Parrino|Shattuck, PC Parrino | Shattuck, PC - Westport Family Law & Divorce Attorneys2024-01-31T22:36:11Zhttps://www.parrinoshattuck.com/feed/atom/WordPressOn Behalf of Parrino|Shattuck, PChttps://www.parrinoshattuck.com/?p=488632024-01-31T22:36:11Z2024-01-31T22:36:11ZWhat triggers a closer look?
When something seems not quite right in a spouse’s asset disclosures, a litigant may decide to consult a forensic accountant, a specialized accounting professional trained to investigate for negligent recordkeeping, fraud or theft when the numbers do not add up. Many scenarios in a dissolution of marriage could suggest the need for a forensic accounting to investigate personal, marital, investment, real estate, tax, income or business records:
To uncover fraud or misrepresentation impacting the amount or existence of income, accounts, gifts or financial assets received
To determine whether a litigant has dissipated or stolen assets
To find if a spouse is hiding money, investment or property
To discover irregularities in regular business or personal accounting records as compared to tax returns and other public filings
To understand why a litigant’s lifestyle is incompatible with their claimed worth
To investigate whether the litigant who works for a family business is taking the income they are due or if the business is transferring or holding that value in some other way
To learn if the litigant has set up a secret trust to hold hidden assets
To determine whether the litigant is transferring property or money into a third-party’s name pending the divorce
And other scenarios involving deception or inept asset management
Information gathered from forensic accounting and investigatory processes may be helpful for a litigant’s attorney in focusing further investigation and planning discovery through requests for documents or admissions, interrogatories, depositions and more. Forensic findings may provide significant leverage in settlement negotiations. A divorce litigant may present to the court as expert evidence their forensic accountant’s written reports or their testimony.
Forensic basics and methodology
According to the Institute of Certified Forensic Accountants (ICFA), traditional audits did not always uncover complex fraud. Out of this scenario grew the field of forensic accounting, which uses a professional’s “accounting, auditing and investigative skills.” They must “look beyond the numbers,” analyze the “smallest detail,” use intuition and instinct to reconstruct past movement of money or assets – and ideally have a “photographic memory.”
A forensic accountant may review many kinds of documents, including some that seem obscure but that could contain a piece of the financial puzzle. Such documentation may include tax records, business financials, bank records, receipts involving major expenditures or transactions, business annual financial records and filings, real estate documents and appraisals, public records and more.
The forensic examination may get particularly complex when a litigant has moved assets or made investments abroad. A litigant may need to involve foreign professionals who can gather the offshore evidence the forensic accountant needs to complete the investigation.
Connecticut appeals court example
In one case, several years after a divorce that had incorporated the parties’ settlement agreement, one ex-spouse filed a motion for contempt of court, alleging that the other litigant owed significant alimony and child support from six years of deficient payments. The payments were to equal 45% of gross annual earned income, but the paying litigant had not included “partnership distributions.”
The payor had provided annual earnings statements to the recipient and monthly alimony and support payments. She testified not “know[ing] anything … financially about … the workings of how [the defendant’s] income [was calculated].” This prompted her to retain a forensic accountant, who told her that the ex-husband had omitted from gross annual earned income yearly capital account distributions of a limited partnership share they had purchased during the marriage.
The parties disagreed about whether distributions from a limited partnership were the kind of income from which alimony and child support were to have been transferred. The trial court found that the distributions were income under the agreement and that the payor-litigant owed $370,440 in past due payments and the appellate court agreed.
Without the analysis of the forensic accountant, the recipient-litigant would not have known of the significant underpayment. McTiernan v. McTiernan, 164 Conn.App. 805 (2016).
Key takeaways
Without accurate inventories of assets, a litigant could face financial harm because a property distribution is not equitable without considering the full value of the marital estate. Similarly, questions of the need for alimony as well as of the size and duration could be made on false assumptions.
An experienced Connecticut family lawyer can recognize the signs or irregularities that could point to the need for a forensic accountant, who would investigate the marital estate in detail to determine its contents and actual value for purposes of fair property division and proper alimony awards.
]]>On Behalf of Parrino|Shattuck, PChttps://www.parrinoshattuck.com/?p=488512023-12-29T16:36:38Z2023-12-29T16:36:38ZEvidence of value
Divorce litigants can stipulate to property valuation or at least to the worth of the most valuable assets. This could happen through negotiation or they could agree, for example, to jointly retain an expert qualified to evaluate the particular type of asset at issue and accept their conclusions. If the litigants cannot come to a meeting of the minds on values, the judge in the divorce case must assign worth based on evidence before the court.
An experienced family lawyer can identify appraisers or evaluators respected in their fields of expertise to work on valuation issues for a litigant. An expert might assist in negotiations, conduct investigations and research, create written reports or testify in the trial.
Three allowable sources of valuation evidence in Connecticut divorce trials include expert opinion, the judge’s own knowledge and the asset owner’s opinion. When the marital property is substantial and involves major assets, litigants normally engage experts to present their opinions on worth as well as the supporting methodology that got them there.
Persuasive characteristics of valuation experts
The judge has broad discretion to assign values, including the valuation method to get there. Expert evidence is often the basis of these decisions. A couple of recent Connecticut trial court opinions discuss what the judge found persuasive in expert valuation methods or conclusions – and why they discredited others.
Objectivity, integrity, attention to detail
In a recent 2023 trial in the Stamford/Norwalk Division of the Superior Court, an “iconic” Cape Cod inn and related businesses were part of the marital estate, all owned directly or indirectly by the husband’s LLC. Both litigants retained their own real estate appraisers and business appraisers. Hearle v. Hearle, 2023 WL 7489933 (unpublished 2023).
The court adopted the fair market value (FMV) findings of the husband’s realty appraiser, noting that this expert found specific, comparable real estate sales, such as a “charming inn” sale price to support the FMV of the charming inn at issue. The judge also liked that this expert did not want to know which litigant he was working for, probably to increase his objectivity.
The wife’s real estate expert, by contrast, focused on finding comparable sales in the surrounding area even if they were not the same kinds of businesses – “comparing apples to oranges.” The court wrote that this appraiser increased his appraised value $1 million after the wife contacted him.
The judge also approved of the husband’s business valuation expert, who normalized the husband’s salary using the FMV of his “active work” instead of his profits as owner. The court also raised concern that the wife’s business appraiser did not normalize rent charged by one subsidiary to another below market rate. “[I]nflated or deflated rent [could] [warp] the valuation.” The wife’s expert said this rental normalization was “beyond his scope.”
Diligence, reasoning, precision
In another 2023 divorce, the court in the Fairfield Judicial District at Bridgeport credited the wife’s expert witness’ valuation conclusions after appraisal of three real estate parcels owned by the family business. The husband did not present opposing expert opinion of value, and while he testified about needed deferred maintenance on the property that would impact value, he also submitted no expert or other evidence to support his assertions of maintenance costs, so the judge did not find sufficient evidence of maintenance needs.
Each litigant presented an expert to determine the value of the family business itself. The experts’ methods were different as were their conclusions. The court adopted the findings of the wife’s expert, calling them “well researched” and well-reasoned. This expert used an “income approach to value” and evaluated the business as a “going concern.” He used complex calculations and adjustments – which the judge found fair and reasonable – to get to the final value.
On the other hand, the husband’s expert evaluated the business for its liquidation value and not as a going concern, a choice that the judge rejected considering the workforce of 18 people and annual receipts over $2 million. The court criticized this expert’s reasoning at almost every step, noting that the expert’s 40% discount for “lack of marketability” was “unreasonably high.” The husband himself provided valuation to the expert of business assets like equipment, but there was no “independent investigation” of value.
Practical takeaways
Reasonable, informed valuation is a necessary component of a fair and equitable distribution of marital property. Valuation-expert traits and practices are therefore crucial in divorce litigation. After all, asset values directly impact the judge’s decisions about property division and alimony.
A seasoned family lawyer can identify solid professionals for consultation and evidence production. An expert is particularly important when assets are complex, novel or rare, and finding a professional with the necessary experience and credentials may be a more challenging endeavor. An attorney can perform the necessary sleuthing to identify valuation professionals with the right qualifications and knowledge of an asset type.]]>On Behalf of Parrino|Shattuck, PChttps://www.parrinoshattuck.com/?p=487952023-11-20T13:23:46Z2023-11-20T13:23:46ZNature of active or passive appreciation
Over time, the value of an asset usually increases or decreases, and valuation change is either driven by active or passive forces. Active appreciation in this context often means that the spouse-owner (“titled spouse” or “propertied spouse”) – or sometimes the nontitled spouse – did something to enrich the value. For example, they may have had a pool or tennis court installed on residential premises, restored a valuable antique or made wise management decisions in a family business or as the executive of a major corporation.
Active participation in property enrichment can be through financial investment, physical effort or application of intellectual skills.
In the divorce context, passive appreciation occurs when the litigants did nothing to drive an increase in value, but it still rose. Passive increases in property value can come from the actions of third parties or from other outside forces. For example, the value of farmland could rise because a metropolitan area has expanded into the countryside, making agricultural land more attractive to developers. Or asset values could go up because of external market pressures such as inflation or heightened demand over limited supply.
Other external pressures that could passively drive appreciation (or depreciation) of real estate or other kinds of assets could include government policy, tax or zoning laws, demographic changes, physical alterations in nearby private or public real estate, economic conditions, environmental problems, location, assessments, fluctuations in market demand or other factors.
Why does the distinction matter?
Like Connecticut, most other states are equitable distribution states, meaning the court divides property between divorcing litigants based on principles of fairness. While the law on the subject may vary some among equitable distribution states, in general they categorize assets as either marital (acquired by either or both parties during the marriage) or separate (owned before marriage by one party or received by one of them as a gift or inheritance).
Broadly, in those states marital property is distributable in the divorce and separate property remains with the owner-spouse.
A tricky question in these states is whether and how to divide the appreciation during marriage of separate property. Depending on the state, it probably depends on whether the appreciation was active through the effort of one or both spouses, or was passive. Potentially the increase could become marital property subject to division.
Connecticut has its own take on marital property subject to distribution
Connecticut is unique as compared to other equitable distribution states. It is an all-property, equitable distribution state, meaning all spousal property, whether singly or jointly owned, acquired before or during the marriage, or received through inheritance or gifting, may be considered marital property subject to division between divorcing litigants. CT Gen. Stat. sec. 46b-81(a). This sweeping definition of marital property does not include the concept of separate property, so Connecticut judges can redistribute virtually all property of either litigant. See Bender v. Bender, 258 Conn. 733 (2001).
Then why do appreciation distinctions matter here?
While Connecticut judges do not need to consider appreciation of separate property, courts still must account for appreciation (or depreciation) during property division. Specifically, the court must, along with other listed factors, “consider the contribution of each of the parties in the acquisition, preservation or appreciation in value of their respective estates.” CT Gen. Stat. sec. 46b-81(c).
A spousal contribution to appreciation is often financial, but nonmonetary contributions can also drive appreciation, in which case fairness may support distribution of value to the nonmonetary contributing litigant. For example, the judge could consider the wife’s care of their children every weekend for three years while the husband left to work on renovation of a second home. Picton v. Picton, 111 Conn.App. 143 (2008); Browning v. Browning, 2018 WL 2749675 (unpublished 2018) (“One party’s nonmonetary contributions that make it possible for the other party to acquire or retain property, or have the effect of preserving or appreciating the value of property, should be considered.”).
Appreciation during divorce proceedings
A context where this comes up is when an asset appreciates or depreciates between the date of separation or the filing of the divorce complaint, and the date of the final order. The Bepler case is instructive. Bepler v. Bepler, 1998 WL 666982 (unpublished 1998).
Significant assets were shares in Capital Group, Inc., the parent corporation of the husband’s employer. The shares were in two classes, each with restrictions and not publicly traded. Spouses of owners were not “permissible owners” and transfers to spouses would trigger company redemption for cash. Still, the court found that despite the restrictions the stock (and its generous dividends) were “present property interest[s] for distribution.”
The husband also had a large share of valuable bank stock. Between the date of the complaint and the trial, the couple’s marital estate had almost doubled to $20 million, most of which was in stock. Noting the lack of appellate court direction on the “distinction of active/passive appreciation,” the court posed the “major issue” as “how to allocate that increase and the efforts regarding that increase.”
Noting that the assets (without an “exceptional intervening circumstance”) should be valued as of the date of divorce, the court found that the $9 million value increase since the complaint’s filing was passive and should be marital property subject to distribution. Despite his contributions as a senior vice president, market forces were responsible for the passive appreciation. The court divided the bank stocks, kept ownership of the company stock with the husband and gave half of future dividends or sales proceeds to the wife.
Takeaways
Our state courts have not said much about the active-passive appreciation distinction in equitable distribution. Considering the wide discretion of Connecticut judges to craft fair property division decisions as well as to choose reasonable valuation methods and to set asset values, the jurisprudence to guide litigants in future divorces will likely continue to evolve.
In the meantime, a knowledgeable family lawyer will know the state of the law and how to present expert and lay evidence relevant to appreciation or depreciation questions.]]>On Behalf of Parrino|Shattuck, PChttps://www.parrinoshattuck.com/?p=487812023-10-24T14:10:28Z2023-10-24T14:10:28Zsubject to equitable distribution between the divorcing litigants. The litigants may be able to settle this matter through negotiation and mutual agreement, including issues of ownership, valuation and division.
If the litigants do not settle on valuation and possibly division, it will be the job of the judge in the divorce proceedings to determine whether any or all of the collection is subject to equitable distribution – meaning fair division between the parties – in the trial. The court will normally place a value on the collection and potentially on each vehicle within the collection, depending on the plan for distribution.
A primer on equitable distribution
The judge’s basic process for dividing property in Connecticut divorce is to:
Identify all property owned either jointly or solely by one of the litigants. Normally all of it becomes part of the marital estate subject to equitable distribution between them. Connecticut is a rarity in that it is an all-property state, so it does not recognize anything owned, inherited or received as a gift by one of the litigants as “separate” property. Rather, all marital property, which often encompasses everything either party owns alone plus what they own jointly, may be fairly assigned to one or the other litigant.
Assign values to all property. While the court must not assign specific values to each item, the family lawyer in a high-asset case is likely to request it of the court to better arrive at a fair distribution. See Bornemann v. Bornemann, 245 Conn. 508 (1998).
Determine which litigant gets what property or whether the court will order any of it sold and the proceeds divided.
A litigant with strong feelings about the property distribution can seek representation by a matrimonial attorney who will present evidence and make arguments in line with the client’s wishes for equitable distribution. In the case of a classic-car collection, the client may be motivated by sentimental attachment or by monetary value.
Evaluating a unique heritage car collection
It is extremely important that a litigant present solid evidence of value for the court has wide discretion in deciding which valuation method to apply to the collection and in assigning a value. See Bornemann.
For example, in an unpublished Connecticut case a litigant who collected vintage cars and trucks presented as their expert evidence of value the testimony and written report of the owner of a classic-car company. The judge adopted the expert’s valuations, finding him a “very knowledgeable and credible witness.” Callahan v. Callahan, 2017 WL 4080388, (unpublished 2017). In another case, the court accepted valuations supported by “methodology, research and expertise” that it found credible. Callahan v. Callahan, 2012 WL 2362387 (unpublished 2012).
Part of the presentation usually includes an independent appraisal and at least one expert witness. Factors that may impact value of a classic-car collection:
Stipulation: Can the litigants agree on values?
Condition: Are the vehicles in pristine condition or do some need repairs or body work? How serious and costly are the problems? Are parts still available for vintage models and if not, how difficult or costly will repair be? How does the substitution of alternate parts impact the value? Has the car been in an accident and was it significantly rebuilt?
Mileage: Does high mileage lower the valuation?
Assessed valuations: Are there assessments used for insurance or of cars that are collateral for loans? Did either or both litigants obtain independent assessments? What values were sufficient to support financing?
Sales and prices: Are there any similar collections advertised for sale or are there records of such sales?
Litigant and judicial opinions: Are values proposed by the litigants reasonable and on what are they based? Judges in Connecticut also have discretion to apply their own knowledge and opinion to the valuation decision.
Sentimentality: Was the collection solely the effort of one litigant? Does it have personal or sentimental worth? Were its origins in the family of one of the litigants?
Rarity and obscurity: Were a limited number of vehicle types in the collection manufactured or do few survive?
Expert opinions: Each party will usually present the opinion of an expert within the field as to valuation. The closer the experience of an expert to the specific type and history of the collected vehicles, the more likely they are to be persuasive.
Notoriety: Does the collection contain vehicles owned by celebrities or that appeared in movies or on television?
Documentation: Are there published materials like books, magazines or trade journals about similar collections? Do collector associations exist for the type of vehicles at issue that may have newsletters or archival information?
Manufacturer certifications: Does the particular manufacturer have a certification program for its collectable vehicles and have any cars in the collection received such a stamp of approval?
A litigant with strong sentimental connection to the collection may not place so much of a monetary value on it as a personal one. The strength of a personal connection may impact the nature of the arguments to the court vis-à-vis future ownership decisions. On the other hand, the other litigant may urge that the collection be sold and the proceeds split.
A skilled family lawyer can curate strong and sometimes obscure evidence of value that may be important for the judge determining worth of the collection. Such evidence may take significant research to uncover, so choosing legal counsel with the experience and capacity to undertake such an investigation may be crucial.]]>On Behalf of Parrino|Shattuck, PChttps://www.parrinoshattuck.com/?p=487802023-09-25T13:10:59Z2023-09-25T13:09:12Zinclusion of bonuses as part of spousal income in divorce cases. The court’s automatic orders request information about bonuses received on the required financial affidavit of each spouse.
Connecticut courts have also ordered the use of bonus money for other purposes like paying down marital debt or reimbursing a marital account the bonus recipient had previously wasted or improperly spent. See Leonova v. Leonov, 201 Conn.App. 285 (2020).
Bonuses are part of available income in divorce
Connecticut courts have an “expansive definition of income used when crafting financial orders in dissolution proceedings,” so judges should normally include annual bonuses in income, even if they are not entirely guaranteed. See Bartel v. Bartel, 98 Conn.App. 706 (2006). A history of regular bonus payouts is sufficient for a court to presume they will continue. If bonuses cease in the future, the remedy is to then request a downward modification of any related support orders based on this change in circumstance.
Difficulty establishing future bonus amounts
Sometimes establishing the size of a future bonus can be challenging. The litigants could negotiate a stipulation to a dollar amount to use for periodic bonuses going forward. That number would be added to other sources of income to determine total resources available for alimony, child support and other financial obligations. Or, for the litigant who would be the recipient of such payments, their own bonuses may help determine fair support levels.
When bonus valuation is difficult, another approach is to enlist an expert to testify about their bonus forecast.
Gray areas
Some bonus arrangements may cast doubt on bonus regularity and continuity. For example, is an annual bonus based on sales or profits and do those numbers vary widely year to year? Does a manager or officer have discretion to approve yearly bonus payouts? Is that decision tied to any other factors or is it completely discretionary?
Is the employer a closely held or family business in which family members or close colleagues have the ongoing power to design or approve bonuses? Is there concern whether the close relationships with the litigant could influence the bonus decision? Might the litigant even be part of the bonus decision making team?
Strong matrimonial lawyers
Did a bonus recipient fail to disclose the bonus on their required financial affidavit? An experienced Connecticut divorce lawyer will carefully investigate the circumstances of any bonuses at issue, using specific discovery requests to uncover all relevant details. See Bartel, 98 Conn.App. 706 (2006).
Skilled legal counsel can present evidence proving (or disproving) the appropriateness of including a bonus in a litigant’s income for support purposes as well as establishing the amount.
Should a complex bonus arrangement make analysis difficult, the attorney can advocate for an arrangement that benefits their client. For example, the litigant receiving support might get a percentage of any future bonuses within a set time of the other litigant’s receipt of the funds, avoiding the need to set an exact dollar amount. Guarascio v. Guarascio, 105 Conn.App. 418 (2008).]]>On Behalf of Parrino|Shattuck, PChttps://www.parrinoshattuck.com/?p=487702023-08-22T13:37:18Z2023-08-22T13:37:18ZFamily businesses in divorce
When the co-owner of a closely held company divorces, their ownership interest is normally a marital asset subject to equitable property distribution between the spouses. A closely held entity’s governing documents often direct that any transfer or sale of shares must be to the other members or back to the business itself – and sometimes they explicitly ban transfer to an ex-spouse.
So, instead of assigning any actual ownership rights to the other spouse, the court often determines the spouse-minority interest owner’s value, keeping ownership with the participating spouse and accounting for the asset’s value in the overall property division. This also makes practical sense as the outside spouse and the other shareholders likely do not desire to work together.
Valuation issues with minority interests
When the spouse-shareholder owns fewer than half the shares or less than half the value of the family business, they normally have less power over business decisions as a minority stockholder. Also, transferability of the shares to new owners may be severely restricted. As a result, the asset has little or no value to buyers on the open market.
Rather, the marketplace of potential purchasers likely consists only of other family members or co-owners of the closely held business. To reflect this severely limited market and diminishment in market value, Connecticut courts often discount the value when someone with a minority business interest divorces.
This “so-called ‘minority discount’ involves first establishing the full market value of a minority interest and then discounting that value by an appropriate percentage to account for such factors as nonmarketability of the shares and the minority interest holder’s inability to control management.” Siracusa v. Siracusa, 30 Conn.App. 560 (1993).
One judge noted that in valuing a minority interest in a business, deciding whether to apply a discount is an “integral part of the process of determining the value of those shares to a potential purchaser.” Curran v. Curran, 2016 WL 402444 (unpublished 2016).
For example, one court on remand applied a minority interest discount because the litigant had a noncontrolling interest, plus a second marketability discount for “lack of liquidity … in the open market … a minority interest in a business does not have a ready market and is more difficult to sell.” Brooks v. Brooks, 2012 WL 4377825 (unpublished 2012).
Court has discretion in valuation matters
The court’s valuation of a minority interest is a finding of fact that can vary in different circumstances. In divorce cases, Connecticut courts have wide discretion to choose the business valuation method (fair market value, liquidation, net asset, capitalization of earnings, or others) they feel is most accurate or equitable.
Still, the judge must “follow some reasonable path … [that is not] a patently erroneous methodology.” Brooks v. Brooks, 121 Conn.App. 659 (2010). A court may choose a method advanced by either litigant, the litigants’ positions, a combination of methods or the judge’s own valuation impressions, as long as the court does not “misappl[y], [overlook], or [give] a wrong or improper effect to any test or consideration which it was his duty to regard.” Turgeon v. Turgeon, 190 Conn. 269 (1983); see Antonucci v. Antonucci, 164 Conn.App. 95 (2016).
Impact of governing business documents is an issue in flux
The governing documents of a closely held company may contain a buy-sell or right-of-first-refusal provision that stipulates what happens to shares when a member divorces, retires or dies. Of course, this may limit the marketability of the shares of a minority interest owner. The agreement may also predetermine the value of a minority interest.
Whether a shareholder, partnership or other agreement binds the court in evaluation of minority interest values or other matters is an area of some disagreement among Connecticut courts. For example, a judge adopted the valuation logic of one party’s expert based on provisions in shareholder agreements, including a formula to determine value resulting in a value of zero. Kravetz v. Kravetz, 2004 WL 2663974 (unpublished 2004).
Another judge pushed back against being constrained by provisions in corporate or business agreements, writing that the litigant asserting that the court was bound by a shareholders’ agreement had “produced no authority to support the proposition that a family court’s broad allocative power can be limited by the provisions of a shareholders’ agreement.” The opinion notes that while the appellate court has said that considering a buy-sell agreement was proper, it did not say that trial courts could not weigh other evidence. Schecter v. Schecter, 1999 WL 34857 (unpublished 1999).
After all, many other factors can impact valuation of a litigant’s business share, including “future prospects … current market value, prior earnings, cash flow, depreciation, assets, book value, excess earnings, capitalization of earnings, projections of future cash flows and adjusted earnings.” Sitterly v. Sitterly, 1991 WL 139677 (unpublished 1991).
Should issues of the applicability of provisions in business agreements to a court’s valuation decisions arise, a sophisticated matrimonial lawyer can analyze the current state of the law on this matter to advocate for their client’s interests.
Minority discount inappropriate where only owners were the two spouses
In Siracusa where the only family business owners were the two divorcing litigants, the court declined to discount the value of the 40% minority interest. The judge ruled that an exception to the discount was appropriate because the family business was wholly owned by the two spouse-litigants and one of them would get the other’s share to become the sole owner. The minority discount applies more logically when one spouse has a minority interest and the other owners are outside third parties, reasoned the court.
Legal counsel imperative
An experienced and knowledgeable Connecticut family lawyer can assist in negotiating a stipulation to the value of a minority interest to avoid having to litigate the issue in the divorce trial, although the judge in narrow situations could reject the stipulated value. Or the parties could agree on an expert to conduct a valuation of the minority interest that both will accept. See Curran, 2016 WL 402444 (unpublished 2016).
The attorney can thoroughly investigate and use the discovery process to understand the nature of the minority interest, and curate and present to the court relevant evidence of value. This often requires the retention of experts to analyze the asset and potentially submit reports or testimony to the court.
If a litigant does not submit adequate valuation evidence, the judge may rely on the other litigant’s assertions or the judge’s own opinion or may order a neutral third-party expert to analyze it. Or, if neither litigant provides sufficient evidence of value, the court can place a value based on “scant evidence.” Bornemann v. Bornemann, 245 Conn. 508 (1998). A party’s failure to present sufficient valuation evidence of a minority interest may cause them to lose the opportunity to challenge the judge’s valuation findings later. McRae v. McRae, 129 Conn.App. 171 (2011).]]>On Behalf of Parrino|Shattuck, PChttps://www.parrinoshattuck.com/?p=487652023-08-11T16:23:34Z2023-07-12T19:53:46ZExpectancies are not sufficiently certain to classify them as marital property
The question of whether an asset is a mere expectancy applies to a variety of property types. For example, we have previously discussed whether particular kinds of potential or difficult-to-define interests like retirement plans, pensions, degrees and licenses, unvested stock options and executive perks are sufficiently concrete that including them as marital property with tangible value would be fair – or are they mere expectancies?
The Connecticut Supreme Court quoted a Tennessee case defining expectancy as the “bare hope of succession to the property ... Such a hope is inchoate. It has no attribute of property, and the interest to which it relates is at the time nonexistent and may never exist.” See Krause v. Krause, 174 Conn. 361 (1978). Put another way, is an interest contingent on a particular future event occurring that is uncertain enough that the potential property interest is only an expectancy?
Giving a divorce litigant as part of their property distribution an “asset” without sufficient certainty that it will eventually vest in the interested spouse would certainly be unfair. The spouse with that property on their side of the ledger may never receive it. An expectancy is not part of the presently available property subject to equitable distribution. See Rubin v. Rubin, 204 Conn. 224 (1987).
Applying a complex analysis to a complicated trust
When is a trust interest sufficiently concrete enough that it is reasonable to call it marital property in divorce? At a basic level, a trust is a legal vehicle a person can create to hold money, property or other assets for distribution to a beneficiary or multiple beneficiaries. A named trustee, who is a person or entity named to control and distribute the trust assets to the beneficiary, must follow the directions and standards for distribution that the creator (settlor or grantor) established in the trust instrument.
A person may create a trust to keep assets out of the reach of someone – creditors, a spouse or child, a vulnerable or incompetent person, children or grandchildren, a loved one with an addiction or who makes unwise financial decisions are examples. The trust settlor may want the trustee to use the corpus (trust assets) to support or care for a person, or to dole out assets to a beneficiary in small amounts over time. Other reasons to use a trust may include charitable giving, tax planning or protection of a disabled loved one’s eligibility for public benefits.
Or to shield assets from availability to their spouse in divorce.
The types of and purposes for trusts as well as the kinds of powers, discretion granted and limits placed on trustees are endless. Against this backdrop, if a divorcing litigant has an interest in a trust, when is that interest sufficiently certain to be marital property rather than a mere expectancy? This interest could be in the trust assets, in an income stream from the trust or in both.
Factors relevant to whether a trust is a marital asset
Courts analyze trusts in this context to determine whether a litigant has any access to or control over trust assets:
Is the litigant a beneficiary who can request distributions or who is scheduled to receive distributions or trust income? Or does the trustee have complete power to make these decisions subjectively at their discretion? Are the trust instructions unlikely to cause the trustee to make a distribution to the litigant?
Is the litigant the sole beneficiary or are there multiple? Or is the litigant’s interest contingent on another event such as surviving another person?
Does the beneficiary have the power to redirect trust distributions to their children instead of taking ownership themselves?
What is the history of distributions or trust income and has it benefited a spouse?
Who is the trust settlor? Was it a third-party as part of their estate plan or was it a spouse trying to make assets unreachable from the other spouse? (See a recent article in Family Lawyer Magazine for more on this.)
What is the nature of the trust assets and where did they come from?
What is the relationship between the trustee and the beneficiary spouse? Is there space between the trustee and the divorce litigants?
Takeaways
Divorces involving complex, valuable trusts are often intricately complicated factually and legally. An experienced Connecticut family lawyer can carefully review a trust instrument to understand whether either litigant has a sufficiently concrete ownership interest in the corpus or in any income stream from the trust. The answer to this question may significantly affect the financial worth of the marital property subject to equitable distribution. Legal counsel is important whether the litigant is a potential trust beneficiary or the other spouse questioning trust asset ownership.]]>On Behalf of Parrino|Shattuck, PChttps://www.parrinoshattuck.com/?p=487642023-06-09T14:08:46Z2023-06-09T14:07:59Ztheir copyrights and any currently or future generated income or royalties to determine whether either constitutes marital property subject to equitable division between the litigants.
Copyright disclosure and discovery
When a litigant files a petition to dissolve a marriage in Connecticut, they must provide a sworn financial affidavit disclosing all assets and income. The form uses broad language requires the litigant to disclose all possible assets, including intellectual property like copyrights and any related economic benefits or proceeds.
Despite the disclosure requirements, an experienced Connecticut family lawyer would likely continue to investigate whether the opposing litigant has interests in copyrights or other intellectual property through vigorous discovery. For example, did a litigant register any copyrights? Did they create a significant or potentially lucrative original work but keep it concealed? Does a litigant have business interests enriched by the company’s ownership rights in copyright? Did a litigant transfer copyright interests to a third party in anticipation of divorce? Is a litigant in negotiation for a potential contract for royalties, such as from book or recording sales?
Connecticut courts on copyrights and their generated economic gain
Connecticut cases are relatively sparse that are specifically about copyright interests in divorce. Our courts have held that they have the power to distribute “proceeds” from intellectual property – of which copyright is a subset – between divorcing spouses. See Lynch v. Lynch, 135 Conn.App. 40 (2012), citing our state Supreme Court in Gallo v. Gallo, 184 Conn. 36 (2012).
The caveat, however, is that the “proceeds or royalties [must be] neither “indefinite nor speculative.”
The Gallo court analyzed whether trial court’s order that one litigant receive 20% of royalties on the other’s textbooks for five years was too speculative. While the court does not mention the word “copyright,” royalties on a book would normally generate from a monetized copyright.
The court emphasized that because the author already had a contractual right to royalties at the time of divorce, not knowing the exact future dollar amount did not make it indefinite or speculative. The agreement was clear as to subject matter, royalties and length of time.
Beyond income from a copyright, can a copyright itself be a marital asset?
This question wades into complex and largely uncharted territory for Connecticut courts and has been a perplexing question in other states. The broad issue is that because federal copyright law gives a creator five main ownership powers in an original work, does that mean that a state court in divorce does not have power to distribute part of those ownership rights to the non-owning spouse because federal law pre-empts state law on the subject?
One theory is that the copyright transfer to a divorcing spouse might qualify as one by “operation of law” that federal law allows – even if the law that operates to do so is state divorce law.
Published cases in our state have not resolved this exact issue, and the leading cases from other states have been community property jurisdictions that automatically give one spouse half ownership when the other acquires property during marriage. See In re Marriage of Worth, 195 Cal.App.3d 768 (1987); Rodrigue v. Rodrigue, 218 F.3d 432 (2000).
By contrast, Connecticut has an “all property” approach to property division, meaning all property of either spouse is subject to division in divorce. It would seem to follow that under this approach, if one spouse owns a copyright, a Connecticut court could transfer ownership interest to the other or even create joint ownership (as opposed to definite licensing proceeds, royalties or other generated income that are already clearly distributable).
How our courts would decide whether federal copyright law on ownership trumps our state equitable division law is yet unknown.]]>On Behalf of Parrino|Shattuck, PChttps://www.parrinoshattuck.com/?p=487632023-05-17T19:21:22Z2023-05-17T19:21:22ZLegal restraint on dissipation of marital assets
Upon commencing a Connecticut divorce, an automatic court order requires that until the divorce is over, each litigant may not “sell, transfer, exchange, assign, remove, or in any way dispose of [or encumber] [property] without the consent of the other party in writing,” or by court order. Either party may still use assets “in the usual course of business or for customary and usual household expenses or for reasonable attorney’s fees” in the divorce. Connecticut Practice Book, Rules for the Superior Court, Rule 25-5 (2023).
The order allows for filing of lis pendens and for some investment activity, subject to restrictions. Litigants may not hide property or remove the other litigant’s name from joint property without written consent or court permission. Neither may “incur unreasonable debts,” including use of a residential credit line, use of any asset as collateral or unreasonable usage of credit cards.
The parties must also exchange detailed financial statements. The litigants have an ongoing duty to update financial information throughout the course of the dissolution proceeding under the mandatory discovery procedure.
Connecticut courts on the parameters of dissipation
Our courts have interpreted and further defined these rules through analyzing whether dissipation has occurred in individual disputes as well as developing potential remedies for the wronged litigants in divorce proceedings. The equitable distribution of property in the divorce may include an offset to reflect one party’s dissipation of marital money or assets in order to even the playing field again and not allow the dissipator to be unfairly enriched through their unethical conduct.
After an extensive review of out-of-state courts on the subject, our state Supreme Court held in Gershman v. Gershman, 286 Conn. 341 (2008), that in divorce, dissipation requires at least “financial misconduct involving marital assets, such as intentional waste or a selfish financial impropriety, coupled with a purpose unrelated to the marriage.”
The court explained that dissipation occurs when one litigant “conceals, conveys or wastes marital assets in anticipation of a divorce,” requiring “some type of improper conduct.” Historically, courts have found dissipation in classic cases involving gambling, spending on a romantic relationship outside the marriage or transferring property or money to a third party for little to nothing in return. Sometimes the transferring litigant classifies these as gifts, but they are really loans that will be repaid or the receiver is just holding the asset outside the marriage for the litigant pending the end of the proceedings.
Importantly, the court emphasized that the test for dissipation does not have “[w]ell-defined contours,” especially in “ambiguous situations.” In other words, these transactions can be difficult to analyze or even discover, with the court noting that these cases often turn on the “financial motivation of the party charged with misconduct.”
In Gershman, the court found that the husband’s losing investments and excessive cost overruns on construction of the marital residence were not dissipation of marital assets because there was no financial misconduct, “intentional waste or … selfish financial transaction,” or spending for a nonmarital purpose.
Timing and motivation
Shortly after Gershman, the Connecticut Supreme Court held that a court may consider whether assets were wrongly dissipated even if it happened before the litigants’ physical separation – with the caveat that at the time at least one of the following was also true:
The dissipating spouse contemplated separation or divorce.
The marriage was “in serious jeopardy.”
The marriage was irretrievably breaking down.
When dividing the property, state statute directs the judge to consider “the contribution of each of the parties in the acquisition, preservation or appreciation in value of their respective estates.” CT Gen. Stat. 46b-81.
The high court noted that while statute does not define “preservation,” the ordinary understanding of the word as described in the dictionary is to “maintain in safety from injury, peril, or harm; protect.” “Dissipation” has a dictionary definition of “[w]asteful expenditure or consumption,” making the concepts of preservation and dissipation “financial[ly] antithe[tical].” Finan v. Finan, 287 Conn. 491 (2008).
The statute places no temporal limitations on when dissipation can be legally recognized. A court may find dissipation occurred before physical separation of the parties, as long as one of the above-bulleted scenarios was also true at the time. Married individuals may argue about unilateral spending choices, but it is just an aspect of the marriage – until it is clearly being done to keep property away from the other spouse when the marriage dissolves.
Finally, if a spouse tolerated excessive or unusual spending behavior during the marriage, it does not suddenly become dissipation when the relationship breaks down. For example, in the Superior Court case of Zentek v. Zentek, 2013 WL 6439597 (2013 unpublished), money the husband spent for gambling during the marriage with no pushback from his wife at the time did not become dissipation when the marriage became jeopardized. The spending was not during the breakdown of the union and the wife sometimes went to casinos with him.
Or, as one Forbes article states, “People are allowed to spend money however they like, and just because you did not like it that your spouse spent $45,000 on a race car, does not necessarily mean it is dissipation.” First, there must be a marital breakdown.
Evidentiary issues
A court cannot find that dissipation or asset concealment occurred without solid, sufficient evidence of the act of dissipation or of hiding. Sufficient evidence of the value of dissipated assets is important to make property distribution fair. Dissipation and asset valuation cannot be based only on the assertions of a litigant, which would call for the judge’s mere speculation. See the opinion of the Superior Court of Connecticut in Candella v. Candella, 2018 WL 3715577 (2018 unpublished). The court requires sufficient evidence to support a finding of “engage[ment] in financial misconduct for a non-marital purpose.”
Experienced legal counsel
Spousal dissipation of assets in anticipation of divorce is a factually specific issue in each case with scenarios falling into gray areas on a regular basis. It behooves a divorce litigant who suspects dissipation, or is accused of dissipating assets, to engage an experienced family lawyer who can initiate a thorough investigation on behalf of the client, which may necessitate the services of a forensic accountant.]]>On Behalf of Parrino|Shattuck, PChttps://www.parrinoshattuck.com/?p=486802023-03-13T13:24:24Z2023-03-15T13:22:42ZAs 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.]]>