Equitable Distribution of Property During Divorce in New Jersey

Transcript:

Is the marital real estate still split equally if a party leaves their spouse?

In the state of New Jersey, we do not have equal distribution of property. We have equitable distribution of property. The way that we decide how property is going to be divided is based on its characterization.

The first thing we have to understand is whether or not the asset we’re seeking to divide is an active asset or a passive asset. If the asset is active, that means that a person was able to increase or decrease the value of the asset based upon their physical or mental contribution. They’re either spending their time physically doing something to the property, or perhaps they are making a lot of strategic decisions to increase the value of the asset or maybe even to decrease it. That normally is an unintended consequence, but that does happen.

A passive asset, the value of that asset is going to rise and fall based on market forces. With real estate, real estate can be either an active asset or a passive asset. But for the most part, we consider it a passive asset, particularly if it is the marital home.

If you’re looking at how we’re going to divide the marital home, where the parties reside is not normally a consideration of how that asset gets divided unless somebody abandoned the property and thus lays a claim, or the other party lays a claim, that they had to disproportionately support the asset for an extended period of time and the asset went up.

You don’t normally get that claim made unless there’s been some extended period of time of someone being out of the home. But just the parties decided that they’re going to get divorced and one party leaves the home, the fact that they left the home or left their spouse is not going to alter how we decide to divide that asset.

How is inherited property divided in divorce and does it matter when the property was inherited?

Inherited property is treated as the sole property of the person to whom that property was left. As a general rule, you want to know when that property became the asset of the spouse. If the property was inherited before the marriage, it’s premarital property, so it’s presumptively the property of the titled spouse. You don’t have a situation where you really have to question what we’re doing with it unless there was commingling.

If it was inherited during the marriage, you really want to look at what was done with it after it was inherited. In that situation, again the issue of commingling comes up. Commingling means property that would normally be separate or inherited property that would not be shared by both parties, and the person who owned the property decided to share it with their spouse in some meaningful or beneficial manner. That could be putting money from an inherited fund into a joint account. Or it could be a piece of real estate is inherited, and the parties are now going to live in that piece of inherited property as a marital home or perhaps even using it as vacation home.

If you’re going to start making beneficial use of the property by the family, then it takes on the nature of a marital asset. But generally speaking, inherited property is the property of the person to whom it was left in a will or if it was inherited by virtue of a person dying intestate without a will. The person who received the property is going to be the one who’s entitled to retain it.

How are stock options and restricted stock divided in divorce actions?

Stock options are a right that’s granted by a company or corporation to the officers or the employees as a form of compensation. That allows for the purchase of corporate stock at some fixed price that’s usually within a specified time period. The fixed price could be market rate or it could be below market rate as a benefit to the employee.

Usually when we’re looking at stock options, we divide that in kind. What that means is if the option is the right of one spouse, we call them the employee spouse , then we look at what the total value is of the number of stocks that can be exercised, the options that can be exercised. We could do a valuation, but much more often we simply say if you have 500 shares, you have an option to exercise to secure 500 shares – 250 are going to go to one spouse, 250 to the other – under the premise that these are passive assets.

It’s not uncommon that one party will say that the compensation was not fully based on past performance, but also based on trying to secure that employee’s continued employment with the employer. So you oftentimes have to look at issues such as whether or not the compensation, the stock option, was issued solely for past performance, or some portion for past performance and some portion for future performance. Then you get into very dicey issues that require a lot of factual analysis as to how many of the options were for the past and how many were for the future.

Restricted stock, on the other hand, is an award of company stock. You get the stock right then and there, or at least you have the entitlement to it right then and there. But the stock is subject to some form of condition. That usually means that you have to remain employed with the company in order for the restricted stock to vest. You have to have met certain requirements in order to sell the stock or transfer the stock.

Restricted stock units are the equivalent of shares, but they are converted to stock once they are vested. With these types of assets, we have to figure out first, are the restricted stock units vested? If they’re not vested at the time of divorce, then we have a question of how much is the non-employee spouse entitled to receive because only a portion of their entitlement has really matured. When it matures, there will be some period of continued employment by the employee spouse from the time that the divorce happens to the time that the vesting actually takes place.

That again requires a very detailed factual analysis. We will oftentimes involve a valuation professional. Sometimes we’ll employ a forensic accountant for that purpose. But oftentimes, it’s someone higher up in the company that is issuing the restricted stock to help us to figure out what portion of the non-vested option should be used to reduce the total amount that the non-employee spouse is going to receive. Again, very factually complex, typically something that’s done by an expert.

What is a QDRO and when is one required in a divorce action?

QDRO stands for a qualified domestic relations order. It’s a special type of court order that we use to grant a person the right to their portion of retirement benefits from their former spouse or their current spouse, depending on the circumstances, that they’ve earned through participation in an employer-sponsored retirement plan.

QDROs are typically prepared during the divorce proceedings, even though they can also be done post-judgment. They’re normally filed many, many years after the divorce. In a QDRO, the person who earned the benefit is called the participant. The person who is designated to receive their share is called the alternate payee.

Not every type of domestic relations order is a QDRO. Sometimes you have a domestic relations order that can be issued by a court that’s not yet a qualified domestic relations order. It only becomes qualified when the private employer qualifies the plan. That means someone who works in the retirement benefits section identifies that the document, as drafted by the court and signed by the court, has actually met the requirements of that particular plan in order to distribute the retirement account.

Qualified domestic relations orders are only for private employers. There are government benefits as well when you need to distribute retirement assets by an employer-based plan that is the government. Then you have what’s called a COAP or court order acceptable for profit. Similar but different language, oftentimes different plan benefits, but you have to make sure that you get the right type of order, the right domestic relations order that is signed by a court and that it meets the plan’s specifications in order to get the retirement benefits into a separate account for the recipient of those benefits who is not the employee. 

What steps can someone take to prevent their spouse from hiding assets from them, and how do you find hidden assets?

It’s very difficult to prevent your spouse from engaging in bad conduct. If they want to hide assets, they are likely to do that. But you can keep yourself informed about the nature of your financial status at all times. That’s something that will help you to detect when your spouse is hiding assets from you.

It is advised that any person who has any concerns about their partner, whether or not they’re contemplating divorce, should be looking into where do we maintain our accounts, how much is the average balance in the account on a monthly basis, and where are we taking the source of our funds when we do things like go on vacations, manage our household, and purchase large items.

In terms of how you find hidden assets, there are a lot of different ways we can go about that. We oftentimes will subpoena financial institutions. Sometimes it’s a matter of taking depositions of people who work with the spouse that is accused of hiding assets. They can oftentimes give us nuggets of information about how things are being handled when not with the spouse so that we have a general understanding of the way that money is handled either in the business that they work in together, or perhaps in general how the two friends are going out and spending money. That gives us little clues about where to seek hidden assets.

Then, of course, the third issue is looking at the credit card debt because almost invariably people will spend directly from their cash accounts very differently than they spend on their credit card. Indications that someone is hiding money will often come through the source of putting money in different places and then using credit cards to withdraw cash in order to pay down.

We have our ways of looking at hidden assets. We often involve experts for that. But we definitely have methods to accomplish that.

What happens if one ex-spouse discovered that the other lied about or hid assets during divorce?

One thing that normally happens in most divorces is that you settle your case and you draft up what’s called a property settlement agreement or a matrimonial settlement agreement. In these agreements, you have to identify that you have conducted discovery and you have to waive future discovery. If you found that your spouse lied about assets, the question that is always going to be asked is, is that something you could have through reasonable diligence found had you completed the discovery process or had you conducted further discovery?

If it’s something that was willfully withheld from you – i.e., there was an intentional wrongdoing – you would have a claim for fraud. We have an application called a Rule 450. Rule 450 is the court rule that we proceed under in order to have that set aside.

On the other hand, if there was an inadvertent disclosure – i.e., there was a list of 40 different properties and the property number 41 was not listed – but we believed that there was cause to be concerned only about the first few properties, and after that we kind of fell asleep at the wheel, if you will, it becomes much harder to prove to a court that there was some malicious wrongdoing.

You’re really going to have to look at the intent of the person who did the disclosure and whether or not that disclosure or failure to make disclosure was willful and intentional versus negligent or inadvertent.

How are multiple properties – perhaps some owned by one spouse before the marriage, some income properties – divided on divorce?

When we are defining how we’re going to divide up different types of real estate, you have to look at whether or not the real estate is an active asset or passive asset. An active asset is one that is increased in value or decreased in value by the active efforts of one of the parties, versus a passive asset that tends to rise and fall in value based on market forces.

Any number of these types of properties that you’re talking about could have a different form of distribution based on how we characterize them as active or passive. Again, the marital residence tends to be a passive asset because you are making improvements to maintain your home, but you’re not necessarily trying to greatly improve the value because you’re not trying to flip your home, you’re not trying to sell it.

But with something like a vacation asset or an income-generating property, those are more often than not active assets because you want to increase the value of them so that you can sell them and recover a benefit from them.

When you look at the properties, you really have to think about are they active or passive and how were you spending in order to increase or decrease the value of the asset over time. That’s really going to guide the distribution plan.

Does fault ever play a role in asset division?

Marital fault has taken on a much lesser role in our divorce jurisprudence over the last several decades. Once upon a time, fault was something that we used to kind of punish someone with their assets and liabilities in divorce. Now it takes on a much, much smaller piece.

But there are times when fault does play a role in asset distribution. For instance, if one party was to go out and do something that would have reduced the property value, the question’s going to be, why did they do that? If they did that for their own selfish purposes, we could call that dissipation of assets, meaning that the person through some wrongful action has reduced the marital estate. In those situations, they would get less of the remaining asset because they are the ones who reduced the value.

On the other hand, if somebody has engaged in bad conduct to the point where they’re not going to receive support, alimony, the court may say that if the extent to which they engaged in bad behavior is going to reduce or eliminate any alimony obligation, it would not be fair and equitable, which is the guiding standard in our law, to say that that person’s not going to receive anything of the marital asset. Because the whole idea of having equitable distribution is that both parties through their contributions to the marriage, whether they were financial or nonfinancial, are entitled to share what comes out of their joint effort.

If somebody put in time and effort into a marriage, they shouldn’t walk away with nothing or walk away with less because they engaged in some bad behavior at some point in the marriage. Because, of course, we don’t typically litigate all of the wrongdoing and there usually is wrongdoing to go around.