In a recent post, we discussed the Connecticut court’s power to impute salary or wage income to a payor spouse in the crafting of an alimony award. This issue arises when the litigant who would pay alimony is unemployed, underemployed or overqualified for their job, earning less than they could considering their professional qualifications and employment history.
As we explained, this would result in less income available to pay spousal support. In appropriate situations, a judge may impute income to such a litigant because of the disconnect between the person’s earning capacity and current job, especially if the underemployment is willful – an intentional attempt to pay less alimony. Still, the court may attribute income to a litigant with or without bad faith.
Passive income from investments
Today we look at a related and extremely important aspect of earning capacity – especially to litigants with large, complex investment portfolios – the imputation of income from underperforming investment for purposes of paying alimony.
The Connecticut alimony statute directs that the court consider several factors when crafting the parameters of an alimony award. Listed factors potentially relevant to investment income are the amount and sources of income, earning capacity, education (that could impact sophistication of investment decision-making) and estate (type, size and value of intangible and tangible property). See CT Gen. Stat. 46b-82.
Indeed, Connecticut courts have at their discretion deemed certain investment income as available to pay alimony and, notably, imputed income to investments performing at an unreasonably low level.
Our leading case
The seminal case on this topic is from the Supreme Court of Connecticut in Weinstein v. Weinstein, 280 Conn. 764 (2007), a child support modification case in which the court agreed with the trial court that it was legal to impute additional income on the ex-husband’s underperforming investments. He had a $1 million investment account and a $25,000 money-market checking account. His rate of return was 1.24% at a time when the five-year treasury-bill rate was 2.96%.
(Please note: Connecticut courts discuss imputation of earned or passive income based on earning potential in both the alimony and child support context interchangeably, meaning the logic in either setting may be applied to the other. However, more complex, additional calculations may be necessary in determining child support.)
The high court in Weinstein said, “a court may impute an ordinary rate of return to an asset that yields less than an ordinary rate of return,” meaning it can classify the difference as attributed income available to pay alimony.
At this point, the investing litigant has the burden to show that the investment was still reasonable, and the imputation of additional income would be improper. The court explained that it is fairer to place that burden on the person making the investment who knows their reasons for accepting returns below market rates.
The court also emphasized that the ultimate decision on imputing investment income did not require that the investment-income disparity be the result of bad faith, a key issue. However, intentional underinvestment may sometimes be relevant to a case.
Finally, the court noted with approval the words of the New Jersey Supreme Court that there exists “no functional difference” between imputing income based on earning capacity in employment or in investment. In employment, the asset of “human capital” is underutilized, while in investment “investment capital” is below market.
Outstanding issues
The Supreme Court left for judicial discretion how to determine an “ordinary” rate of return. Weinstein used the rate on five-year treasury bills, attributing income to the alimony payor of the difference between what the return would have been at that rate (2.96%) and the actual rate of return (1.24%).
To determine the ordinary or prevailing rate of return, rates of return tied to government products or official data seem likely to be persuasive. But our state Supreme Court specifically declined to set the “ordinary” rate as that of treasury bonds in stone. See Vincent v. Vincent, 2016 WL 2891285 (unpublished 2016) (discussing historical rates of return in the Federal Reserve Statistical Release).
Future litigants may dispute what rate of return is ordinary under their circumstances. The Weinstein court did adopt the approach of the American Law Institute (ALI) to these issues, quoting the ALI that an “ordinary rate of return is the prevailing rate of return for secure investments.” The question of what a “secure” investment is will be up for debate in future litigation.
Notably, Weinstein was silent on the issue of a litigant who relies on investment income for the costs of living, and whether it would be inappropriate to impute income on the part of an investment generating income for legitimate expenses. See Weinstein v. Weinstein, 104 Conn.App 482 (2007)(footnote two of Weinstein on remand from the Connecticut Supreme Court).
Legal advocacy
This is clearly a developing area of Connecticut family law, so there may be future opportunities for litigants to advocate for preferable findings considering the particular investments at issue in their divorces. An attorney with detailed understanding of the judicial evolution of earning capacity and imputed income in investments can analyze complex investment schemes in this context, whether viewed in light of the interests of the investor-litigant or of the alimony recipient.
