What factors inflence a spouse’s eligibility for alimony after divorce under Pennsylvania law?

Under Pennsylvania law, post-divorce alimony “is a secondary remedy . . . available only where economic justice and the reasonable needs of a party cannot be achieved by way of an equitable distribution award and development of an appropriate employable skill.” These are the well-known words of the Superior Court of Pennsylvania in its Opinion in Nemoto v. Nemoto, 620 A.2d 1216 (Pa.Super.1993). Most of the important concepts in alimony jurisprudence are covered in this sentence. First, the trial courts must attempt to divide marital property in a way that avoids the need for post-divorce alimony. Why? Because the courts encourage a complete cessation of financial ties between divorcing spouses. If enough property (particuarly income-generating property) can be conveyed to a divorcing spouse, then that property can fulfill all of the spouse’s economic needs without the financial “umbilical cord” of alimony.

• The value of the assets and liabilities distributed to each of the parties must be considered before awarding alimony. 23 Pa.C.S. § 3701(b)(10), (16); Fee v. Fee, 496 A.2d 793 (Pa.Super. 1985).
• In its determination of alimony, the trial court must consider the income generated by a spouse’s marital and nonmarital assets. Ressler v. Ressler, 644 A.2d 753 (Pa.Super. 1994).

Second, our Courts encourage spouses to maximize their earning capacity and income potential through appropriate employment. In the first decade of the Divorce Code, enacted in 1980, the law provided that alimony could be awarded only for rehabilitative purposes, such as paying for college or vocational training. Alimony was not permitted in Pennsylvania prior to 1980, and the legislators who enacted the  Divorce Code worried that spouses would lose their incentive to become self-supporting if they could easily receive post-divorce alimony. The alimony law has been revised since 1980, allowing alimony for other reasons, such as meeting the budgetary shortfall of a spouse who is incapable of self-support. Still, the old law remains a strong influence among judges and lawyers in Pennsylvania. Several attempts to modernize the alimony law have failed, primarily because they might reduce a spouse’s incentive to go back to work. 23 Pa.C.S. § 3701(b)(1), (9), (17).

• The Court imputed an earning capacity to a dependent spouse who devoted her time to an unproductive start-up business instead of seeking gainful employment. Thomson v. Thomson, 519 A.2d 483 (Pa.Super.1986).
• An award of alimony for ten years was deemed excessive when a college education leading to a self-supporting job would require just four years. Barrett v. Barrett, 614 A.2d 299 (Pa.Super.1992).
• In cases where there is no evidence of an impediment that would prevent a spouse from becoming self-supporting, the court is authorized to limit an alimony award. Adelstein v. Adelstein, 553 A.2d 436 (Pa.Super.1989).
• In cases where a spouse’s earning capacity was limited by a medical disability or the disability of a custodial chid, Soncini v. Soncini, 612 A.2d 998 (Pa.Super.1992), the court may decline to impose a full time earning capacity upon a dependent spouse, justifying an award of alimony.

Finally, the law looks to the reasonable needs of a spouse. After a divorce, each spouse must have sufficient cash flow to meet his/her monthly household expenses. Yet, judges realize that two households cannot exist as cheaply as one combined household. The marital standard of living is just one of the seventeen statutory criteria for alimony awards, and in practice, it is one of the least influential. The expenses associated with custody of a child is more influential in an ex-spouse’s request for alimony. Just as important is the ability of a dependent spouse to become self-supporting through appropriate employment and the financial hardship that alimony may cause to the payor. When determining the amount and duration of an alimony award, the courts scrutinize the budget of a spouse seeking alimony carefully. 23 Pa.C.S. § 3701(b)(7), (8), (13).

• The Court will not allow an award of alimony that would divert twice as much income to the alimony recipient as the payor, which would allow her to enjoy a better standard of living than she had enjoyed during the marriage Ressler v. Ressler, 644 A.2d 753 (Pa.Super.1994).

Marital misconduct is just one of the seventeen factors in awarding alimony, and it has remained one of the least influential since the enactment of the Divorce Code. 23 Pa.C.S. § 3701(b)(14); Nuttal v. Nuttal, 562 A.2d 841 (Pa.Super.1989).

The Supreme Court of North Dakota has been asked to decide whether breast implants should be identified as marital property and valued for divorce purposes. Clearly, the owner’s husband is the advocate of this novel argument. His lawyer argued that the expense should be included in instances when a medical expense is “clearly cosmetic, elective, (and) non-necessary.” Insurance companies often make those judgments in deciding what to cover, she said.

The trial judge reported to news sources that he considered the argument to be frivolous. “I can’t imagine people would actually waste time thinking that breast implants are marital assets. It just defies common sense,” the judge stated. “I don’t know how you would expect me to award breast implants, if you want me to have them cut out and given to Mr. Isaacson. It is absolutely nonsense.”

The implant owner’s husband valued the implants at $5,500. No word on whether they might depreciate over time.

My friend from the East, Michael Viola, publishes a great divorce blog that occasionally chronicles the divorce of Jon and Kate Gosselin (which has been playing out in Eastern Pennsylvania). Recently Michael reported about a series of motions in which Kate accused Jon of withdrawing $230,000 from their joint bank account, leaving nothing for Kate. Michael summarized the law concerning spousal withdrawals, which is worthwhile reading.

I have a couple of rules about spousal withdrawals:

1. Live by the sword, die by the sword. Some lawyers advise clients to withdraw as much as they can before litigation commences.  I generally do not subscribe to this advice. It is a surefire way to foment litigation and hard feelings, which impedes settlement. Still, it is not always wrong to withdraw some of the money to pay joint debts or set up a nest egg to pay household bills and professional fees during separation.

2. Use freeze orders judiciously. One technique to prevent a raid against the marital savings is an injunction to prevent unauthorized withdrawals. We can’t obtain an injunction until someone has filed a support or divorce action, however, so freeze orders can’t prevent pre-emptive strikes. Still, some judges will force spouses to return the money if the issue is promptly brought to the court’s attention.

3. Logic is persuasive. If there is a good logical reason to withdraw the money or preserve it, let your lawyer know as soon as possible.  Contentious motions can be avoided if both spouses agree to set aside money for year-end taxes or tuition bills; and if they don’t agree, a judge may be persuaded.

BVWire.com reported this week on a recent California case where the issue of double dipping was examined in the context of divorcing business owners:

The husband owned a produce company in California, valued at $5.6 million, ostensibly under the capitalization/excess earnings method. After a marriage of “long duration and substantial standard of living,” the trial court awarded the wife $20,000 per month in spousal support plus half ($2.8 million) of the business. The husband appealed, urging a blanket prohibition against double dipping—i.e., using the same stream of earnings to determine business value/property division and also support.

In Blazer v. Blazer (No. DR 38292, Aug. 25, 2009), the California Court of Appeals discusses the excess earnings method and, in particular, the myriad ways to distinguish personal from enterprise goodwill. It also considers the double-dipping precedent from other jurisdictions as well as its own cases concerning pension divisions. In the end, the court sidesteps the issue by finding insufficient proof that the husband’s expert in fact valued the business by capitalizing his future income stream. Moreover, “the earnings of an ongoing business…do not always derive solely from the personal efforts of its operator, nor is there evidence that such is the case here.” The court explicitly confirmed the equity of the spousal award in this case as well as the trial court’s implicit determination that there was no double counting of the husband’s income.

Thus, the question remains open in California and elsewhere—especially for cases concerning owners of a professional firm or solo practice whose interests are valued under the excess earnings method. Look for a full summary of Blazer and our continuing analysis of double dipping in the November Business Valuation Update™.

This weekend I am in Chicago to attend the BVR Divorce Conference. I will read the case and many others while I am there, so I will have much to report about when I return!

In divorce litigation where one of the spouses owns a professional practice, such as a medical practice, dental practice, law firm or accounting firm, the lawyers and their experts have to determine whether the business has value. Their determination depends upon whether the professional practice is believed to have enterprise goodwill.

Briefly, enterprise goodwill is the price that a buyer would pay for a professional practice over and above the value of its hard assets like equipment and supplies. In theoretical terms, enterprise goodwill is the reputation of the business that is not closely associated with a particular owner or professional. The opposite of enterprise goodwill is personal goodwill, which is the reputation and skill of the professional. Enterprise goodwill has value because it is transferrable but personal goodwill is not. Someone might be willing to pay for a name like Aspen Dental Systems, but what about Jane Doe, PC?

Increasingly, there is a market for professional practices that are not part of a regional or national chain. Dental practices, even those with a single location and single dentist, are bought and sold frequently. The same is true for specialty medical practics. Yet, primary care medical practices and legal practices are rarely bought or sold. So, how does a lawyer decide whether a professional practice should be evaluated by a business valuation specialist? Here are three signs that a professional practice might have value:

1. Actual transactions. If a professional or his/her partners have bought or sold their practices, it is more likely that there is transferrable enterprise goodwill. However, you must distinguish market transactions from succession planning. If the only transactions are between retiring partners and advancing associates, then there may not be much enterprise goodwill.

2.  Subordinates and equipment.  One reason why dental practices are increasingly transferrable is that dental procedures are performed by hygenists and associate dentists. If the owner of the practice is earning profit from other professionals and paraprofessionals, then a buyer might be willing to pay something to step into those shoes.

3.  Excess compensation. If a professional is earning substantially more than industry standards, then the professional’s practice might have enterprise goodwill. No buyer would pay to assume an existing practice if he or she could start a new practice for free – except if the existing practice were more profitable than a new practice would be. This criteria is based on the principle of substitution.

Years ago, a wise lawyer published a column in the Pittsburgh Post-Gazette to advise her readers about family law issues (Patricia G. Miller, Esq., “Legal Eagle”). In one of her best-known articles, she described the most common mistakes made by women in divorce cases. (Later she published an article describing men’s most common errors.) Her words, now time-tested, ring even truer today. The most common mistake was sacrificing cash flow to keep the marital residence, becoming “house-poor.”

Pat Miller felt that some women had invested so much time and energy in creating a hospitable environment for the family that they could not bear to part with their life’s work, even though keeping the house would mean sacrificing liquidity and cash flow that they would need to support themselves and maintain their property.

I was reminded of Pat Miller’s article when I read an article recently in the Washington Times. The article, entitled ” The art of selling a home despite a marital split,” noted that real estate has become an albatross in some divorce cases where the value of property has decreased dramatically in the current recession. Properties that once had equity may be under-water in today’s declining real estate market. As a result, a spouse who wants to keep a house may have an asset with negative value. Worse, it may be impossible to refinance a mortgage to relieve the other spouse from the obligation.

A long-term perspective might help to resolve these situations but sometimes there is no choice other than divesting property that has minimal or negative value.  In a tough economic climate, a pragmatic approach must be considered. Sentimentality may be costly.

Tracing is a method of identifying nonmarital property so that it will be preserved as nonmarital property and not divided in the process of equitable distribution.

In Pennsylvania, property acquired during the marriage is presumed to be marital property. Property owned prior to marriage is nonmarital property. But what happens when premarital property is sold, liquidated or exchanged?

For example, let’s say that a husband owned a car prior to marriage. The car was titled in his name alone. If he sells the car and deposits the proceeds into a joint bank account, he creates a “gift” to the marriage, which “transmutes” his separate property (his car) into marital property (their joint account). The joint bank account is marital property which is subject to equitable distribution.

If the husband deposits the proceeds into his own bank account instead, then there is no “gift” to the marriage. But he has co-mingled the proceeds with money that he may have earned during the marriage, which is marital property. Under the tracing doctrine, we can separate the nonmarital component of the husband’s bank account (proceeds from the car) from the marital component (money earned during marriage).

In Lawrence Smith v. Carol Smith, 653 A.2d 1259 (Pa.Super.1995), the trial court employed tracing to identify the nonmarital component of the wife’s stock portfolio and investment accounts. The wife hired a forensic accountant to testify as an expert based upon her tax returns, personal stock ledger and transaction records. Wife’s records were not complete, but her expert did his best to reconstruct years of stock trades.  Since the husband offered no alternative evidence, the trial court adopted the opinion of the wife’s expert. On appeal, the Superior Court held that the expert’s analysis was good enough under the circumstances.

It’s never easy to take the first step on any journey. When you are facing a marital separation, there are five things that you can do to protect yourself, financially and emotionally.

1.         Secure your property. Review your joint bank and credit card statements regularly to ensure that no unexpected withdrawals or charges have been made. You might want to divide joint accounts or close credit cards if there is no legal restriction, but check with your divorce lawyer first. It’s also a good idea to secure property that may have sentimental value, like family heirlooms, where they cannot be misplaced or damaged.

2.         Conserve resources. Creating a budget and sticking to it are always prudent measures, especially during a marital separation. When one household becomes two households, the expenses are increased but income is not. When making financial decisions, consider the effect on cash flow and liquidity. It might be better to pay joint debts out of joint income and assets instead of your separate income and assets, but check with your divorce lawyer first.

3.         Gather financial records. If you keep your records organized, you will have an advantage in the divorce process and save legal fees. Make photocopies and keep them in a secure place so that you can furnish them to your divorce lawyer when asked. If you have access to your spouse’s records legally, make copies of them as well. You can obtain most documents through a legal process known as discovery, but it is cheaper to make copies yourself.

4.         Think twice before acting. Imagine at all times that your kids and a family judge are watching every action and reading what you write. Anything you say or write in emails and text messages might be used as evidence. How would a family judge react to your Facebook profile? If you have a temper, consider moving out before you do something that might result in a restraining order. Don’t make any agreement without consulting a lawyer first.  

5.         Contact reliable allies. Trust is one of the first casualties of divorce, so you need to find reliable allies. Consider supportive friends and family members who are able to keep your confidences and empathize with your feelings. Physical activities like exercise can reduce stress more effectively than alcohol or junk food. Hire a family lawyer that you feel comfortable with. It is very important to understand what your lawyer is saying and to be heard when you speak to your lawyer. Consider lawyers who concentrate their practice in divorce and know the nuances of this complex area of legal practice.

Here is an interesting issue, not yet resolved by the Pennsylvania courts: whether the proceeds of a life insurance death benefit may be counted as a marital asset. Here’s the story:

Let’s say that husband and wife are separated, and one of them dies. If the grounds for divorce existed prior to the death (i.e., both spouses filed their affidavits of consent, or they were separated two years prior to the death), the divorce action does not abate. The deceased spouse’s estate becomes a party to the divorce action, which must go on to its conclusion. If the deceased spouse was insured under a life insurance policy (let’s say a whole life or universal policy, which has cash value), then someone is going to receive a death benefit.

Perhaps the surviving spouse was named as the death beneficiary before the spouses were separated. The divorce court might have even entered an order compelling the now-deceased spouse to name the surviving spouse as the beneficiary under the life insurance policy. (We will discuss the other possibility – that the deceased spouse named someone other than the surviving spouse as beneficiary – another time.) 

The death benefit of a life insurance policy is usually greater than its cash value. (For a whole life or universal life policy, the cash value is equal to the excess premiums that were paid over the cost of term insurance; the excess premiums accumulate, and the insurance company invests them for the benefit of the policy owner.)  In a divorce case where whole or universal life insurance is a marital asset, the asset value is generally equal to the cash value less any policy loans. But now that a spouse is dead, there is no cash value. There is only the proceeds of the life insurance death benefit, which likely exceed the cash value. Is the death benefit a marital asset?

It might depend on what our law means by the word “acquired.” You see, property acquired prior to separation is marital property unless it falls into one of the statutory exclusions. The policy itself was acquired during the marriage, but the death benefit was not acquired until after separation (which would make it separate property). In the case of a personal injury settlement or verdict, our law says that the property is “acquired” when the settlement agreement is signed or the judge enters the verdict, even if the injury occurred prior to separation. The post-separation settlement or verdict does not “relate back” to the pre-separation injury under our law, so it is not marital property.

But there is a problem. If we treat life insurance proceeds like personal injury settlements, then a marital asset (the cash value) has disappeared and there is no marital asset to replace it.

Property which is received in exchange for marital property is, generally, marital property. For instance, if a divorcing couple owns a bank account, and after separation, someone withdraws money to buy a TV, the TV is marital property. So a life insurance policy could be viewed as a lottery ticket that was purchased prior to separation, and its proceeds would be deemed to be property received in exchange for marital property, which is still marital property.

What if the deceased spouse named someone other than the surviving spouse as a beneficiary? The analysis becomes even more troublesome, because now we have to balance the interests of the surviving spouse against the interests of a third party. If we decide that the life insurance proceeds are entirely non-marital, then the marital estate may be diminished. But if we decide the proceeds are marital, a third party’s property rights are impaired. As I mentioned, the courts have not yet resolved this matter.

This is the fourth in a series of posts containing summaries of Pennsylvania case law on the issue of double dipping in divorce. “Double dipping” occurs when an income-producing asset (such as a pension or business) is counted as marital property subject to equitable distribution, as well as income subject to an alimony or child support obligation.

McFadden v. McFadden, 563 A.2d 180 (Pa.Super.1989).

            McFadden was a post-divorce alimony modification proceeding.  In this case, the husband’s pension annuity benefit was in pay status, and he was receiving the entire pension benefit. Yet, the court found that the husband’s pension had not been identified as marital property at the time of equitable distribution. Therefore, the Superior Court did not reverse the trial court’s calculation of the husband’s income, which included the pension benefit. Most troubling, in dicta, the Superior Court held (per Popovich, J.): “[I]t is equally clear that income from a pension is to be considered when fashioning an alimony award, even if the pension was previously subjected to equitable distribution. See 23 Pa.S.A. § 501(b)(3), (10), (13); Pacella v. Pacella, 342 Pa.Super. 178, 190, 2492 A.2d 707, 711-712 (1985)(court did not err in consideration earlier equitable distribution property in fashioning alimony); Braderman, 488 A.2d at 620 (pension subject to equitable distribution also may be used to calculate alimony award).”