Alimony for the Heiress? Imputing Income to Assets
The aging of the baby boomers in the U.S. has resulted in many late-in-life divorces that leave one or both parties with substantial assets. Some assets may be the result of work and investment both before and during the marriage, and some may be inherited or gifted. The property owned by each party after distribution, including the nonmarital property, can bear heavily upon an alimony determination, depending upon what income is thrown off by those assets. The important question, and one for which there is a dearth of authority and guidance, is precisely what income, if any, should be attributed or imputed to which of the marital and nonmarital assets owned by the parties after distribution. All assets are not equal. Or are they?
Both marital and nonmarital assets are part of the alimony equation. In assessing both the need and ability to pay alimony, the court is required to consider all relevant economic factors, including the financial resources of each party, the assets and liabilities distributed to each in the divorce, the nonmarital holdings, and “all sources of income available to either party.”1
Under this broad mandate, the courts are presented with the problem of whether they should consider realized income currently produced by an asset; deferred income; income potential; or all three. Is a vacation home in Vail worth $800,000 to be accorded the same treatment as a stock portfolio with the same value but producing interest, dividends, and capital gain? What of unexercised, vested stock options, and deferred income retirement vehicles? In the existing Florida cases, not all assets are equally factored into the alimony income equation.
Cash and Liquid Assets
Cash can be deceptively simple. While the law clearly requires the imputation of income to cash and other liquid assets,2 there are some minor twists. In some cases, the investment corpus has been reduced by cash needed for attorneys’ fees and new housing before the income calculations were made. See Elliott v. Elliott, 867 So. 2d 1198 (Fla. 5th DCA 2004), and McLean v. McLean, 652 So. 2d 1178 (Fla. 2d DCA 1995). The hidden consequence in reducing the cash (and therefore the income from that cash) by the amount of a fee obligation, with a concomitant increase in alimony, is that the payor spouse indirectly pays the other’s attorneys’ fees where fees were not otherwise awarded.
Should either spouse be permitted to shelter liquid assets from the income equation by investing in low- or non-income-producing portfolios? If a reasonable income is not imputed to that capital, one party may be indirectly subsidizing the high-risk, long-term gain strategy of the other.
The New Jersey Supreme Court, in Miller v. Miller, 734 A.2d 752 (N.J. 1999), pointed out that the law does not hesitate to impute income to an underemployed spouse for the purpose of support issues, and that persons with a duty of support to another are not expected nor will they be permitted to underutilize their talents and capabilities (“human capital”) at the expense of the other. Id. at 760. the same token, a party is not expected nor permitted to underutilize financial capital. In the Miller case, the court found there was “no functional difference between imputing income to the supporting spouse earned from employment versus that earned from investment.” Id. at 760. In this case, an experienced investor-husband who was earning 1.6 percent annually on his growth stock investments was found to be underinvested, and the court held it appropriate to impute a more reasonable income to those investments.
Real estate presents a unique set of problems. Parties own not just their residences, but very often vacation homes or land upon which to build a retirement home. Vacant land, rental, or development properties may be carried at a loss but held for long-term appreciation and eventual profit. The risk is the investor’s, but should that strategy be used to advance an “inability to pay” argument or, conversely, to enhance a needs claim?
In Rosecan v. Springer, 845 So. 2d 927 (Fla. 4th DCA 2003), the trial court found that the wife had minimized her income from her rental property by collecting no rent in one instance, and in renting below fair market value in the other. The alimony award was held excessive in light of those particular findings and other factors, and remanded for reconsideration. In that case, the trial court had also noted that the wife’s income was dependent on what she did with her liquid assets and whether she converted her property to cash. The income potential (not just the existing income) from the rental properties became key to the alimony determination.
What does the court do with a party who transmutes income-producing assets into equity in a new residence? In a New Jersey case, a payor spouse received a substantial inheritance in cash and promptly purchased an imposing and expensive residence. He then claimed a reduced ability to pay support. In finding that income should be imputed to funds now represented by the home equity, the New Jersey court commented:
When a spouse is not earning to his or her true potential and capacity then an imputation of income based upon that potential is appropriate. . . . In the same way, an inheritance, which generates no income solely because its owner has altered its capacity to earn interest, should not be automatically exempt from the alimony calculus. It is its potential to generate income which is germane.
Stiffler v. Stiffler, 698 A.2d 549 (N.J. Super. Ch. 1997) (emphasis added). The Stiffler court compared the husband’s new home to the one resided in during the marriage, allowed the sheltering of an equivalent amount of value, and imputed income on the remaining equity.
A spouse who rattles around solo in a large and extremely expensive home creates an issue as to necessary expense as well as the underutilization of capital. In Gandul v. Gandul, 696 So. 2d 466 (Fla. 3d DCA 1997), the court considered whether the wife really needed the large marital residence and decided she did not. The residence was ordered sold, the court holding that the equity, when split between the parties, would be not only a source of alimony income to be paid by the husband, but would serve the wife double duty by providing her with a financial cushion and a reduction in her living expenses.
In Elliott, the wife argued unsuccessfully on appeal that the court wrongly attributed income to her from her liquid assets, and was particularly indignant because the husband was possessed of a commercial investment property which returned no present income, which the court had ignored in computing the husband’s income. Although the Elliott court intimated that it might have done something about that seeming inequity, it found its hands were tied: the wife had failed to present any evidence as to what income could or should be imputed to that particular asset.
The California courts have concluded that in the context of support, real estate is like any other investment, and income may be imputed to non-income-producing real properties. See In re Marriage of Destein, 91 Cal. App. 4th 1385 (2001).
In a bold California case, In re Marriage of de Guigne, 119 Cal. Rptr. 2d 430 (2002), the parties lived off the husband’s enormous inherited resources which, by the time of the divorce, had been reduced primarily to the family mansion on some 47 acres, worth between $25 and $30 million. Leaving the husband his ancestral home, but only on seven acres of the land, the court imputed income on the potential sale proceeds from the remaining 40 acres and calculated support accordingly, stating, “[I]t was inappropriate that Christian’s support obligation be based on that investment income alone [non-real estate investments], while he sheltered and benefitted from substantial assets producing no income.”3
It is axiomatic in Florida family law that a needy spouse should not have to invade capital assets for support.4For that reason, perhaps, the income produced by pensions, individual retirement accounts, and other deferred income vehicles appears to be exempt from the income calculation, but upon closer examination perhaps should not be. In McLean v. McLean, 652 So. 2d 1178 (Fla. 2d DCA 1995), where the husband had an established ability to pay support, the court refused to impute income to the wife based on her ability to convert her retirement plan to an ongoing payment stream.5 The court said only that it was “hesitant” to approve any financial arrangement that forced the liquidation of retirement funds.6
However, Florida courts are not foreclosed from considering such options. In O’Conner v. O’Conner, 782 So. 2d 502 (Fla. 2d DCA 2001), the wife took $140,000 in marital assets and invested the funds in a deferred income retirement account. The appellate court held it error not to have assessed income from that account in determining alimony.7
A handful of courts from other jurisdictions have not been so particular, at least as to individual retirement accounts, and have counted the dividends and interest accumulating in such accounts as income for the purposes of child support.8
In purely economic terms, alimony paid to a spouse who is accruing income in a tax-deferred retirement fund is simply enabling that spouse to continue to increase his or her savings equity. A simplistic example: A wife claims she has needs of $20,000 a year over and above what her earned income can supply. She has $300,000 in cash, which produces $10,000 in annual interest income, and she has $300,000 in an IRA, which also produces $10,000 in reinvested, tax-deferred income. Her $10,000 in interest income will supply one-half of her claimed need. Under the current trend in the law, she very probably will not be assessed the $10,000 in income that is accumulating in her IRA, and the husband will be expected to make up the difference with alimony. However, if the wife draws down not only the interest, but another $10,000 in principal from her cash account to meet her needs, she obtains economic neutral buoyancy: the depletion of the $10,000 principal from the cash account is made up by the addition of $10,000 in capital assets in her retirement savings. She has simply transferred funds from her left pocket to her right pocket.
When the income generated by a retirement fund is not factored into the income equation, the payor spouse is subsidizing the recipient spouse’s savings, and not even very indirectly, at that. This is an apparent contradiction to the policy established in Mallard v. Mallard, 771 So. 2d 1138 (Fla. 2000), in which the Florida Supreme Court held: “[C]urrent necessary support rather than the accumulation of capital is the purpose of permanent periodic alimony.” Id. at 1140.
Rate of Return
Once the court has determined the assets, what standards or monetary principals are to be used to calculate the imputed income?
The courts speak generally of “prudent” investment standards.9 In several cases Florida courts have disapproved investment schemes hatched by expert witnesses that involved the complete conversion of existing investments into high income, low growth portfolios, with attendant fees, penalties, taxes, and loss of principal.10 The court pointed out in Brock v. Brock, 690 So. 2d 737 (Fla. 5th DCA 1997), that such a strategy would ultimately result in a loss of principal due to inflation. This was considered anything but prudent and disapproved.
Brock seems to imply that the wife would have had to rearrange her portfolio to increase her return. However, an imputation of income to underutilized assets does not of necessity require a change in investment strategy. A high-growth, low-income portfolio will generate capital gain. A small part of the gain can be periodically liquidated to satisfy the income cash requirements, leaving the owner of the portfolio in an economically neutral position. Imputation is about making an award based on reasonable return, not about dictating an investment strategy.
As to a specific rate of return, there appears to be only one Florida case in which a rate was mandated by an appellate court. In one of several appellate incarnations of Rosen v. Rosen, the wife inherited $100,000 during the divorce, artfully divested herself of that cash by giving it away to her father, and asked for alimony. The Third District mandated the imputation of income to the wife on that $100,000 at the 30-year U.S. Treasury note rate.11
In the New Jersey Miller case, the court mandated the use of Moody’s Composite Index on A-rated Corporate Bonds to establish a five-year average rate of return. In doing so, the court specifically noted that it was not requiring that the husband actually change his low-income high risk investment strategy; it was, however, a reasonable imputation of income comparable to a “prudent” use of his investments.12
The Miller court also addressed the argument that the courts have no business, no time, and no expertise in such matters, and therefore should not attempt to determine a reasonable investment return. This argument was given short shrift. The court pointed out that first, in imputing earned income to an unemployed party, a court struggles with exactly the same sort of variables in order to reach a reasonable income imputation. It noted as well that the perceived judicial difficulty involved in resolving a particular matter should not dictate whether a claim is barred.13
Some Florida cases have focused on the historical pattern of the parties’ investments during the marriage for guidance. In Goodman v. Goodman, 797 So. 2d 1282 (Fla. 4th DCA 2001), the court noted the conservative investing history of the parties and accepted a low return.14 However, in Greenberg v. Greenberg, 793 So. 2d 52 (Fla. 4th DCA 2001), the court questioned an existing low return and pointedly stated that the trial court, on remand, was not limited to accepting a particular return on the wife’s equity.
A few states have established what is considered a reasonable rate of return for the imputation of income to investments and other assets by statute. See Ohio Rev. Code Ann. §3119.01(C)(11)(b) (Page 2003 Supp.) (interest rate determined from local passbook savings rate, not to exceed statutory rate); Vt. Stat. Ann. Tit. 15, §653(5)(A)(i) (LexisNexis 2004 Supp.) (“current rate for long-term U.S. Treasury Bills”); W. Va. Code Ann. §48-1-205(d) (Michie 2004) (assets considered underperforming if they do not produce income at rate equivalent to “current six-month certificate of deposit rate or such other rate that the court determines is reasonable”).
Depletion of Assets by Annuitization
It is somehow gospel that imputation of income should not cause the depletion of capital. The estate of the party is expected to be preserved in perpetuity, notwithstanding financial reality. People at or near retirement do not realistically expect to preserve their capital until the end of their lives, and family law awards should reflect this reality. If one party has a sufficient lump sum to purchase an annuity to meet his or her end-of-life needs, then should the other be ordered to provide an alimony award to prevent this depletion of the estate, especially where such use of capital would be normally expected? If a party at age 62 receives an equitable distribution of $5,000,000, and after imputation of income falls short of the historic needs by 20 or 30 percent, should the other party be made to pay alimony when an annuitization of even half of the $5,000,000 would be sufficient for support?
A Neutral Determination
These authors suggest that the courts would be best not involved in the micromanaging of the parties’ lifestyles and investments, and further should discourage the parties, attorneys, and accountants from jockeying assets and investments to influence support awards. The better practice would be to make an independent financial determination of the needs of the parties coupled with a valuation of all assets, whether used for investment or personal pleasure, and regardless of existing income status. Thereafter, a standard return rate on the total should be applied, and one that is readily available, easy to determine, and that reflects a reasonable, secure, and consistent return. The 10-year U.S. Treasury Bill rate is an example.
Thereafter, the income imputation on the total should be computed, reviewed in light of historical needs, and a support award determined. The parties would be left to be as prudent or imprudent with their finances as they see fit. If they want to overspend and liquidate capital to live lavishly, that is their choice. Likewise, if they prefer a frugal lifestyle in order to preserve assets for their heirs, or in order to further secure a comfortable old age, that is their choice as well. The choices should not be imposed upon either by the other party or the courts.
1 Fla. Stat. §61.08(2)(d) and (g).
2 Sharon v. Sharon, 862 So. 2d 789 (Fla. 2d D.C.A. 2003); Greenberg v. Greenberg, 793 So. 2d 52 (Fla. 4th D.C.A. 2001).
3 In re Marriage of de Guigne, 119 Cal. Rptr. 2d 430 (2002).
4 Sinclair v. Sinclair, 594 So. 2d 807 (Fla. 1st D.C.A. 1992); Kaufman v. Kaufman, 541 So. 2d 743 (Fla. 3d D.C.A. 1989).
5 Individual retirement account funds may be utilized penalty-free prior to age 59 ½ under several IRS approved formulae, which generally utilize a form of annuity calculation. I.R.C. §72.
6 See also Brock v. Brock, 690 So. 2d 737 (Fla. 5th D.C.A. 1997), and Bacon v. Bacon, 819 So. 2d 950 (Fla. 4th D.C.A. 2002).
7 Since distributions from a retirement plan include both a return of the original capital contribution to the account, and interest, dividend, and possibly gain on that original contribution, the next accounting step would have been to segregate the two components and include only the dividend, interest, and gain in the support calculation.
8 Dunn v. Dunn, 952 P.2d 268 (Alaska 1998); In re Marriage of Tessmer, 903 P.2d 1194 (Co.Ct.App. 1995). Other courts have examined this issue and reached a contrary conclusion based, in part, on the public policy favoring private retirement savings accounts. See Carmichael v. Siegel, 754 N.E. 2d 619 (Ind. App. 2001); Bullock v. Bullock, 719 So. 2d 113 (La. Ct. App. 1998).
9 Fla. Stat. §518.11, the Uniform Prudent Investor Act, provides a statutory primer on “prudent” investment.
10 Brock v. Brock, 690 So. 2d 737 (Fla. 5th D.C.A. 1997); Bacon v. Bacon, 819 So. 2d 950 (Fla. 4th D.C.A. 2002).
11 Rosen v. Rosen, 659 So. 2d 368 (Fla. 3d D.C.A. 1995); the U.S. Treasury has ceased to issue 30-year treasury notes.
12 Miller, 734 A.2d at 761. A later case held that that particular rate was specific to the particular set of facts in Miller, and did not establish a “one-size-fits-all” standard. Overbay v. Overbay, 869 A. 2d 435 (N.J. Super. Ct. 2005).
13 Id. at 760.
14 Although the court refused to impute a higher return on the husband’s nonmarital assets, it approved an alimony award predicated on the regular invasion of capital. The court noted that the husband had, during the divorce, sold profitable rental properties and conservatively invested the funds, thus reducing his income significantly. Goodman, 797 So. 2d at 1284.
William H. Stolberg has been in the private practice of law since 1973 in Ft. Lauderdale, practicing exclusively in the area of family law. He is board certified in marital and family law. Mr. Stolberg received his B.S. from Cornell University in 1968 and his J.D. from the University of Florida College of Law in 1973. He is a member of the American Academy of Matrimonial Lawyers.
Jane Hawkins has been in the private practice of law since 1970 in Ft. Lauderdale, practicing exclusively in the area of marital law. She received her B.A. from Memphis State University in 1972 and graduated cum laude from Nova Southeastern University School of Law in 1990.
This column is submitted on behalf of the Family Law Section, Evan R. Marks, chair, and Kristen Adamson-Landau, editor.