Special Types of Assets

Question 1

Business Owned before marriage that greatly increases in value

Answer 1

1. applicability: business that shoots up in value during marriage
   i. highly tested
2. Pereira and Van Camp tests control

Question 2

Business Owned before marriage that greatly increases in value – pereira test

Answer 2

i. applies where spouse’s time, skill, and effort are major factors in growth of business
a. i.e. active investor
b. ex. spouse contributes creative ideas, develops new techniques, or works long hours and only draws modest salary

ii. formula: pay interest on SP, and the rest is CP
a. simple interest at rate of 10% per year of the SP (value of business before marriage)

iii. P = personal skills and effort, pay interest on SP

Question 3

Business Owned before marriage that greatly increases in value – van camp test

Answer 3

i. applies if capital investment was main growth factor, skills were less of a factor. Spouse of paid substantial bonuses and salary, meaning community was compensated on the way.
a. i.e. passive investor
b. ex. W owns Ford dealership in 1947, increases in value because of demand for cars after the war
ii. formula: value of community labor, the rest is SP
a. CP = value of services - family expenses
i) start w value of spouse’s services at market rates (how much would executives in similar positions be compensated on the market?)
ii) subtract family expenses paid from community funds
b. balance is SP
iii. VC = valuable company or asset, value of community labor

Question 4

Business Owned before marriage that greatly increases in value – Example

Answer 4

i. W owns company worth $100k at time of marriage
ii. W and H divorce 10 years later when company worth $4 mil
iii. H contends substantial portion of the business is CP (increase due to W’s labor, W had modest salary, H made sacrifices, etc.)
iv. W contends increase in value is SP because increase in value stemmed from luck or timing, and that W had a substantial salary

v. Pereira:
a. W entitled to $200k, balance of $1.8M to CP
b. SP = $100k (value of business before marriage) + $100k interest (10 x 10% of 100k)

vi. Van Camp:
a. assume market rate of $100k for similar executives, $80k living expenses
b. CP = ($100k x 10) - ($80k x 10) = $200k
c. SP = balance of $1.8M
6. the court is not bound to either, and the court may select the test that most achieve substantial justice
i. bar: do both (b/c fact patterns will likely give elements of both)

Question 5

Pension benefits - death

Answer 5

1. federal preemption (ERISA): where a marriage terminates because non-participating spouse dies before a participating spouse, the predeceased non-participating spouse that has no interest in the pension

Question 6

Pension Benefits – divorce

Answer 6

1. employee retirement benefits accumulated during marriage are community property, whether or not vested at the time of divorce
   i. CP because deferred compensation
   ii. participating spouse = employee spouse participating in the pension plan
2. proration rule: years service while married / total years employed to retirement
3. unvested: decree types if participating spouse not eligible for retirement at time of divorce:
   i. if and when received decree: if and when pension is received, non-participating spouse gets their share
   ii. cash-out decree: non-participating spouse is cashed out immediately with other assets of equal value
4. matured: if participating spouse is eligible for retirement at time of divorce:
   i. non-participating spouse can seek payment of community share at time of divorce
   ii. whether participating spouse actually retires irrelevant, only eligibility matters
   iii. election not to retire does not defeat non-participating spouse’s present right
   a. non-participating spouse gets an order to cash out proportion
5. example:
   i. H worked for C Co for 10 years when he married W (1982)
   ii. marriage ends in divorce in 1992, H eligible to retire in 2002
   iii. H participates in company pension plan entire time, measured by years of service
   iv. H not eligible for pension at time of divorce action
   v. proration rule: pension is 1/3 CP
   vi. remember: W only gets 1/6 of the pension (half of the CP portion), by either decree type

Question 7

Disability Benefits

Answer 7

1. disability retirement and worker’s compensation benefits for injuries are treated as wage replacement and classified based on when received, not when earned
   i. i.e. disability benefits become SP upon divorce
2. election: if employee-spouse can elect to take regular retirement benefits or disability retirement benefits/worker’s compensation. If H decides to take disability to try to defeat CP interest, then:
   i. the non-contributing spouse has a community interest in the retirement benefits that could have been selected
   ii. i.e. husband cannot elect spouse’s community interest

Question 8

Severance pay

Answer 8

1. no clear rule on severance pay
2. rule 1: severance pay is SP bc it replaces lost earnings (which is SP after divorce)
3. rule 2: severance pay is CP bc earned by employment during marriage

Question 9

Stock options

Answer 9

1. options:
   i. right to buy company stock at a future date
   ii. usually not vested, meaning holder must be employed on date of exercise to exercise
2. proration used if option awarded during marriage vests after economic community ends
3. proration type depends on primary intent of employer granting the option
4. Message of Hug proration: options primarily awarded as reward for past services
   i. CP = years employed during marriage ÷ years employed until option exercisable
5. Marriage of Nelson proration: options primarily awarded to incentivize employee to remain with company
   i. CP = years from date option granted until end of marriage ÷ years from date option granted to date option exercisable
6. note: in both formulas, CP interest is the fraction times the share of stock
7. example:
   i. H married to W employed by A Co on Jun 10, 1998
   ii. A Co grants H option to buy 5k shares on Jun 10, 2004 if still employed on Jun 10, 2008
   iii. H and W divorce, economic community ended on Jun 10, 2006
   iv. Message of Hug proration: (intent of employer: primarily to reward past services)
   a. CP = 8 years / 10 years = 0.8 x 5000 shares = 4000 shares CP, 1k SP
   v. Marriage of Nelson proration: (intent of employer: incentive to remain w company)
   a. CP = 2 years / 4 years = 0.5 x 5000 shares = 2500 shares CP, 2.5k SP

Question 10

Goodwill of a professional practice

Answer 10

1. goodwill of a professional practice acquired during marriage is CP subject to division on divorce
2. goodwill: income generated not derived from the professional’s labor or reasonable return on capital and physical assets
   i. usually established by expert testimony
   ii. example:
   a. W is a solo practitioner. At time of divorce, W makes $100k per year after expenses (would earn $60k on the market as an associate). W’s firm has $100k in capital assets, would earn $10k at 10% return
   b. goodwill = $100k - ($60k + $10k) = $30k
3. a buy sell agreement (provision that any partner who dies or leaves the firm will receive a set amount for their interest in the partnership) is factor but is not conclusive in determining the amount of goodwill

Question 11

Educational Expenses

Answer 11

1. a professional degree is not “property” subject to division on divorce
2. reimbursement available if education enhancing a spouse’s earning capacity:
   i. paid for with CP, or
   ii. expenses incurred before marriage but loans paid with CP AFTER marriage.
3. defenses to reimbursement:
   i. other spouse receives a CP-funded education, or
   ii. the community has already substantially benefited from the increased earnings
   a. rebuttable presumption of substantial benefit (thus no reimbursement) if over 10 years have elapsed since the degree was awarded
4. note: education debt is SP of the spouse that incurs the debt
5. example:
   i. H and W marry after graduation, W works to put H through Med School, H takes out $120k grad school loan as well
   ii. H files for divorce at graduation
   iii. W can seek reimbursement for education expenses, and entire loan belongs to H