Complex Financial Issues in Family Law Cases - October 2008
| Publication year | 2008 |
| Pages | 53 |
2008, October, Pg. 53. Complex Financial Issues in Family Law Cases - October 2008
October 2008
Vol. 37, No. 10 [Page 53]
About the Author
David M. Johnson is a shareholder with the law firm of Johnson & Cord, P.C., in Colorado Springs-(719) 471-4034, dmj@johnsoncord.com. In addition to practicing family law, he has served as a district court magistrate in the Fourth Judicial District. He is a past chair of the Colorado Bar Association (CBA) Family Law Section and is the 2008-09 CBA President-Elect.
This article discusses complex financial issues in family law cases, including valuation methods for different types of assets and the equitable division of marital property. The article also discusses income matters involving maintenance, as well as some of the more unusual aspects of family law cases, including common law marriage and prenuptial and postnuptial agreements.
The days are long gone when a divorce lawyer could put together a simple agreement that gave the house to one spouse and divided the furniture, cars, and bank accounts without much thought about value and the effect of the division. In today's world, more and more Americans are acquiring wealth that a few decades ago seemed out of reach. Dissolution of marriage now often involves complex financial issues ranging from capital gains and related tax issues on houses, stock options, and trust income to the valuation of a business or professional practice.(fn1)
As the practitioner begins the process of evaluating a dissolution or other type of family law case, it is necessary to ask a number of questions and familiarize oneself with resources that can assist in handling a complex financial family law case. Questions to ask include:
1. What assets and liabilities exist? A subset of this issue is the task of actually finding assets and liabilities that may be undisclosed, overlooked, or forgotten.
2. Is there a question as to whether an asset is "property"?
3. Are there separate property claims for the assets or liabilities?
4. Will an expert be helpful to the preparation and presentation of the case?
5. Are there tax issues related to the property that need to be considered?
6. What will an equitable division of the property and debt look like?
7. Is this a maintenance case?
This article discusses how to determine whether assets constitute property; the use of experts; classifying assets as marital or separate property; tracing and valuing separate property; and the equitable division of marital property. The article also addresses income issues that relate to any award of maintenance. Finally, the article examines some unusual aspects of family law cases, including property issues between unmarried parties, common law marriage, and prenuptial and postnuptial agreements.
Defining "Property"
Any discussion of marital and separate property should begin with the applicable statute. The relevant statute for the allocation of property in dissolution cases is CRS § 14-10-113. The statute does not define "property," except in paragraph 7(b), which excludes certain irrevocable trust interests and gifts of nonbusiness tangible personal property. Pursuant to CRS § 14-10-113(1), the court "shall set apart to each spouse his or her property and shall divide the marital property, without regard to marital misconduct, in such proportions as the court deems just. . . ." The Colorado Supreme Court has held that the term "property," though not defined, is to be liberally construed to be broadly inclusive.(fn2)
Sometimes, defining property is more a question of what it is not than what it is. Here, the case law is helpful. For example:
1. A policy of term life insurance has no objective tangible or vested value that can be divided and therefore is not property.(fn3)
2. An unvested stock option is not property.(fn4)
3. A discretionary trust interest that is a mere expectancy is not property.(fn5)
4. Trust income is a mere gratuity and is not property.(fn6)
5. Social Security benefits, by virtue of the federal nature of the benefits, are not property, but can be an economic circumstance.(fn7)
6. An educational degree, such as a law or medical degree, is not property.(fn8)
Although these types of assets are not classified as property, they still may be an "economic circumstance" under CRS § 14-10-113(1)(c) for the court to consider when determining a just division of the property.(fn10)7. Military disability benefits, often referred to as "VA waivers," are not property.(fn9)
Assets that clearly have been held to be property in Colorado include the following:
* a vested interest in an irrevocable trust(fn11)
* deferred income earned during the marriage(fn12)
* cash paid pursuant to an employment contract(fn13)
* a vested and matured military retirement benefit(fn14)
* military voluntary separation incentive (VSI)(fn15)
* the value of a disability policy purchased during the marriage(fn16)
* vested stock options.(fn17)
Tangible and Intangible Assets
Tangible assets that are easily defined as property can be characterized as marital or separate property. Tangible assets are physical assets, such as real estate, cash, bank accounts, investment accounts, retirement plans and accounts, furniture, personal property and household goods, automobiles, livestock, and crops, as well as the hard assets related to a business, such as furniture, business machines, equipment, inventory, and accounts receivable.(fn18)
Intangible assets are nonphysical assets that grant rights and privileges and have economic benefits to the owner. Examples include franchises, patents, copyrights, mineral rights, the goodwill in a business, or the potential value of a stock option or an interest in a trust. These intangible assets are not as easy to categorize or value. For example, in Colorado, the concept of goodwill in a business has been the topic of much discussion in case law.(fn19) Valuing a business therefore can be difficult not only because of the need to value all assets (both tangible and intangible), but also because of the manner in which the valuation process occurs.(fn20) Tangible assets of a business-such as furniture, bank accounts, and accounts receivable-may be easy to value. However, some tangible assets may be very difficult to properly value. Consequently, the involvement of experts who know how to value such tangible assets is imperative.
In Colorado, goodwill is an asset of a business or professional practice.(fn21) Beginning with the holding in the case In re the Marriage of Nichols(fn22) and continuing through a long line of cases,(fn23) Colorado courts consistently have held that goodwill is an asset of a business or professional practice to consider when valuing that asset.
Valuation of Goodwill
The major issue in these cases has been the method of valuation to be employed. In the case In re the Marriage of Huff,(fn24) the Colorado Supreme Court noted that the valuation method used is a factual determination made by the trial court. In Huff, the Court specifically approved the "excess earnings method" of valuation.(fn25) The weight to be given to valuation techniques used by experts is for the trial court to decide.(fn26) The trial court may select the valuation of property presented by one party over the valuation offered by the other, or may assess value based on its own calculations. Such determinations are within the discretion of the trial court.(fn27)
The valuation of intangible assets-such as contract rights or patents, copyrights, and other intellectual property-also can present challenges. In Colorado, there is no case law concerning intellectual property, but there are instructive cases from other jurisdictions that address the issues of intellectual property, patents, and copyrights.(fn28)
The specific discussion of the various methods of valuation and the pros and cons of those methods is beyond the scope...
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