 per share. The $50 profit is the “spread.” It is taxable as ordinary income. When the holder later sells the stock, capital gains or losses are taxed as short-term if held for less than one year, and long-term if held for more than one year.

Restricted Stock Units: A grant valued in terms of company stock, but company stock is not issued at the time of the grant. After the recipient of a unit satisfies the vesting requirements, the company distributes shares or the cash equivalent of the number of shares used to value the unit.

A restricted stock unit is compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock immediately, but instead receives it according to a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with the employer for a particular length of time.

The restricted stock units (RSU) are assigned a fair market value when they vest. Upon vesting, they are considered income, and a portion of the shares are withheld to pay income taxes. The employee receives the remaining shares and can sell them at any time.

Restricted Stock is stock that is granted to an employee at no cost, but with certain restrictions, such as that it cannot be transferred until the employee has remained with the company for a specified period of time. See Forbes Article.

Vesting is the process by which an employee accrues non-forfeitable rights over employer-provided stock incentives or employer contributions made to the employee’s qualified retirement plan account or pension plan. Vesting gives an employee rights to employer-provided assets over time, which gives the employee an incentive to perform well and remain with the company.

The vesting schedule set up by the company determines when the employee acquires full ownership of the asset. Generally, non-forfeitable rights accrue based on how long the employee has worked there.

Dividing Stock Options:

https://www.forbes.com/sites/jefflanders/2014/03/19/dividing-stock-options-and-restricted-stock-in-divorce/#5c8106cb31c8

Author: Jeff Landers, March 19, 2014 (Visited May 21, 2016)

1) Know that the stock options exist.

This is not a no-brainer. The stock options or restricted stock units won’t appear on tax returns or W2s until the options are actually exercised or the restricted stock is vested. If your spouse is inclined to hide assets, he probably won’t voluntarily disclose his stock options or restricted stock. You may need to subpoena his company’s HR Department for information about any stock options or restricted stock, including the timetable for exercising the options or selling the stock.

If you need to obtain information from a company’s HR Department, you will want to get information on the number of stock options the employee was granted, how many are vested already, and the vesting schedule.

See https://www.wsj.com/articles/SB10001424052702304834704579405260807013826
(Visited May 21, 2016).

If you are participating in collaborative divorce (a wonderful process where applicable), this will be impossible. Collaborative divorce pre-supposes a willingness to trust in your spouse’s transparency and willingness to supply full disclosure. Thus, collaborative divorce is not necessarily the best option where you believe your spouse may hide assets.

Similarly, mediation in situations where a spouse may be inclined to hide assets is best accomplished after the completion of reasonably discovery of all pertinent financial information.

2) Determine the worth of the stock options or restricted stock

It is very difficult to evaluate the worth of stock options in a private company, since it is uncertain how valuable they will turn out to be. The current stock price of a publicly traded company can be found easily on google. But the most difficult issue is determining the value of stock options and restricted stock that have been granted but have not yet vested.

Some states do not consider stock options that have not vested as of the date of separation to be marital property. In other states they are, but their current value will depend on a number of factors, including how far in the future they will vest.

For example, in California, the longer the wait between the time the couple splits up and the date on which an employee can exercise stock options, the smaller the share of options the non-employee spouse typically gets.

Valuing restricted stock may be easier simply because, if the company does not go bankrupt, it will have at least some value.

Stock options are more difficult to value. If the exercise price of an option exceeds the current market value, the option is said to be underwater. But this does not necessarily mean that the option has no value. It may have tremendous value depending on the potential of the company and its likely prospects for success.

But determining the value of a stock options for a company with a lot of potential but an uncertain future, particularly in volatile market conditions, can be all but impossible. If the stock is currently trading at $100, and the exercise price is $10, then the option has obvious value. But if the current market price is less than the exercise price, the option is worthless, at least temporarily.

Depending on the circumstances, you may need the services of a forensic accountant or an economist to help evaluate the options’ value over time. Valuing options is a mixture of art and science. There may be intangible and emotional factors that go into the mix, as well as objective measures.

If a state does not recommend have a common practice for dividing stock options, the couple may be best served by deciding on a fair distribution of the stock options without trying to figure out the future value, which may simple be too speculative.

See https://www.wsj.com/articles/splitting-up-stock-options-in-a-divorce-1393619944?tesla=y
(Visited May 21, 2016).

3) Make sure you receive your fair share.

You may wish to consider having your client work with a divorce financial planner. If you elect not to receive a share of stock options/restricted stock, you will want to make sure you receive a portfolio that is equally likely to appreciate at least as much, with no worse tax consequences.

4) Have a plan for exercising the options.

Once you have an idea of the range of value for the options, and your fair share of the settlement, your client should have a plan in place for exercising the options. Your client may wish to consult with a financial advisor in making this decision. Oftentimes, a financial professional will advise the client to exercise the options as soon as possible, to avoid the risk of future loss of value.

5) Always think about tax consequences

Income from exercising “qualified” options, such as ISOs (Incentive Stock Options), which can only be granted to employees, is usually taxed as capital gains rather than ordinary income, provided that the options are held for two years after the grant date, or one year after the exercise date, whichever is later.

On the other hand, income from exercising “non-qualified” options (which can be granted to a wider range of people than just employees) is generally subject to ordinary income tax rates. Thus, the difference between the market price and the strike price will be taxed as ordinary income. When the stock is later sold, any gain or loss will be taxed as short-term if held for less than a year, and long-term if held for more than one year.

Restricted stock is taxed as ordinary income upon vesting.

In many cases, stock options and restricted stock cannot be transferred to a spouse. In such a case, your ex may need to exercise the options and/or sell the restricted stock on your behalf. If this is the case, the proceeds will be taxed at your ex-spouse’s tax rate.

in 2012 the typical company granted 578,000 in stock options, according to Equilar, a Redwood City, California company that tracks compensation data.

Because the value of unexercised stock options can be difficult to calculate, they can be a tricky asset to divide in divorce. For example, suppose a couple who splits up where the husband has unexercised stock options. The couple could agree to the wife’s keeping the vacation home in exchange for the husband’s keeping his stock options. The couple could end up with assets of equal value. Or, if the husband’s company is wildly successful, the value of his stock options could end up greatly exceeding the value of the vacation home.

Stock options were a big item of dispute in the divorce of Jack Welch, former CEO of General Electric.

Deferred compensation is an arrangement in which a portion of an employee’s income is paid out at a later date after which the income was actually earned. Examples of deferred compensation include pensions, retirement plans, and employee stock options.

In most cases, taxes on this income are deferred until it is paid out.

https://www.investopedia.com/terms/d/deferred-compensation.asp (visited July 25, 2016).

An employee may opt for deferred compensation because it offers potential tax benefits. In most cases, income tax is deferred until the compensation is paid out, usually when the employee retires. If the employee expects to be in a lower tax bracket after retiring than when they initially earned the compensation, they have a chance to reduce their tax burden. Roth 401(k)s are an exception, requiring the employee to pay taxes on income when it is earned. They may be preferable, however, for employees who expect to be in a higher tax bracket when they retire and would therefore rather pay taxes in their current, lower bracket. There are many more factors that affect this decision, such as changes to the law: in 2008, the highest federal tax rate was 35%, half what it was in 1975. Id.

Deferred compensation often refers to Non-Qualified Deferred Compensation Plans (or NQDCs).

However, there are technically two types of deferred compensation plans; namely, qualified and non-qualified. Id.

Qualified Deferred Compensation plans meet the requirements of ERISA (the Employee Income Retirement Security Act – a federal law enacted in 1974 that establishes certain minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans.

Such qualified plans include 401(k) plans and 403(b) plans.

401(k) plans are the most well-known of these qualified plans. A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest part of their paycheck before taxes are taken out. Matching contributions up to a certain amount are often made by the employer. Taxes aren’t paid until the money is withdrawn from the account.

https://www.google.com/?gws_rd=ssl#q=401k+plans (visited July 25, 2016).

TSA (Tax Sheltered Annuity) 403(b) plans are retirement plan for specific employees of public schools, tax-exempt organizations (501(c)(c) organizations) and certain ministers, which can invest in either annuities or mutual funds, the features of which are comparable to those found in a 401(k) plan.

https://www.investopedia.com/terms/1/403bplan.asp (visited July 25, 2016)).

Some requirements of a qualified plan: If a company sets up a qualified plan, it must be offered to all employees (the non-discrimination requirement), though not to independent contractors. Such plans are established for the sole benefit of the recipients, which means that creditors cannot access the funds if the company cannot pay its debts or goes bankrupt. Plan contributions are capped by law.

https://www.investopedia.com/terms/d/deferred-compensation.asp (visited July 25, 2016).

Non-Qualified Deferred Compensation plans (NQDCs), are also known as 409(a) plans (or “golden handcuff” plans – because they often contain forfeiture provisions if the employee separates from the company, thus becoming a powerful tool for “binding” or handcuffing the employee to the company. They are contractual agreements between employers and employees that do not meet the requirements of ERISA.

NQDCs are more flexible than qualified plans. They do not need to be offered to all employees, and can be offered to independent contractors. They are often used to attract and retain especially valuable employee, without having to pay their full compensation immediately. As such, they are something of a gamble. As contractual agreements, they are not as limited as qualified plans, and can included clauses such as non-compete agreements.

From an employee’s perspective, NQDCs can be a way to reduce tax burdens and save for retirement. Because of the caps placed on qualified plan contributions, highly compensated executives may be able to invest only a tiny portion of their incomes in qualified plans. NQDCs do not have this limitation. However, NQDCs can be risky for employees because, unlike qualified plans, they are subject to the claims of the company’s creditors which means they can be seized if the company goes bankrupt.

This riskiness can be a big factor for employees whose deferred compensation begins years in the future, or where the company’s financial position is weak. Id.

Deferred compensation is usually paid out when the employee retires, although payout can also begin: on a fixed date, upon a change in ownership of the company, or due to disability, death or a (strictly defined) emergency. Depending on the terms of the contract, deferred compensation might be retained by the company if the employee is fired, defects to a competitor or otherwise forfeits the benefit. Early distributions on NQDC plans trigger heavy IRS penalties. Id.

Deferred compensation is generally not taxable to the employee until paid out. Likewise, the company cannot claim a deduction until the benefits are taxable to the employee.

Internal Revenue Code Section 409A (IRC Section 409A) is a tax code that applies to all compensation an employee earns in one year but is paid in a future year. A 409A nonqualified deferred compensation plan defers a portion of an employee’s compensation to a future date. The compensation amount is considered held back while the employee is working for a company, and it is paid out when the employee separates from the employer, becomes disabled, dies or experiences a similar event. The reason the plan is considered “nonqualified” is the compensation is still subject to tax.

https://www.investopedia.com/ask/answers/110215/what-409a-nonqualified-deferred-compensation-plan.asp (visited July 25, 2016).

NQDC’s all have certain things in common. They do not meet the requirements of ERISA, which is why they have “non-qualified” status. In addition, they have the following characteristics in common:

1) Current compensation is deferred into the future. For example, compensation into a NQDC in 2015 would be compensation for the employee’s work in 2014.

2) The method of distribution must be selected prior to deferral. Plans usually have distribution options ranging from a single lump sum to distribution over a period of years (5, 10, or 15 years). Rule 409A, in response to Enron’s demise, eliminated the ability for employee’s to access their money early in exchange for a penalty.

3) There is no income tax paid when the deferral is made. The deferred compensation may not show up on a W2 with other wages. It may be necessary to ask for an earnings statement from the employer in order to determine the employee’s entitlements.

4) NQDC payments are treated as wages. As such they will be subject to ordinary income tax when paid. In addition, they will be subject to full social security and Medicare tax payment withholding when paid, if these withholdings were not made at the time of the deferral.

5) NQDC is subject to creditors. Unlike with qualified plans, NQDCs are subject to the claims of the company’s creditors, even though the funds may be segregated and prohibited from being used for current operations.

6) NQDC may be forfeited upon termination for cause. Many plans include a clause that an employee will not be entitled to the benefits if they are terminated for cause.

https://www.womansdivorce.com/nonqualified-deferred-compensation.html (visited July 27, 2016).

Some of the common forms NQDCs can take are: stock or options (which were discussed above), deferred savings plans, 457 plans, and supplemental executive retirement plans (SERPs).

Tax-deferred savings plans are savings plans or accounts that are registered with the government and provide deferral of tax obligations. Tax-deferred savings plans may defer taxable income earned within the account either until withdrawal or until a particular date. All profits within the account, including dividends and capital gains, are taxed only upon withdrawal. Basically, these plans allow a person to defer taxes and use the money that would otherwise go to the government for investment purposes. In the end, taxes are still paid, but not before the funds are used to make more money. The most common of these plans are IRA’s and 401(k)’s. IRAs are non-qualified while 401(k)s are qualified. Tax deferred saving accounts are also available for educational savings accounts and other types of accounts.

The 457 plan is a type of nonqualified, tax-advantaged deferred compensation retirement plan that is available for governmental and certain non-governmental employers in the U.S. The employer provides the plan and the employee defers compensation into it on a pre-tax basis. For the most part the plan operates similarly to a 401(k) or 403(b) plan, which many people are familiar with. The key difference is that unlike with a 401(k) plan, there is no 10% penalty for withdrawal before the age of 59½ (although the withdrawal is subject to ordinary income taxation). 457 plans (both governmental and non-governmental) can also allow independent contractors to participate in the plan where 401(k) and 403(b) plans cannot.

457(b) plans (“eligible” plans) are deferred compensation plans described in Internal Revenue Code (“IRC”) section 457, which are available for certain state and local governments and non-governmental entities tax exempt under IRC Section 501. Employers or employees through salary reductions, may contribute up to the IRC 402(g) limit ($18,000 in 2015 and 2016) on behalf of participants under the plan. The tax advantages to these plans are that contributions are tax-deferred, and earnings on the retirement money are tax-deferred. In addition, a governmental 457(b) plan may be amended to allow designated Roth contributions and in-plan rollovers to designated Roth accounts.

https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans (visited July 25, 2016).

If a tax-exempt employer limits participation to a “top hat” group, such as a select group of management or highly-compensated employees, then it is exempt from most ERISA requirements. https://www.tiaa.org/public/advisors/products/457b (visited July 25, 2016).

457(b) plans are not subject to non-discrimination rules, which are designed to ensure that highly compensated employees do not receive a disproportionate share of benefits under a qualified plan maintained by an employer. Id.

457(f) nonqualified deferred compensation arrangements (“ineligible” plans) are nonqualified retirement plans which give a tax-exempt employer an opportunity to supplement the retirement income of its select management group or highly compensated employees by contributing to a plan that will be paid to the executive at retirement. Governmental non-qualified deferred compensation plans must satisfy the requirements of IRC Section 457(f). Under such plans, current taxation of the employee is avoided only if the plan is subject to a substantial risk of forfeiture. https://www.google.com/?gws_rd=ssl#q=457(f)+plans (visited July 25, 2016).

One of the big differences between 457(b) plans and 457(f) plans is that the amounts deferred under a 457(b) plan, whether due to salary reductions or nonelective employer contributions, generally are not taxable until paid to a participant or beneficiary, under a government plan, or until paid or otherwise made available to a participant or beneficiary, in the case of the plan of a tax-exempt employer. On the other hand, amounts deferred under a 457(f) plan are taxable in the first year in which there is no substantial risk of forfeiture of rights to the deferred compensation.

A supplemental executive retirement plan (SERP) is a nonqualified retirement plan for key company employees, such as executives, that provides benefits above and beyond those covered in other retirement plans such as IRA, 401(k) or nonqualified deferred compensation NQDC plans. There are many different kinds of SERPs available to companies wishing to ensure their key employees are able to maintain their current standards of living in retirement. SERPs are funded through current cash flows or a cash value life insurance policy. They require no IRS approval and minimal reporting. The benefits accrue to the executive without current tax consequences.

https://www.investopedia.com/terms/s/serp.asp (visited July 25, 2016).

Top Hat Plans: This is simply a generic term that is used to describe any type of non-qualified plan that is not subject to most requirements of ERISA and is offered only to selected company employees, usually key executives. There are generally two types of top hat plans: a non-qualified deferred compensation plan, and a SERP (described above). The former allows participants to defer income into the plan during each calendar year, while the latter is funded entirely by the employer.

https://www.investopedia.com/terms/t/top-hat-plan.asp (visited July 27, 2016).

Another example of deferred compensation might be a teacher’s salary. Suppose a teacher works from August 1st, 2015 through May 1st, 2016 and earns $54,000 based on this work. If she is paid with a 10-month salary, she earns $5,400 per month. She earns $27,000 in 2015 and $27,000 in 2016. However, if she is paid the same amount based on a 12-month salary. Then she earns $4,500 per month for her work. She earns $22,500 in 2015 and $31,500 in 2106. $4,500 of work done in 2015 is paid out in 2016. This is considered non-qualifying deferred compensation under IRC Section 409(A).

https://www.investopedia.com/ask/answers/110215/what-409a-nonqualified-deferred-compensation-plan.asp (visited July 27, 2016).

Excess Benefit Plans: An excess benefit plan is a nonqualified deferred compensation (NQDC) plan that provides supplemental retirement income benefits to employees whose benefits under the employer’s qualified retirement plan are limited by the application of Internal Revenue Code (IRC) Section 415. Put more simply, the goal of the excess benefit plan is to allow employees who participate in a qualified plan to exceed the limitations imposed by Section 415. The benefit that is provided to an employee under an excess benefit plan generally amounts to the difference between what the employee would have received under the employer’s qualified retirement plan without applying the Section 415 limitations and what the employee actually receives under the qualified retirement plan. An excess benefit plan differs from a top-hat plans in that participation in an excess benefit plan is not limited to a select group of management or highly compensated employees. In addition, an excess benefit plan is required to be maintained solely for the purpose of providing benefits in excess of the limits contained in Code Section 415.

https://www.henssler.com/blog/2014/8/1/excess-benefit-plans.html (visited July 27, 2016).

401(k) Wraparound Plan: This is a NQDC plan that coordinates with a 401(k) plan. An executive may not defer more than a statutory dollar amount into a 401(k) plan each year ($18,000 for 2016). However, the maximum amount may be less in any particular year, if the 401(k) plan violates the statutory ADP (Actual Deferral Percentage) test. In essence, this test is a discrimination test which is designed to limit the extent to which elective contributions of highly compensated employees exceed those of lower paid employees. The coordination works as follows: The executive defers a specified percentage of compensation under the NQDP plan, and specifies that from this deferred amount, the maximum contribution would be made to the qualified 401(k) plan, after the 401(k) ADP testing is completed.

https://www.thecommco.com/pdf/ft-nqdc-wraparound.pdf (visited July 27, 2016);

Severance compensation to be paid under a severance plan or severance agreement is generally considered deferred compensation unless an exception exists.

https://www.morganlewis.com/pubs/eb_avoiding409apitfalls_10april12.pdf (visited July 27, 2016).

Golden Parachute: An agreement between a company and an employee that guarantees the employee certain benefits, like monetary compensation or stock options if employment is terminated.

https://www.investopedia.com/ask/answers/09/difference-between-golden-handshake-parachute.asp (visited July 27, 2016).

Golden Handshake: Similar to a golden parachute but goes further to include the severance packages granted executives upon retirement, too.

A Silver Handshake is an early retirement incentive in the form of increased pension benefits for several years or a cash bonus.

https://quizlet.com/40978633/human-resources-chapter-11-flash-cards/ (visited July 27, 2016).

Rabbi Trust: A trust created for the purpose of supporting the non-qualified benefit obligations of employers to their employees. So called because of the first initial ruling made by the IRS on behalf of a synagogue, these forms of trusts create security for employees because the assets within the trust are typically outside the control of the employers and are irrevocable.

https://www.investopedia.com/terms/r/rabbitrust.asp (visited August 1, 2016).

Discovery:

It is important to obtain discovery of any compensation arrangements of a spouse who is an executive. This may necessitate the need for dogged discovery. The following discovery requests are a sample:

● If you are or have been a participant in any qualified or non-qualified compensation plan, whether employee stock option, stock option, stock appreciation plan, participating unit, defined
benefit, defined contribution, 401(k) savings plan or other retirement or additional compensation
program, please list the plan by name.

● If you are a participant in any plan as described in the preceding interrogatory, please provide the name of the department committee and/or person, as well as specific address where the records are maintained concerning such plan or benefit.

● Please provide the name and address of the plan administrator of each of the plans, programs or compensation arrangements or agreements described in Interrogatory Number _____.

At the same time as the interrogatory is sent, a production request should be sent which is as detailed as possible in its request for anything tangible as well as historic for the appropriate time frame concerning these plans. Again, every type of descriptive or explanatory word, which describes the plan, should be used so as to provide as small an opportunity as possible to not comply with the request.

Other sources of information include the corporate employer, the proxy statement and notice of shareholder’s meetings for publicly traded companies (although this may not have the specifics of the contract with the particular officer whose compensation agreement is sought), and officers of any compensation committee. Id.

Reading and analyzing the discovery documents, in consultation with an accounting, financial and/or taxation professional is an important part of the process. Id.

The following information regarding division of NQDC in divorce is compiled from the website:

See https://www.womansdivorce.com/nonqualified-deferred-compensation.html (visited July 25, 2016), which contains an article entitled “Equitable Distribution of Nonqualified Deferred Compensation” by Noah B. Rosenfarb, CPA, ABV, PFS, CDFA:

There are basically two ways in which to divide a non-qualified deferred compensation plan in a divorce:

1) Each spouse receives their entitlement at the time payments are made (referred to by Mr. Rosenfarb as the “As, If, and When” option); and

2) The non-titled spouse receives a present value payment in lieu of the distribution (referred to by Mr. Rosenfarb as the “buyout” option).

Many cases are settled on the basis of the “As, If, and When” option. This means that the non-titled spouse receives their portion at the same time as the titled spouse. One of the greatest benefits of this approach is that both spouses share the risks of the plan. One of its biggest challenges involves the application of tax rates (both marginal and effective rates; inclusion or exclusion of social security and other withholding taxes; and the means to calculate these amounts).

One issue when the titled spouse anticipates continued contributions to the NQDC is the determination of the appropriate entitlement for the former spouse. Some plans can create a “slot” account for the non-entitled spouse. If their entitlement is 50% of the account as of the date of the complaint (plus passive appreciation/depreciation), that account is accounted for by the plan administrator as if it were a separate account. This may include separate investment options between the title spouse’s account and the non-titled spouse’s “slot” account. Under this option, there is no need to be concerned about future contributions to the account.

However, where this option is not available, the issue of calculating the non-titled spouse’s entitlement is complicated and may require the use of actuaries at the time distributions are made.

Another method is awarding to the non-titled spouse a fraction of the future payment equal to their entitlement percentage (50%) times the number of years the titled spouse was in the plan while married divided by the total number of years in the plan (the “coverture” fraction). If this approach is used, one should consider the ability of the titled spouse to control the amount of future deferrals, thus manipulating the future payment stream. In addition, one should consider whether future contributions may result in an unfair distribution to the non-titled spouse.

Another issue to consider is the selection of investment options. If only one investment option can be selected for the entire portfolio, it usually must be made by the titled spouse. An issue to consider is whether the selected option is in line with the non-titled spouse’s risk tolerance and investment objectives. If the selected option is to invest 100% in bonds, will it generate enough anticipated growth in plan assets to meet the non-titled spouse’s investment objectives? If the selected option is to invest substantially all assets in emerging markets, can the risk of a substantial decline in the value of the assets be tolerated by the non-titled spouse?

The Buy Out Option: It is often desirable to settle the case based on a credit to the non-titled spouse of the current value of future entitlements. The challenge with this approach is the present value calculation. The following factors are important to consider in making this present value determination:

1) The impact of income taxes
. There are two basic approaches for applying an income tax discount rate: a) using the highest current marginal tax bracket for federal and state income taxes; and b) using an effective tax rate.

2) The impact of social security and Medicare taxes. If these taxes were not withheld at the time of deferral, they will be withheld up to statutory limits when paid. So it is important to factor into account these taxes if they have not yet been paid.

3) The value of tax deferral. Tax deferral is widely perceived as a great benefit, and in fact, has been the impetus for vehicles such as 401(k)s and IRAs. If the non-titled spouse will receive their entitlement credit in the form of another tax-deferred vehicle, then this is a non-issue. However, there is the possibility, given factors such as the federal debt, costs of entitlement programs, and baby boomer demographics, that the federal tax rates could go up in the future and that the titled spouse will pay taxes at a higher rate.

4) Investment options and performance within an NQDC. Most plans offer a fixed rate of return on deferred compensation, or the ability to invest in a limited number of mutual funds. Thus, the rate of return within an NQDC may be lower than fund invested without the NQDC, such as in a high-performing hedge fund or private equity investments. This factor should also be considered.

5) The lack of control over timing of payments
. All plans require that the payment election option be selected before the deferral. In addition, most plans begin payment upon termination of employment (or death, disability, or the sale of the company). Thus, the titled spouse does not have much control over the timing of payments, and the non-titled spouse has little or no control over the timing of payments. This should be factored into account as well.

6) The risk of default and forfeiture. A characteristic of all NQDC is that they are subject to the claims of the company’s creditors. Thus, payment of the money inside an NQDC is not necessarily guaranteed. One way to determine the risk is to compare the rate of return on the NQDFC with the rate of return on a risk-free investment, such as Treasury bonds, and that of the company’s bonds, if they are marketed.

In the author of the article’s opinion, beyond the income tax impact in factor #1, a reasonable discount rate to apply to the account balance in order to account for the remaining factors is between 10 and 15%.

Non-qualified Fringe Benefits

Non-qualified fringe benefits plans are a way to offer additional benefits to key employees and owner employees. Some of these fringe benefits include: Executive Bonus Plans, Split Dollar Plans, Deferred Compensation Plans, and Section 79 Plans.

Executive bonus plans work as follows: An executive is issued a life insurance policy with premiums paid by the employer as a bonus to the executive. Premium payments are considered compensation and are deductible to the employer. The bonus payments are taxable to the executive. In some cases, the employer may pay a bonus in excess of the premium amount to cover the executive’s taxes. https://www.investopedia.com/terms/n/non-qualified-plan.asp (last visited July 25, 2016).

A split dollar plan is used when an employer wants to provide a key employee with a permanent life insurance policy. Under this arrangement, a policy is purchased on the life of the employee and ownership of the policy is divided between the employer and the employee. The employee may be responsible for paying the mortality cost, while the employer pays the balance of the premium. At death, the main portion of the death benefit is paid to the employee’s beneficiaries, while the employer receives a portion equal to its investment in the plan. Id.

A group carve out plan is another life insurance arrangement in which the employercarves out a key employee’s group life insurance in excess of $50,000 and replaces it with an individual policy. This allows the key employee to avoid the imputed income on group life insurance in excess of $50,000. The employer redirects the premium it would have paid on the excess group life insurance to the individual policy owned by the employee. Id.

Accumulated Vacation Time

Sometimes couples forget to fight over accrued vacation time. But some courts have held that accrued vacation time is a form of deferred compensation and is a martial asset. Other courts have held that vacation time is really just an alternative form of wages because it replaces wages when an employee does not work.

One difficulty is that some companies require an employee to “use it or lose it” (meaning vacation time) within a specified period of time, while other employers (including many public employers and those with employees protected by unions) allow employees to carry vacation time forward until termination or retirement. Id.

Thus, some courts have held that accumulated vacation time is an asset if it can be reduced to a cash value. If not, it is speculative and not properly subject to division.

For example, in a fight over speculative vacation time in Illinois, husband had accrued 115 sick days and 42 vacation days at his company at the time of his divorce.

A trial court awarded him 45 sick days and his wife nearly $15,000 — the value of the remaining sick and vacation days (based on his salary, minus taxes).

However, an appeals court overturned this award — and later the state supreme court agreed — that the sick and vacation days were not marital property.

The Illinois Supreme Court held:

“. . . the value of accrued vacation and sick days is speculative and uncertain until a party actually collects compensation for those days at retirement or termination of his employment. A party cannot receive cash for those days prior to retirement or termination. In fact, it is possible that in some cases, an employer might change its policy concerning the right to receive compensation for accrued sick days, limiting or eliminating that right entirely. Similarly, in cases where provided for in a collective-bargaining agreement, an employer might change its policy concerning the right to receive compensation for accrued vacation days. See 820 ILCS 115/5 (West 2008).

Accordingly, we find that accrued vacation and sick days are not marital property subject to distribution in a dissolution of marriage action.

In so holding, we note that the facts of this case differ from the facts in Brotman v. Brotman, 528 So.2d 550 (Fla.App.1988), and Ryan v. Ryan, 261 N.J.Super. 689, 619 A.2d 692 (1992).

In those cases, the husbands received payment for accrued vacation days following separation but prior to dissolution of marriage. We agree that when a party has actually received payment for vacation and/or sick days accrued during marriage prior to a judgment for dissolution, the payment for those days is marital property subject to distribution in the marital estate. Under that scenario, the vacation and/or sick days have been converted to cash, the value of which is definite and certain.

In this case, however, the accrued days have not been converted to cash, and the value of those days remains uncertain. Abrell v. Abrell, 923 N.E.2d 791, 236 Ill.2d 249, 337 Ill.Dec. 940 (Ill., 2010).

https://www.illinoisdivorce.com/#!sick-days-and-vacation-days/c1p5x (visited August 1, 2016).

See also https://www.sandiegodivorceattorneysblog.com/2011/12/is-accrued-vacation-time-a-com.html (visited August 1, 2016); https://www.hrmorning.com/what-to-do-with-sick-vacation-time-in-a-divorce/ (visited August 1, 2016).

Dividing Frequent Flyer Miles

https://www.forbes.com/sites/jefflanders/2013/06/26/divorce-who-gets-the-air-miles/#609cb1b8316c (visited July 27, 2016) from a blog titled “Divorce: Who Gets the Air Miles? By Jeff Landers.

1) Check the terms and conditions of your various rewards programs. Some programs may state specifically that they are not divisible in divorce. In such a case, you may need to assign a dollar value to the points and negotiate for something of equivalent dollar value. However, some programs provide a cash value equivalent to points and some do not. If yours does not, you may need to do a rough conversion of miles or points into trips or other rewards and then estimate the value of those. For example, if an airline requires 50,000 bonus miles to be redeemed for a first class ticket that would cost $1,500, then you can estimate $1,500 as the reasonable cash value for 50,000 miles.

2) If the company allows it, have the airline or other reward-granting program divide the points equally into two separate accounts.

Some benefits may not be divisible upon divorce but should not be overlooked in considering relative earning capacities and benefits to which a non-employee spouse will no longer have access. An example is flexible spending account, which designates funds pre-tax into an account to use for uninsured medical expenses or childcare.

See Characterization – Dividing, Understanding, and Drafting Non-Qualified Compensation Benefits.

QDROs & Orders

A QDRO is an appropriate vehicle for dividing an ERISA “qualified” plan. However, non-qualified plans are not likely to be appropriate subjects for a QDRO.

In drafting a proposed order, it may be wise to use an appropriate apportionment formula applied to the benefit if, as and when available or received by the employee. The order should address any conditions of the benefit under which funds may be required of the participant [e.g. money required to exercise an option]. The order should also address any holding periods or forfeiture provisions or other restrictions related to the benefit. Id.

It is important to read the plan or agreement documents in order to determine whether they are divisible in the manner you propose.

Remember Basic Principles on Equitably Dividing Property in Utah Divorce Cases

Utah’s statutory law is rather vague but sets forth the broad principle that that courts may enter equitable orders relating to property division in connection with a divorce. See Utah Code §30-3-5.

Case law enhances our understanding of equitable division of property. An excellent summary of case law rules regarding the distinction between marital and separate property is set forth in the article “Conundrum Revisited” by David S. Dolowitz, posted on the Utah Bar website on May 13, 2010. https://www.utahbar.org/utah-bar-journal/article/conundrum-revisited/ (visited July 31, 2016).

In a divorce action the court is required to determine how to divide the spouses’ property and whether alimony should be awarded. Property division comes first. See Batty v. Batty, 153 P.3d 827, 829 (Utah Ct. App. 2006) (citing Burt v. Burt, 799 P.2d 1166, 1170 n.3 (Utah Ct. App. 1990) (As a matter of routine, an equitable property division must be accomplished prior to undertaking the alimony determination.); see also Burt v. Burt, 799 P.2d 1166, 1170 n.3 (Utah Ct. App. 1990) ( Proper distribution of property interests of one sort or another should have come first, and only then would alimony need to be considered.).

Specifically, the court should first properly categorize the parties’ property as part of the marital estate or as the separate property of one or the other. Each party is presumed to be entitled to all of his or her separate property and fifty percent of the marital property. But rather than simply enter such a decree, the court should then consider the existence of exceptional circumstances and, if any be shown, proceed to effect an equitable distribution in light of those circumstances…That having been done, the final step is to consider whether, following appropriate division of the property, one party or the other is entitled to alimony. Burt, 799 P.2d at 1172.

In Utah, the purpose of divorce is to end marriage and allow the parties to make as much of a clean break from each other as is reasonably possible. Gardner v. Gardner, 748 P.2d 1076, 1079 (Utah 1988). Thus, courts have awarded, as often as possible, whole assets to each party in a divorce action. Courts must distribute the parties’ assets equitably. An equitable distribution of marital property does not require strict mathematical equality.” Trubetzkoy v. Trubetzkoy, 2009 UT App. 77, ¶24, 205 P.3d 891; see also Teece v. Teece, 715 P.2d 106, 107 (Utah 1986). Thus, in dividing a personal injury award, the court must determine (1) whether it constitute’s one party’s separate property and (2) whether if it is joint property how it should be divided.

Marital property is usually divided equally between the parties and each party is awarded his or her separate property, which may include pre-marital property, gifts, and inheritances. Bradford v. Bradford, 1999 UT App 373, ¶ 23, 993 P.2d 887.

After the separate property of each spouse is identified and backed out of the estate, the marital property is typically awarded so that each spouse receives a roughly equal share. See Kunzler v. Kunzle 2008 UT App 263 ¶ 15, 190 P.3d 497.

However, “[a] property distribution does not have to be mathematically equal to create a fair and equitable distribution of property.” Colman v. Colman, 743 P.2d, 782 (1987), Fletcher v. Fletcher, 615 P.2d 1218, 1223-24 (Utah 1980). In effecting an equitable distribution of property, the party should consider both parties’ circumstances at the time of the divorce. Newmeyer v. Newmeyer, 745 P.2d 1276, 1278 (Utah 1987).

The case of Elman v Elman, 2002 UT App 83, 45 P.3d 176 restates the general rules succinctly as follows:

In distributing property in divorce proceedings, trial courts are first required to properly categorize the parties’ property as marital or separate.   See, e.g., Kelley v. Kelley, 2000 UT App 236,¶ 24, 9 P.3d 171.   Generally, trial courts are also required to award premarital property, and appreciation on that property, to the spouse who brought the property into the marriage.   See Dunn v. Dunn, 802 P.2d 1314, 1320 (Utah Ct.App.1990); see also Mortensen v. Mortensen, 760 P.2d 304, 308 (Utah 1988).

However, separate property is not “totally beyond [a] court’s reach in an equitable property division.”  Burt v. Burt, 799 P.2d 1166, 1169 (Utah Ct.App.1990). The court may award the separate property of one spouse to the other spouse in “ ‘extraordinary situations where equity so demands.’ ”  Id. (quoting Mortensen, 760 P.2d at 308); see also Rappleye v. Rappleye, 855 P.2d 260, 263 (Utah Ct.App.1993) (“ ‘Exceptions to this general rule include whether ․ the distribution achieves a fair, just, and equitable result.’ ” (quoting Dunn, 802 P.2d at 1320)).

Thus, after the determination of which assets are separate and which are marital, each spouse is then generally awarded his or her separate property, including pre-marital property, gifts, and inheritance, unless some exception applies, such as:

1) the other spouse has by his or her efforts or expense contributed to the enhancement, maintenance, or protection of that property, thereby acquiring an equitable interest in it, or 2) the property has been consumed or its identity lost through commingling or exchanges or where the acquiring spouse has made a gift of an interest therein to the other spouse. Mortensen v. Mortensen, 760 P.2d 304, 308 (Utah 1988)(citations omitted).

“Generally, the rule for premarital property is that each party retain the separate property that he or she brought into the marriage. Some exceptions include where the property has been commingled so that it had lost its separate character, or where it is fair, just and equitable to do otherwise.” Dunn v. Dunn, 802 P.2d 1314, 1321 (Utah Ct. App. 1990)(citations omitted).

Generally, the appreciation of separate assets is awarded to the owner of the separate assets, (Burke v. Burke, 733 P.2d 133 (Utah 1987)), especially if the appreciation is due to inflation and not the efforts of the parties.

But in the case of Elman v Elman, 2002 UT App 83, 45 P.3d 176, the wife was awarded a small portion of the appreciation in the husband’s separate assets, but only for the period of time in which she devoted significant efforts to increasing the value of the parties’ marital assets, while at the same time freeing the husband to devote his full-time efforts to managing his separate assets.

See also Schaumberg v. Schaumberg, 875 P.2d 598 (Utah Ct. App. 1994), in which the court awarded wife one-half of the appreciation in the husband’s business office building on the grounds that “even though Husband used inherited funds to pay the down payment on the building, he used substantial marital funds to maintain and augment that asset. The Schaumberg court stated:

While a trial court has discretion to award inherited property, such property, “as well as its appreciated value, is generally regarded as separate from the marital estate and hence is left with the receiving spouse in a property division incident to divorce.” Burt v. Burt, 799 P.2d 1166, 1169 (Utah App.1990); accord Hall v. Hall, 858 P.2d 1018, 1022 (Utah App.1993). Courts have considered inherited property as part of the marital estate when “the other spouse has by his or her efforts augmented, maintained, or protected the inherited or donated property, when the parties have inextricably commingled the property with marital property so that it has lost its separate character, or when the recipient spouse has contributed all or part of the property to the marital estate.” Id. However, even in cases when the inherited property has not lost its identity as such, the court may nevertheless award it to the non-heir spouse in lieu of alimony and in other extraordinary situations when equity so demands. Id

After reviewing many reported and unreported cases on property distributions, the author of “Conundrum Revisited” argues that “the hard-and-fast rule stated by Mortensen … is honored more in the breach than by enforcement.” He argues that each case is decided on its own merits based on the principles set forth in the case law.

In Oleikan v Oleikan, 2006 UT App. 405 the trial court divided the husband’s Deferred Compensation Plan (DCP) pursuant to the well-known Woodward formula. This formula divides the years (or months) of service of the employee in the plan during the marriage by the total number of years (or months) of service in the plan. The result is multiplied by the benefit amount, which then represents the marital portion of the plan. The martial portion is divided in half. The Woodward formula applies in particular to a defined benefit plan, and can be stated mathematically as follows:

(years (or months) of service in the plan during the marriage divided by the total number of years in the plan) times the monthly benefits amount times one-half

The husband appealed this result. He argued that the entirety of the DCP should have been awarded to him as his sole separate property. He contended that the DCP benefit was frozen in 1990, before the marriage, and that therefore it was entirely premarital. The trial court had recognized this fact but found that interest was earned on the account during the marriage, and that the parties’ work together during the marriage had enabled his early retirement. The Court of Appeals affirmed this reasoning, finding that it was not an abuse of discretion.

Illustrative Utah Cases on Dividing Retirement Plans (both defined benefit and defined contribution plans): Woodward, Oleikan, Thompson, Johnson, Granger

There are two basic types of retirement plans; namely, defined benefit plans and defined contribution plans.

Defined benefit plans pay to the retired employee a set (or defined) sum of money per period of time, typically each month. The amount of the benefit is usually determined by factors such as the employee’s wages during their working career and the length of their service to the company. These types of retirement plans are often referred to as pension plans.

On the other hand, defined contribution plans are plans to which the employee contributes a portion of his or her wages, usually pre-tax. The employer often contributes to the plan as well, sometimes matching the employee’s contributions up to a certain percentage of the employee’s wages. The classic example of a defined contribution plan is a (401) k plan.

Woodward v. Woodward, 656 P.2d 431 (Utah 1982).

One of the seminal Utah cases for dividing marital assets in a divorce, specifically retirement assets, is Woodward v. Woodward, 656 P.2d 431 (Utah 1982). That case involved the equitable division of the husband’s retirement pension plan. The parties had been married for fifteen years, during which time the husband had contributed to his pension plan through his employer, Hill Air Force Base. If the husband were to continue with his employment for 30 years, he would receive the maximum benefits from the plan. If, and only if, he continued the full 30 years, the government would match his contributions and he could receive his full benefits in the form of an annuity or a lump sum. The trial court awarded the wife a one-fourth portion of the husband’s retirement plan. The husband appealed, claiming that the wife was not entitled to that portion of his retirement to be paid by the government because this was a future contribution, for which he would receive no benefit until and unless he continued with his employer for a full thirty years.

He did not dispute that the wife was entitled to one-half of the amount of the retirement plan attributable to his contributions during the fifteen-year marriage. The Utah Supreme Court rejected the husband’s argument, holding that all retirement benefits accrued during the marriage were subject to equitable division. The Court noted that where possible, in order to avoid strife and ongoing entanglements, it may be preferable to ascertain the present value of a pension and fix the other spouse’s percentage share, to be satisfied out of other assets, thus leaving the pension benefits to the employee himself. However, in the case before the Court the present value of the retirement was nearly impossible to ascertain because the value of the benefits was contingent upon the husband continuing to work for the government. Moreover, the other marital assets were inadequate to satisfy the wife’s share of the pension. The Utah Supreme Court modified the trial court’s one-fourth formula by awarding the wife a one-half share of the pension benefits accrued during the marriage. Thus, both parties shared equally the risk that the husband, for whatever reason, might not continue with his employer long enough to obtain the maximum retirement benefits.

Although Woodward was decided more than thirty years ago, it remains a foundational case for dividing retirement benefits in Utah divorce cases. Although its facts related specifically to the method for dividing a defined benefit pension plan, it seems to stand for the broad principle that all retirement benefits that have accrued during the marriage are subject to equitable division by the Court.

Oliekan v. Oliekan, 2006 UT App. 405

In the Oliekan case, husband and wife were married in 1993 and separated in 2002. At the time of the divorce, wife was working as an office manager and husband was retired from Utah Power and Light, but did some part-time consulting.

When husband had retired, he had three separate retirement accounts: a basic retirement plan (BRP), a deferred compensation plan (DCP), and a 401(k). The BRP and DCP were defined benefit plans and the 401(k) was a defined contribution plan. Defined benefit plans pay a set amount of benefits per period of time, typically monthly. Benefits are usually determined by factors such as wages and length of service to the company. Pension plans are defined benefit plans. Defined contribution plans are accounts held through an employer to which the employee contributes a portion of his or her wages. The employer will often make a matching contribution up to a certain percentage of the employee’s wages. 401(k) plans are defined contribution plans.

At the time of his early retirement, husband had received a lump sum distribution from his retirement plans in the amount of $583,358.48. He placed the distribution in three separate IRA accounts, each consisting of the amounts from one of the retirement plans.

The trial court divided the BRP and DCP according to the Woodward formula. The trial court in Oliakan did not use a strict Woodward formula, however, because it found that a large portion of husband’s retirement had accrued during the marriage. The court therefore used a modified Woodward formula, making equitable adjustments to account for the fact that the wife had enabled the husband’s early retirement, and that an outsized portion of the retirements had accrued during the marriage.

The trial court divided the 401(k) differently, because it was a defined contribution plan. The court awarded the husband his premarital contributions plus appreciation on that amount, then divided the rest equally.

The wife appealed. She first argued that the husband’s retirements had been entirely commingled, thus causing any pre-marital portions to lose their separate character. The Court noted the Mortensen case, which sets forth principles for determining when pre-marital property loses its separate identity. This happens if:

1) the other spouse has by his or her efforts or expense contributed to the enhancement, maintenance, or protection of that property, thereby acquiring an equitable interest in it, or 2) the property has been consumed or its identity lost through commingling or exchanges or where the acquiring spouse has made a gift of an interest therein to the other spouse.

Mortensen v. Mortensen, 760 P.2d 304, 308 (Utah 1988)(citations omitted).

Wife did not contend that she had fulfilled the first prong of the Mortensen test. Rather, she contended that the marital and pre-marital portions of the husband’s retirements had been commingled, and that therefore the pre-marital portions had lost their separate identity at the time he had deposited the lump sum into three separate IRA accounts.

The court noted the case of Dunn v. Dunn, which held that “[g]enerally, the rule for premarital property is that each party retain the separate property that he or she brought into the marriage. Some exceptions include where the property has been commingled so that it had lost its separate character, or where it is fair, just and equitable to do otherwise.” Dunn v. Dunn, 802 P.2d 1314, 1321 (Utah Ct. App. 1990)(citations omitted).

In the instant case, the court held that although the husband’s retirements had been commingled, the premarital portions had not lost their separate character because the premarital amounts could still be traced. This was especially true with the 401(k). The husband’s expert forensic accountant had testified at trial that he had been able to account for the premarital contributions to the 401(k), as well as any appreciation from that amount. The wife had not rebutted this testimony.

Wife also argued that the trial court should not have used a couverture fraction to separate the premarital from the marital portions of the defined benefit plans. “Couverture” is an archaic term referring to a wife’s married condition. The wife’s contention was that an outsized portion of the retirements had accrued during the marriage and the couverture fraction did not account for this. She argued that the defined benefit plans should have been valued as of the date of the marriage in 1993, and the value after that date split equally.

The Court of Appeals found this argument unpersuasive. The wife had acknowledged that Woodward was the controlling case, and the trial court had applied a modified Woodward formula. This modified formula had made equitable adjustments due to the fact that a large portion of the retirements accrued during the marriage. Moreover, the Woodward case had made no fine distinction between an employee spouse’s marital and premarital years of service in a pension plan, but had treated each year of service equally.

The trial court had not precisely followed the Woodward formula, because the Woodward formula applies to future pension benefits, whereas in the instant case the husband’s retirement plans had been liquidated. But the trial court had been meticulous in applying the Woodward rationale, giving equal credit to each year of the husband’s service in the plans and making equitable adjustments to account for the fact that a significant portion of his retirement benefits had accrued during the parties’ marriage. The Court of Appeals noted the principle that “the trial court may, in the exercise of its broad discretion, divide the property equitably, regardless of its source or time of acquisition.” Haumont v. Haumont, 793 P.2d 421, 424 n. 1 (Utah Ct. App. 1990).

The husband made a cross-appeal of his own. He argued that the entirety of the DCP should be awarded to him as his sole separate property. He contended that the DCP benefit was frozen in 1990, before the marriage, and that therefore it was entirely premarital. The trial court had recognized this fact but found that interest was earned on the account during the marriage, and that the parties’ work together during the marriage had enabled his early retirement. The Court of Appeals affirmed this reasoning, finding that it was not an abuse of discretion.

The case is interesting in that it seems to clarify that the Woodward formula applies primarily to future benefits from a pension plan. A modified Woodward formula may be used for liquidated pension plans. But Woodward’s rationale of giving equal credit to each year (or each month) of an employee spouse’s service in a pension plan still applies. Finally, Woodward‘s overarching rationale allows a defined contribution plan, such as a 401(k), to be split by first awarding to the employee spouse his or her premarital contributions plus any appreciation on that amount.

Thompson v. Thompson, 2009 UT App 101, 208 P.3d 539,

The court ruled that the trial court had erred when it held that the wife was entitled to one-half of the appreciation on the pre-marital portion of husband’s 401(k), affirming that a husband was entitled to the appreciation on the premarital portion of his retirement as separate property. Court noted that

“[S]eparate property[, however,] is not `totally beyond [a] court’s reach in an equitable property division.’” Elman, 2002 UT App. 83 ¶ 19, 45 P.3d 176 (third alteration in original) (quoting Burt v. Burt, 799 P.2d 1166, 1169 (Utah Ct.App.1990)). Separate property can become part of the marital estate and subject to equitable distribution if (1) the other spouse has contributed to “the enhancement, maintenance, or protection of that property,” Mortensen v. Mortensen, 760 P.2d 304, 308 (Utah 1988); (2) “the property has been consumed or its identity lost through commingling,” id.; or (3) “the distribution [of separate property] achieves a fair, just, and equitable result,” Dunn, 802 P.2d at 1320. To make such a determination, however, a trial court must enter findings that the property has lost its separate identity, see Child v. Child, 2009 UT 17, ¶ 3 (per curiam), and failure to do so is reversible error, see Gardner v. Gardner, 748 P.2d 1076, 1078 (Utah 1988). Further, these findings must sufficiently detail the steps by which the trial court reached its conclusion. See Rappleye v. Rappleye, 855 P.2d 260, 263 (Utah Ct.App.1993).

The Court held that the trial court had erred by not awarding the appreciation on the pre-marital portion of his 401(k) to husband, or to make findings that the appreciation had become marital property. The result was the same as that in Dunn v. Dunn, 802 P. 2d 1314 (Utah Ct.App.1990).

Johnson v. Johnson,
2014 UT 21

Husband and wife married in 1974 and divorced in 1984. During the marriage husband accrued ten years of service with the U.S. Air Force. At the time of the divorce, husband was a staff sergeant with an E5 pay grade.

Because the husband’s retirement required twenty years to vest, the divorce court could not determine a specific amount that husband owed wife for her share of his retirement at the time of divorce. Instead, the Court awarded wife 1/2 of 10 years of the husband’s retirement.

Wife first attempted to enforce her share of the retirement in 1998. She filed the divorce decree with the military. But the Defense of Finance and Accounting Service (DFAS) denied her request, stating the Decree was not specific enough.

The husband retired in 1999. At the time of his retirement, husband was a master sergeant with an E7 pay grade. He had completed twenty-four years of service.

It was alleged that wife made a statement to the parties’ son to the effect that she did not intend to seek her share of husband’s retirement. The son conveyed this information to his father, who alleged that he made “substantial changes to his life financially” based on this information.

In 2000 husband was awarded veteran’s disability benefits. His retirement benefits were reduced by the amount of the disability pension.

In 2008 wife filed a Qualified Domestic Relations Order (QDRO) in another attempt to secure her share of husband’s retirement. This order clarified the Decree, as required by DFAS.

Here it should be noted that that DFAS will only assist a divorcee in collecting her marital share of a service member’s retirement benefits if the 10/10 rule is satisfied; that is, if the parties were married for at least ten years during which the service member spouse completed at least ten years’ of service in the plan. If the 10/10 rule is not satisfied, the marital award is still valid, but the military will not assist in paying the marital share; instead, the payee must collect directly from her ex-spouse.

In an effort to comply with the 1984 Decree, the trial court awarded wife her marital share of husband’s actual monthly benefits based on his salary at the time of his retirement and the number of years of his service, less his disability benefits. The trial court held that wife’s share of benefits up until the time she filed the QDRO was barred by the doctrine of laches.

The husband appealed. The court of appeals upheld the trial court’s award to wife of a portion of husband’s actual retirement benefits.

The husband petitioned the Utah Supreme Court for review.

The husband made three arguments. First, he argued that the wife’s claim was barred by the statute of limitations and laches. In the alternative, he argued that the court should have applied a different approach in calculating the wife’s share of his retirement.

Utah’s Supreme Court reviewed the decision of the court of appeals on the statute of limitations under a correctness standard, granting no deference to the court of appeal’s decision. With respect to the laches issue, the court of appeals had ruled against the husband on the grounds that the issue was inadequately briefed. The Court also applied a correctness standard to the court of appeal’s decision on the laches issue. The Court applied an abuse of discretion standard to the court of appeal’s decision upholding the method of calculating wife’s share of husband’s retirement.

On the statute of limitations issue, the Court upheld the decision that wife’s claim to her marital share of husband’s retirement was not time-barred. While wife could have, and probably should have, acted sooner to secure her marital share of the retirement, she still had an unequivocal right to a future stream of income from husband’s retirement. The Court, citing the case of Seeley v. Park, 532 P.2d 684 (Utah 1975), held that the eight-year statute of limitations on judgments applies separately to each monthly installment of wife’s share of retirement benefits as it became due. This is analogous to marital installment payments such as child support and alimony, which become a final judgement as they become due and cannot thereafter be modified.

A retirement award in a pension plan is the right to draw upon “a stream of income that begins to flow upon retirement.” Lehman v.Lehman (In re Marriage of Lehman), 955 P.2d 451, 454 (Cal. 1988). The Court declined to consider the entire retirement as being time-barred all at once, but considered each installment as subject to its own statute of limitations.

The Court held that the husband’s argument that wife’s claim was barred by the legal doctrine of laches was not adequately briefed, and therefore rejected the argument. The Court reasoned that an appellant cannot simply transfer the burden of doing research upon the Court, but must do his own due diligence. Here, husband had merely cited two cases from New York in support of his argument, but had provided no meaningful analysis as to how the doctrine applied to the facts of the case. There are two basic elements to the doctrine of laches. It must be established that 1) the plaintiff unreasonably delayed in bringing the legal action, and 2) the defendant was prejudiced by the unreasonable delay.

The most interesting part of the case related to the method of calculating wife’s share of the retirement. The mathematical formula, set forth in the Woodward case, is:

(years (or months) of service in the plan during the marriage divided by the total number of years in the plan) times the monthly benefits amount times one-half

All parties agreed that the number to be used for the fraction was 20.8.

The unknown factor in the equation was what number to use for the amount of monthly benefits. There are three basic approaches to determining the monthly benefit to be used in calculating a spouse’s marital portion of a retirement: 1) the bright line approach, 2) the marital foundation approach, and 3) the context specific approach.

The bright line approach treats all post-marital enhancements of a retirement benefit as the employee spouse’s separate property. This approach is in line with Utah courts’ general approach to valuing marital assets as of the date of divorce.

The marital foundation approach treats all post-marital earnings as separate property but treats all post-divorce increases in pension benefits as marital property. The advantage of this approach is ease of calculation; a court need not parse out which portion of a monthly pension benefit is marital versus non-marital. This approach also seeks to compensate for the recipient spouse’s risk of forfeiture of benefits, delay of receipt, and lack of control over timing of receipt of benefits by allowing her to share in post-divorce enhancements to benefits.

The context specific approach treads a middle ground. If there is evidence of a non-employee spouse’s specific contribution to the employee spouse’s post-divorce earning capacity, then the court will consider allowing the non-employee spouse to share in post-divorce enhancements to benefits. Judge Davis at the court of appeals had advocated this approach. He would have awarded wife a one-half share of 20.8 percent of husband’s monthly benefits based on the husband’s E5 pay grade at the time of divorce (plus cost of living increases), reasoning that there was no evidence that wife specifically contributed to husband’s post-divorce earning capacity.

The Court found Judge Davis’ approach persuasive and adopted the context specific approach. The trial court had erroneously believed it was bound by the marital foundation approach, probably based on the case of Woodward v. Woodward, 656 P.2d 431 (1982). But Woodward had not been specific on this particular issue.

The case was remanded to the trial court for further fact finding regarding the equitable distribution of husband’s retirement benefits.

I do not blame the trial court for believing it was bound by the marital foundation approach. Although the Woodward case was not very specific on this issue, it seems to stand for the broad principle that Utah courts have a fair amount of discretion to divide retirements in the most equitable way possible. The marital foundation approach has the advantage of ease of calculation and the theory that the parties’ marriage provided a foundation for the employee spouse to earn his full retirement. The context-specific approach may mean more a fact intensive inquiry on the part of trial courts. But, after all, that is the hard work the courts are tasked with doing in fashioning the most equitable property distribution in a divorce.

Granger v. Granger, 2016 UT App 67

In the Woodward case, the Utah Supreme dealt with the issue of how to equitably divide a pension, or defined benefit plan. The Granger case involved a 401(k) defined contribution plan.

In Granger, the husband had requested in his divorce petition that all retirement accounts be divided according to the Woodward formula. The wife had requested in her answer simply that all retirement accounts should be equitably divided.

The case went to trial. At trial the parties stipulated, or agreed, that the retirements accounts should be divided according to the Woodward formula. As it turned out, however, the parties did not have the same understanding of the Woodward formula.

Following the divorce, the husband’s attorney prepared a Qualified Domestic Relations Order (QDRO — an order that divides retirement accounts pursuant to a divorce), dividing his retirement according to his understanding of the Woodward formula. He used a formula that divided the number of years of the marriage by the number of years of his employment, multiplied by the 401(k) account balance as of the date of divorce. The resulting figure represented the marital portion of the husband’s retirement. This figure was then divided in half, representing the wife’s equitable share of the husband’s retirement. (At least, that is my explanation of his calculation, although he described it somewhat differently).

On the other hand, the wife understood the Woodward formula differently. She assumed that it awarded her one-half of all retirement benefits that were accumulated during the marriage (much the same as my understanding had been). Her calculation took the balance in the husband’s account as of the date of the divorce and subtracted from it any premarital contributions and any appreciation attributable to the pre-marital contributions. Then she divided the resulting figure by one-half to determine her equitable share of the retirement.

The difference between the two methods of calculation amounted to about $30,000. Not surprisingly, the husband’s method awarded the wife less money than her method. However, these different methods of calculation became clearly apparent only after the husband’s attorney prepared a QDRO following the divorce.

The attorneys dickered back and forth over the matter, as befitting well-trained doctors of the law. Ultimately, neither yielded any ground. The wife’s attorney then filed a motion to set aside or to clarify the Decree of Divorce. The trial court ruled that this motion was untimely under Rule 60(b) of the Utah Rules of Civil Procedure, and then upheld the husband’s interpretation of the Woodward formula. The wife appealed.

On appeal, the Utah Court of Appeals first explained the similarities and subtle differences between contracts in a strictly legal sense and agreements (or stipulations) in a divorce case. The Court explained that divorce agreements are governed by equitable principles. Generally speaking, such agreements are not as binding as a legal contract because they are expected to be generally consistent with equitable principles, or at least not be egregiously unfair. They are considered persuasive, however, and may be thought of as “advisory” to the Court.

But in any event, the Court observed the axiom that a contract or agreement, in order to be valid and enforceable, must reflect a “meeting of the minds.” In Granger, there was no meeting of the minds because the husband and wife each understood the Woodward formula differently, and in such a way that their respective understandings resulted in a $30,000 difference of opinion.

The facts in the Granger case were different than the Woodward case. They involved a defined contribution plan, specifically a 401(k), that was easily valued at the time of divorce.

The Court opined that the formula used by the husband’s attorney in preparing his QDRO was a modified Woodward formula, applied to a defined contribution plan, similar to the one used in the Johnson v Johnson case. See Johnson v. Johnson, 2014 UT 21, 330 P.3d 704 for the “time rule” formula.

The Court held, in essence, that the so-called Woodward formula applies to retirement plans whose present value cannot be readily determined, such as defined benefit plans. The Court remanded the case to the trial court for further findings. Because the parties had no meeting of the minds on what constituted the Woodward formula, the trial court was instructed to determine how best to equitably divide the husband’s retirement account. The Court of Appeals did not provide any specific formula to be used; rather, it allowed the trial court to use its best judgment as to what was equitable under the circumstances.

Liquidity of Assets

One important issue to consider in divorce is the liquidity of assets. Assets are considered liquid if they are easily converted into cash. A bank account or brokerage account are examples of highly liquid assets. On the other hand, a valuable work of art or an antique car may not be easily converted into cash and, therefore, may be considered relatively illiquid.

A divorce settlement may appear equitable on the surface because the value of the assets is roughly the same. However, if one party is awarded primarily illiquid assets (such as the marital home), the primary concern of that party may be cash flow. What good is it to have the home to live in when one cannot afford to pay their monthly bills? Id.

One could potentially borrow against home equity, but this entails closing costs, interest, and time to close the loan. In a worst case scenario, the home or other illiquid asset could be sold to provide needed cash flow. Id.

Consider consulting a financial planner in connection with your divorce. Client’s will want to have a settlement that affords them sufficient cash flow following the divorce.

Consider the tax and other consequences of assets. For example, retirement accounts are not worth the amount on the statement balance. Taxes will need to be paid on the amount at some point. If there is an early withdrawal, there may be a withdrawal penalty as well. This should be factored into account in the property distribution.

Most times, it is not sound financial planning to liquidate all or part of your retirement funds for purposes other than retirement; however, this may be the only source of cash available to maintain one’s standard of living.

Under section (72(t)(2)(c) of the Internal Revenue Code , an alternative payee (i.e. the non-employee spouse) can take cash from a Qualified Plan (such as a 401k), without the 10% penalty, even if they are under age 59½. To avoid the penalty, the following criteria must be met:

• The retirement plan must be a qualified plan covered by ERISA (e.g. 401K and other Defined Contribution Plans);

• The funds must be paid to an alternative payee, not the owner of the account; and

• A Qualified Domestic Relations Order (QDRO) must be created and used to divide the plan

The amount paid is taxable income to the alternate payee and the employer will withhold 20% of the distribution to prepay the tax. So whatever non-employee’s cash need is, the 20% withholding should be taken into account when asking for a withdrawal. If the spouse who is entitled to the distribution does not need all of the cash, part could be paid in cash and part could be transferred to that spouse’s IRA. There will not be a 10% early distribution penalty on the cash paid out or the transfer.

However, a word to the wise: This rule does not apply to IRAs. Any premature distribution related to a divorce would be subject to a 10% premature penalty.

https://www.divorce-finances.com/articles/bid/46343/Providing-spouses-penalty-free-access-to-retirement-funds-in-divorce (visited July 31, 2016).

Take into account the effects of inflation when considering the cost of future living expenses.

https://www.huffingtonpost.com/gobankingrates/40-secrets-only-divorce-a_b_8602766.html (visited July 31, 2016).

Your client could be set up for failure if the property distribution is one-sided with respect to liquid assets. Value may be trapped and not easily accessible in a non-liquid asset such as a house. It is important to consider the need for future cash flow in creating an effective settlement.

It is important to understand the impact of taxes. Suppose, for example, you and your spouse recently purchased a rental property for $100,000 and your spouse offers you an old rental property purchased for $25,000 which is currently worth $100,000 in exchange for keeping the recently purchased property. This is not a fair trade, even though the market values are the same. This is because of capital gains taxes. If the recently purchased property is sold for $100,000, there will be no capital gains tax. However, if the older rental property is sold for $100,000, there will be a capital gain on the sale of at least $75,000 (plus depreciation). Assuming a $75,000 capital gain taxed taxes at a rate of 15% (the capital gains rate for most earners, although for higher earners it can be up to 20%), there is $11,000 of taxes that need to be taken into consideration. The value of the asset you received is actually $11,000 less than you might have thought looking at just the paper value of the assets. Id.

Alimony may be an important consideration for a client that is not liquid. It is important to remember that alimony is taxable to the recipient and tax deductible to the payor. This should be taken into consideration in assessing future cash flows for your client.

It is important to prepare a realistic budget going forward. Divorce necessitates major changes and it is important to know how much money you will need post-divorce. Having a working knowledge of a realistic forward-looking budget will help you in creating an optimal division of liquid and illiquid assets. Id.

Treatment of Social Security Benefits, Property Division, and Alimony in Utah Divorces

Social Security benefits are not classified as marital property under Utah law. See Olsen v. Olsen, 2007 UT App 296, ¶ 25, 169 P.3d 765.

This is because the Social Security Act, under the federal Constitution’s Supremacy Clause, has preempted state equitable division laws with respect to social security benefits. So social security benefits cannot be transferred or assigned to another. See Id. at 769.

However, under Utah case law, social security benefits may be considered along with all other joint and separate marital assets in ensuring that “property be fairly divided between the parties, given their contributions during the marriage and their circumstances at the time of the divorce. See Id. quoting Newmeyer v. Newmeyer, 745 P.2d 1278, 1278 (Utah 1987).

This is also the position that has been adopted by a majority of equitable division states. See Id.

The theory is that both spouses contributed to the marriage partnership that enabled each of them or one of them to be able to acquire social security benefits. See Id. at 771.

But even though courts can consider social security benefits in fashioning an equitable property division, they cannot treat such benefits in a manner that is “tantamount to treating the benefits as a marital asset.” Rather, they should be treated similarly to separate assets, such as a gift or inheritance, in creating an overall equitable division. See Id. at 772.

In making an equitable division, the courts first classify property as separate or marital. It is presumed each party will be awarded his or her separate property and one-half of the marital property unless exceptional circumstances dictate otherwise. See Id. at 773 quoting Burt v. Burt, 799 P.2d 1166, 1172 (Utah Ct. App. 1990).

However, it is important to remember that if an individual was married for at least ten years, they may qualify for social security benefits based on their divorced spouse’s earnings record.

The spouse seeking benefits must meet the following requirements:

1) The marriage must have lasted ten years or longer.

2) The person must be unmarried.

3) The person must be 62 years or older.

4) The benefit the person is entitled to receive under their own record must be less than the benefit the ex-spouse is entitled to receive.

5) The ex-spouse is entitled to receive social security disability or retirement benefits.

The amount of retirement benefit for an individual seeking benefits based on an ex-spouse’s earnings record is one-half of the amount the ex-spouse is entitled to receive at full retirement age.

If the individual seeking benefits on an ex-spouse’s account is remarried, they typically cannot receive benefits on their divorced spouse’s earnings records unless the marriage has ended (such as by divorce, death, or annulment).

If an ex-spouse has not yet applied for retirement benefits, but can qualify for them, then the individual can receive benefits on the ex-spouse’s record if they have been divorced for at least two years.

If an individual qualifies for retirement benefits on his or her own record, Social Security will pay that amount first. But if the amount of benefit from the divorced spouse’s record is higher, the individual will receive a combination of benefits equaling that higher amount (reduced for age).

If an individual has reached full retirement age and is eligible for a spouse’s benefit and their own retirement benefit they may choose to receive only the divorced spouse’s benefits now and delay receiving their retirement benefits until a later date. If retirement benefits are delayed until a later date, there may be a higher benefit because of the Delayed Retirement Credits.

However, this option is only available to individuals born before January 2nd, 1954. If you were born after January 2nd, 1954, and file for one benefit, you will in effect be filing for all retirement and spousal benefits.

The amount of benefits an individual receives will have no effect on the amount of benefits the divorced spouse or their current spouse will receive.

See https://www.socialsecurity.gov/retire2/divspouse.htm (last visited July 31, 2016), from which this information was gleaned.

In addition, if you have been married ten years or longer and your ex-spouse dies, you may be entitled to widow’s benefits after you reach age 60 (or 50 if you are disabled). The amount you receive will not affect the amount other survivors of your ex-spouse receive. If you survive your ex-spouse and remarry after age 60 (or age 50 if you are disabled), then the remarriage will not affect your eligibility for survivors benefits.

If you survived your ex-spouse and are caring for you and your ex-spouse’s disabled child or child who is under age 16, the length of marriage rule will not apply. The child must be you and your ex-spouse’s natural or legally adopted child. The amount you receive in such a circumstance may affect the amount other survivors of your ex-spouse receive.

https://www.ssa.gov/planners/survivors/onyourown3.html (visited October 6, 2016).

The period of time between your youngest child’s 16th birthday and your 60th birthday, if you are a surviving spouse or ex-spouse, is sometimes referred to in financial planning circles as the social security “blackout period.”

It is important to keep these spouse’s benefits in mind, particularly in situations where a divorce is imminent but the marriage has lasted slightly less than ten years. If the divorce becomes necessary, the parties may want to consider delaying finalization of the divorce until the marriage has lasted at least ten years. This is particularly so where one spouse is at an economic disadvantage.

Treatment of Social Security Disability benefits and Supplemental Security Income (SSI) benefits for child support purposes.

In calculating child support, Utah courts look at the parties’ gross monthly incomes. The definition of income for child support purposes is fairly broad. See Utah Code Section 78B-12-203 (1).
However, certain benefits including Social Security Disability benefits and Supplemental Security Income (SSI) benefits are excluded from gross income for purposes of calculating child support. Utah Code Section 78B-12-203 (3)(b).

The reason for this seems to be that the Social Security Administration will pay auxiliary benefits to the custodial parent of the minor children based on the disabled person’s work record. These auxiliary benefits are in the nature of child support so there is typically no need for a separate child support order as long as the person who is required to pay the child support remains disabled.

If the person receiving child support is disabled, typically there would be a child support order but the disabled person’s Social Security and/or SSI benefits would not be included as income in the child support calculation.

I have had a case where the wife sought alimony from disabled husband who received about $2,100 per month in Social Security disability payments. However, he also needed to do a spenddown to qualify for assisted living expenses through Medicaid. Discovery from Department of Workforce Services revealed that alimony would not qualify as a spenddown, but rather, is considered a personal expense. Needless to say, this was not a very good alimony case. It would seem that seeking alimony from a disabled spouse will not usually work because most recipients of social security benefits only receive between $700 and $1700 per month, with the average being $1,166 for 2016.

The average social security disability benefit is thus less than minimum wage at full-time, which is about $1,257 per month. Any able-bodied spouse seeking alimony, if they are not already working and making at least minimum wage, would almost certainly be imputed an earning capacity of at least $1,257, thus seemingly making the effort of seeking alimony from a disability recipient a futile endeavor.

Utah Courts treatment of personal injury awards and settlements in dividing marital property in a divorce case.

How a personal injury award is divided in a Utah divorce action depends on how the award is allocated between medical bills and lost wages and pain and suffering.

In a divorce action the court is required to determine how to divide the spouses’ property and whether alimony should be awarded. Property division comes first. See Batty v. Batty, 153 P.3d 827, 829 (Utah Ct. App. 2006) (citing Burt v. Burt, 799 P.2d 1166, 1170 n.3 (Utah Ct. App. 1990) (As a matter of routine, an equitable property division must be accomplished prior to undertaking the alimony determination.); see also Burt v. Burt, 799 P.2d 1166, 1170 n.3 (Utah Ct. App. 1990) (Proper distribution of property interests of one sort or another should have come first, and only then would alimony need to be considered.).

Specifically, the court should first properly categorize the parties’ property as part of the marital estate or as the separate property of one or the other. Each party is presumed to be entitled to all of his or her separate property and fifty percent of the marital property. But rather than simply enter such a decree, the court should then consider the existence of exceptional circumstances and, if any be shown, proceed to effect an equitable distribution in light of those circumstances…That having been done, the final step is to consider whether, following appropriate division of the property, one party or the other is entitled to alimony. Burt, 799 P.2d at 1172.

In Utah, the purpose of divorce is to end marriage and allow the parties to make as much of a clean break from each other as is reasonably possible. Gardner v. Gardner, 748 P.2d 1076, 1079 (Utah 1988). Thus, courts have awarded, as often as possible, whole assets to each party in a divorce action. Courts must distribute the parties’ assets equitably. An equitable distribution of marital property does not require strict mathematical equality.” Trubetzkoy v. Trubetzkoy, 2009 UT App. 77, ¶24, 205 P.3d 891; see also Teece v. Teece, 715 P.2d 106, 107 (Utah 1986). Thus, in dividing a personal injury award, the court must determine (1) whether it constitute’s one party’s separate property and (2) whether if it is joint property how it should be divided.

What part of a personal injury award is separate property?

Because of the personal nature of special damages, amounts received as compensation for pain, suffering, disfigurement, disability, or other personal debilitation are generally found to be the personal property of the injured spouse in divorce actions. See Izatt v. Izatt, 627 P.2d 49, 51 (Utah 1981). Likewise, money realized as compensation for lost wages and medical expenses, which diminish the marital estate, are considered to be marital property. See Bugh v. Bugh, 125 Ariz. 190, 608 P.2d 329, 331 (1980). Dahl v. Dahl, 2015 UT 23 (UT Sup Ct).

Thus, in order to determine what part of a personal injury award belongs to who, there must be a determination of how much of the award constitutes lost wages and medical expenses. Everything else should go to the injured spouse.

Special damages are considered to be personal in nature and, as such, are generally awarded to the injured spouse as his or her separate property. Special damages are amounts received as compensation for pain and suffering, disfigurement, disability, or other personal debility. See Naranjo v Naranjo, 751 P.2d 1144, 1148 (Utah Ct. App. 1988); Izatt v Izatt, 627 P.2d 49, 51 (1981).

On the other hand, money received as compensation for things such as lost wages or medical expenses, which diminish the marital estate, are generally regarded as marital property. Naranjo at 1148 citing Bugh v. Bugh, 125 Ariz. 190, 608 P.2d 329, 331 (1980).

In the Naranjo case the husband sustained a serious knee injury in an industrial accident during the marriage, for which he received compensation. The trial court found that he failed to meet his burden of proving the amount of the award that was attributable to pain and suffering, and therefore, the wife was entitled to share in the injury award. Husband appealed, arguing that Colorado law under which he received the personal injury verdict, did not distinguish between special and general damages. The appellate court affirmed the trial court’s decision, noting the trial court’s authority “to make such distributions as are just and equitable, and may compel such conveyances as are necessary to that end.” Id. at 1148, quoting Jackson v. Jackson, 617 P.2d 338, 340-41 (Utah 1980).

The moral of the story as I see it, is that if a personal injury award is the subject of contention in a divorce case, the injured party should be prepared to show the amounts that were received as compensation for special damages that are of a personal nature as opposed to the amounts, if any, that are for things such as lost wages or medical expenses that reduce the marital estate. To paraphrase the Court in Izatt, the fact that amounts which are personal belong to the injured party “is not to be doubted.” Izatt at 51. But the Izatt court still opined that the fact that the injured party possessed the significant sum from her personal injury award could be used as one of the total circumstances considered by the trial court in fashioning what it believed to be an equitable allocation of the parties’ property and finances. See Id.

This material should not be construed as legal advice for any particular fact situation, but is intended for general informational purposes only. For advice specific to any individual situation, an experienced attorney should be contacted
.

Contact a Salt Lake City Attorney Committed to Protecting Your Rights

When it comes the family law and social security disability, each client and case is different. It is also important to select an attorney with the experience, skills and professionalism required to address your legal issues. To learn more, contact the Salt Lake City law offices of Melvin A. Cook and schedule an initial consultation to discuss your case.

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