Determining the nonmarital portion of retirement benefits and other property.

• Author: Miller, A. Matthew

Determining the nonmarital portion of property is like building a house. It involves different experts having different skills and responsibilities as may be required based upon the nature of the property in question. Because such determination involves a mixed question of fact and law, the matrimonial attorney must necessarily be a significant part of the construction process. A forensic accountant, an economist, and an actuary/pension expert may also be important parts of the construction team. Retirement plans and benefits are particularly difficult to analyze properly, so it is not surprising that the courts seem to have the most difficulty properly dealing with valuation and apportionment of these types of assets in determining the equitable distribution scheme. Appellate courts rarely reverse trial court valuations. The trial court then becomes the "court of last resort." When you have only one chance to get it right, you need to make sure to get it right!

The foundation must be in place before a house is built, and it must be able to support the house. The starting point for a determination of the nonmarital portion of any asset is F.S. [section] 61.075, which defines what is marital property and what is nonmarital. The valuator must be well versed in this statute. The case law interpreting this statute is not a substitute for utilizing the statute and for identifying the valuation principles driving the result.

This article will address the typical issues associated with determining a nonmarital portion of property, which will not be divided under equitable distribution. This includes many issues associated with passive earnings. It also includes valuation issues associated with an interspousal gift under F.S. [section] 61.075(3).

Identifying the Passive Earnings Component--[section] 61.075(5)(a)(2)

One of the biggest problems in family law and one with which courts often have the most difficulty is distinguishing the passive increases of nonmarital property under [section] 61.075(5)(b)(3) from the active increases defined in the statutes under [section] 61.075(5)(a)(2). The result of the statute is clear: A court finding that substantial marital time has been spent improving the nonmarital property may cause some of the appreciation to be active and marital property. Narrowly construing the statute leads one to conclude that only when little or no marital time is spent improving the nonmarital value that all appreciation is passive. The increase is then the result of market forces. The difficulty begins when the results of market forces are confused with what work effort is necessary in order to achieve the market result. (1)

To better understand this distinction, we begin the analysis by examining the statute and searching for the common sense purpose behind it. Section 61.075(5)(a)(2) tells us that active increases are the result of substantial work effort expended during the marriage. But is the "substantial work effort" sufficient in and of itself to define an active accrual on nonmarital property? Or is it simply a necessary element before a conclusion may be reached that the accrual is active appreciation, but by itself is insufficient to support the finding that the amount of marital property is to include the appreciation resulting from the substantial marital work effort? Simple logic tells us that it cannot be sufficient to support this finding because substantial work effort can result in a loss. (2) The clear intent behind the statute is not to decrease the amount of marital property by this loss.

It is impossible to achieve a positive market result without spending some marital time even if that time is spent finding someone unrelated to the marriage to manage the nonmarital investments. It is ludicrous to suggest that marital time spent automatically transforms the appreciation into a marital asset, because if that were true there would be no point to [section] 61.075(5)(b)(3) defining passive appreciation. (3) Yet, some will spend more marital time than others, and this extra time may produce better results. When this occurs, the extra income achieved is no different than if that person acquired a second job and it produced an extra income. The test, then, is to determine when the additional time transforms some of the income into extra income, as if that person acquired a second job. (4) This is easily accomplished by using averages to define the "pure" market forces. Such averages could be established by indexes such as the Dow Jones, New York Stock Exchange, or the S&P 500, when the measurement process involves active trading. (5) Averages could also be established with expert testimony on the particular type of investment under scrutiny (e.g., real estate). The measurement baseline could be the averages produced by the industry itself, which would be particularly relevant and meaningful when measuring passive appreciation of a business owned before the parties married. (6)

Another factor that needs to be considered is the structure of the nonmarital asset. Certain nonmarital assets may be segregated while others may not. When the nonmarital asset cannot be segregated, it is impossible to spend marital time improving the marital portion without the nonmarital portion benefiting as a result of that effort. Yet spending marital time improving the nonmarital asset does not automatically transform the income of the nonmarital portion into marital property. (7) A detailed analysis must be made in order to isolate the cause of the increase and in order to separate the increase resulting from market conditions from that produced by the extra work effort. (8) Examples of assets that may not be segregated include a nonmarital home owned by one spouse, a business that existed before the marriage commenced, and a retirement plan.

In fact, under a retirement plan, the federal public policy on retirement plans should defeat the application of [section] 61.075(5)(a)(2), because this policy created a 29 USC 1103 trust, which is exempt from creditors (29 USC 1056(d)(1)) and which owns the assets and any income thrown off by them. (9) Accordingly, it is impossible for one to spend...