Minnesota Divorce Basics: Invading Non-Marital Property

propertydivIn terms of dividing the assets and liabilities of the parties following divorce, the first step in the analysis involves determining which assets are “marital” and which assets are “non-marital.”

Simply stated, marital assets are those acquired during the marriage, through marital efforts. Non-marital assets are those that one spouse: (1) brings into the marriage; (2) inherits during the marriage; (3) receives as a gift during the marriage; or (4) acquires through the sale of other non-marital property.

The general rule is that non-marital assets are awarded, in their entirety, to the spouse who demonstrates that their property interest is, indeed, non-marital. There are, however, exceptions.

In some situations, the Court may determine that it is appropriate to divide a non-marital asset. Pursuant to Minn. Stat. Sec. 518.58, Subd. 2:

If the court finds that either spouse’s resources or property, including the spouse’s portion of the marital property … are so inadequate as to work an unfair hardship, considering all relevant circumstances, the court may, in addition to the marital property, apportion up to one-half of the property otherwise [non-marital] to prevent the unfair hardship. If the court apportions property other than marital property, it shall make findings in support of the apportionment. The findings shall be based on all relevant factors including the length of the marriage, any prior marriage of a party, the age, health, station, occupation, amount and sources of income, vocational skills, employability, estate, liabilities, needs, and opportunity for future acquisition of capital assets and income of each party.

The practical reality is that the Court will rarely invade non-marital property. There are two common situation in which the Court will do so: (1) if one spouse will be left insolvent; or (2) if non-marital interests represent the entire estate of the parties.

If the estate of the parties contains some marital and some non-marital interests, the Court may unequally allocate marital property in lieu of a division of non-marital interests.

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Key Concepts In Dividing Property During Divorce In Minnesota

homAt the end of the day, the vast majority of divorces in Minnesota result in an equal division of the marital estate (those assets and liabilities incurred, or accrued, during the marriage.

“Equal division,” however, is not the relevant standard. Pursuant to Minn. Stat. Sec. 518.58, the Court must make a “just and equitable division of the marital property of the parties.” What constitutes a “just and equitable” allocation? Well, usually equal – but not always.

In Minnesota, the family law judge has the ability to consider a number of statutory factors in dividing property unequally, including:

  • The length of the parties’ marriage;
  • Whether either party has been married before;
  • The age, health, occupation and sources of income of each party;
  • The vocational skills of each party;
  • The employability of each party;
  • The income of each party; and
  • The nature of the marital estate (both assets and debts).

Does this happen very often? No – except for cases involving a dissipation of assets.

“Dissipation” is described by statute as “without the consent of the other party…in contemplation of divorce, separation or annulment…” transferring, encumbering (creating debt against), concealing or disposing of marital assets, except in the usual course of business or for necessities of life.

Here are a few examples of dissipation:

  • Selling a motorcycle to a family member for $1.00, knowing it will be bought back for $1.00 following divorce;
  • Placing large amounts of debt relative to an extra-marital affair (hotel rooms, restaurants, airline tickets) on a credit card;
  • Incurring significant gambling losses;
  • Destruction of items of personal property (electronics, furniture or clothing);
  • Investment losses relating to an obvious scam; or
  • Spending large quantities of money on drugs or alcohol.

Should dissipation occur, the Court will likely allocate assets in such a way that the non-offending spouse is put back in the position they would have been, but for the dissipation – usually by allocating other assets to them. The party claiming dissipation bears the burden of proving that it occurred.

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Methods Utilized By Real Estate Appraisers During Divorce

propertyIn the vast majority of the divorce cases we handle, the parties own real property. Sometimes that property is a primary residence, while other times the property takes the form of a lake cabin, vacation home, investment property or business property.

Generally speaking, the equity resting in each piece of real estate is subject to equal division among the parties. It is, therefore, appropriate to determine how the parties will realize their equity. Will they sell the property and split the proceeds? Do they agree on the value of the property? Or, is an appraisal of the real estate necessary because one party wishes to keep the property and “buy the other side out.”

When an appraisal becomes necessary, there are a number of approaches utilized by the professional hired to value the property. They are characterized as the:

  • Cost Approach;
  • Market Approach;
  • Income Approach;
  • Investment Value Approach; and
  • Development Cost Approach

The cost approach involves a determination of what it would cost to rebuild the same property from scratch. This includes not only the structure itself, but also the improvements to land that would be necessary to complete the sale and take ownership. This approach is typically reserved for relatively new construction.

The market approach involves a comparison of similar properties that have recently been sold. Comparable sales offer a measuring stick based on recent economic activity. So as sufficient data is available, the market approach is most often relied upon in determining the value of a traditional home.

The income approach involves market value being determined as a multiple of profits derived from the use of the property. What would a willing investor pay to receive a return of “x?” Naturally, the more earned from the property, the higher the value of the property itself. This approach is often used to value investments, such as apartment buildings, commercial office buildings and shopping centers.

The investment value approach (rather uncommon) applies to property with sophisticated metrics for measuring the benefits, both short and long-term, associated with a piece of real estate. The more highly unique a piece of property, the more likely the investment value approach will be utilized.

Finally, the development cost approach may be utilized in a situation in which the parties own raw, undeveloped land. Questions involving future use and development potential, and then profits that may arise therefrom, are taken into account.

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Minnesota Divorce Lawyers Rely on New Judicial Resource: Pendleton’s Blog

mosMinnesota divorce attorneys have an emerging resource to rely upon in preparing their cases, and it’s coming straight from the bench. Anoka County District Court Judge Alan Pendleton’s blog, entitled “Pendleton’s Judicial Training Updates,” has now captured national attention from legal commentator and author Robert Ambrogi – and for good reason.

Whether custody, child support, personal property disputes, the involvement of children in a court proceeding, or family law motions in general, Pendleton offers the analytical framework utilized by the bench, in a rather user-friendly format. The nice thing is that the issues he addresses tend to be those causing some confusion for lawyers.

For example, our attorneys routinely debate how, and whether, to involve a child within a particular case. Pendleton provides insight relative to a highly sensitive question.

In addition to family law proceedings, Pendleton’s blog provides insight concerning domestic abuse proceedings, appeals, contempt, and the rules of evidence. Most posts provide an easy-to-navigate summary of a particular legal issue. The information provided certainly doesn’t dive into the minutia but, rather, offers a starting point for analysis.

Moreover, Pendleton offers links to the most common resources relied upon by lawyers and judges, including the Minnesota Rules of Civil Procedure, the Minnesota Rules of Evidence, and the Minnesota Rules of Appellate Procedure. Attorneys should strongly consider bookmarking the blog for that reason alone. Frankly, new lawyers should read every post on his site.

Pendleton’s work is one of a small number of blogs authored by District Court Judges in Minnesota. Anyone can subscribe, either by e-mail or RSS feed. Cutting-edge stuff, and a trend this author hopes continues.

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What are the Differences Between Judges, Family Law Referees and Child Support Magistrates?

gavjuIn Minnesota, family law matters are typically handled either by a family court judge, referee, or child support magistrate.  There are minor variations in the legal authority and responsibilities of each such official, and there is also some variation in the types of cases that they preside over. 

Most family court hearings in Minnesota are presided over by judges. A family court referee may get involved, but only in certain counties that allow referees to preside over proceedings – for instance Hennepin County or Ramsey County. Because of the volume of cases these counties experience, a family court referee may be hired at the discretion of the county itself. The referee is not appointed by the governor.

There is no major difference between a family court referee and a judge, and a family court referee has, more or less, the same kind of legal authority that a judge has.  Yet, when the family court referee signs an order, it must also be approved by a judge.  There is no need to appear at a separate hearing before the judge for approval of the referee’s order.

Child support magistrates, as the term suggests, are only involved in those cases where the issue revolves around child support and enforcement of child support payments. In the State of Minnesota, all counties have child support magistrates.

If you have a question about your rights in a divorce or family law case, call (763) 323-6555. Our attorneys will speak with you free of charge, and provide you with the best information possible.

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How Are Businesses Valued And Divided As Part Of A Divorce In Minnesota?

Many of our current and former clients are entrepreneurs – owners of small businesses, including restaurants, hair salons, trucking entities, vending services, auto repair shops, construction companies and web design firms. Important to keep in mind that even if the business was started and managed by just one spouse, it may be “marital” in nature. Marital assets are generally subject to an equal division among the parties.

The first step in allocating a business interest involves ascertaining a market value for the entity. It should come as no surprise that business owners typically think their enterprise is worth very little when a spouse comes knocking with divorce papers. That’s when a divorce attorney experienced in complex property valuation and allocation cases can help.

In an effort to combat the difficulty associated with determining the market value of a business interest, one (or sometimes both) parties will retain the services of a qualified business appraiser to evaluate the asset. The best business appraisers are certified in their field, have many years of experience and hold advanced degrees and credentials in accounting. We have ongoing relationships with some of the best appraisers in the Twin Cities.

The cost of a business appraisal varies widely, depending upon the qualifications of the appraiser and the nature of the company being valued. Naturally, the larger the enterprise, the more involved the appraisal will be. Base rates for appraisals of simple sole proprietorships typically range from $4,000 to $6,000.

As part of their valuation, business appraisers will produce a detailed report. These reports become evidence in the case and describe the information gathered by the evaluator, methods utilized to determine value and an ultimate opinion as to the value of the business.

Evaluators will use some, or all, of the following approaches in determining the value of a business:

  • Income Approach: Values a business based upon the ability to generate economic benefit for the owners. For example, if a small business is a “high risk” investment, a buyer may wish to realize a return of 20% per year on equity. As a result, the business may be worth five times the profits of the business.
  • Asset Approach: Values a business based on a balance sheet of assets less liabilities. Profits are not taken into account, just equipment, inventory and goodwill, offset by debts owed.
  • Market Approach: Values a business by comparing historic sales of similar businesses. An evaluator may research recent sales in the marketplace to determine what a willing buyer would pay for the business interest.

Please contact me if you have further questions about the division of business interests in a Minnesota divorce. Our Minneapolis divorce lawyers offer a free consultation to all potential clients.

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The Parties, The Lawyers, The Judge And Uncle Sam: The Key Players In Most Divorces

Many divorces involve alimony, child support and the division of assets – all of which involve taxation issues. Litigants tend to overlook the impact that these provisions will have on their taxes. As lawyers, however, we consistently take the tax consequences into account in determining what is fair and equitable under the circumstances.

Alimony payments are considered income for the person to whom the payments are made, and are deductible to the person who’s making the payments. If the parties are in different tax brackets, the government may wind up subsidizing part of the alimony payment.

In contrast to alimony, child support payments are not considered as income to the person receiving the payments, nor are payments deductible to the person making the payment. As a result, child support payments do not have any tax consequences at all. Important, however, if alimony is also an issue, to run the child support numbers and compare available cash – as opposed to gross income – in determining need versus ability to pay.

The sale of the marital homestead does not typically involve a taxable event. Capital gains up to $500,000 from the sale of the homestead will be not subject to taxation, if you have lived there for two of the last five years.

If you choose to transfer title to the residence, allowing your spouse to retain the equity, no taxable event occurs. Many clients will opt to use the home equity as an offset against alimony payments, avoiding tax issues altogether.

However, if you want to adjust the property division in a way that allows both partners to retain equal equity in assets, there may be sizable tax consequence to consider. For example, if one spouse retains the marital homestead and offers the other a retirement account in exchange for his/her share of equity in the house, the resulting settlement may not be fair to the one who takes the retirement account. That’s because if this spouse wants to access his retirement account funds, they cannot do so without incurring a tax liability. As a result, when you factor in the tax liability, the person who received the retirement account could actually end up with a lower settlement.

Simply put, a dollar of equity in a home is worth a dollar on the street. A dollar in a 401(k) plan is worth, perhaps, 70 cents on the street. For that reason, we always consider the net value of a particular asset in creating an equal property settlement.

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What Is An FENE…And Why Do They Work?

More and more Minnesota counties are providing divorce litigants with an opportunity to resolve their financial issues through a process known as “Financial Early Neutral Evaluation.” Settlement success rates in the FENE model are astonishing – as high as 75% in some jurisdictions.

An FENE involves a half-day session (or two, or three, or four) with a court-appointed neutral. This neutral typically is an experienced family law attorney, or a CPA familiar with the financial issues involved in a divorce. The parties, and their lawyers, sit down with the evaluator very early in the case – in an effort to catch people before they become too embroiled in conflict, or stuck in their position.

The process begins with the exchange of information, to ensure that there has been a full and fair disclosure of all income, assets and liabilities. A balance sheet is often created, which defines the universe of assets and debts, attributes value, provides a basis for the value, carves out any non-marital claims, and then allocates the relevant item to one of the parties. Once all allocated assets and debts are added up for each litigant, the cumulative value for each should be equal. This is typically the least controversial portion of the FENE, but can take some time.

The more controversial portion of the FENE involves the issue of spousal maintenance. With the assistance of the evaluator, the income and budgets of the parties will be scrutinized. A range of possible outcomes may be discussed, and recommendations may be made by the evaluator concerning the amount, and duration, of alimony in the event that the judge is left to decide the issue. Settlement discussions begin with that opinion as a backdrop.

Why does FENE work so often? A few points:

  • The parties have direct conversation with one another, and the evaluator, in a natural way. A far cry from the robotic “question and answer” method of introducing evidence during a trial.
  • The rules of evidence go out the window at an FENE. Any issue is up for discussion, empowering participants to voice their real-life concerns.
  • Emotions may be taken into account at an FENE. Issues concerning “fairness” and “hurt” may be addressed as part of the process. Frankly, the law of “no-fault divorce” precludes alot of this in the courtroom.
  • The process can be therapeutic. People feel like they can speak their mind, and they are listened to. Sometimes all a party needs is to be heard by someone.
  • Spouses have to look each in the eye as they discuss the issues. Very different from sitting 25 feet apart in the courtroom, facing front.
  • There is a real sense that the parties can “get it done” during the process. Litigants believe that closure has real value, and may be worth a compromise.
  • The process is a respectful one. Most evaluators know how to keep tempers from flaring.
  • The evaluators, not the lawyers, control the agenda. Both parties feel they are on a level playing field.
  • Opinions matter. Litigants afford substantial weight to the perspective of the evaluators. They know the evaluator has no stake in the outcome, and the experience to back up their opinions.
  • The neutrals are forced to “show their work.” What I mean is that the parties are literally walked through each of the elements of the case, together, and hear the same thing at the same time. They see how the opinions of the evaluator are created right before their eyes, giving them more credibility.
  • The surroundings are comfortable. There are no robes, no gavels, no court reporters, and no security. Just people sitting around a table, with their favorite beverage, talking.

As time goes on, we suspect the FENE process will gain statewide acceptance. Most of the counties in the Twin Cities metro area have adopted such a program. Why wouldn’t they? With a 3/4 reduction in divorce litigation, everybody wins….except those lawyers whose practice model is based on “dog fight” mentality. But, who’s feeling sorry for them anyway?

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Division Of Retirement Assets In Divorce: Field Guide To QDROs, SEPs, ESOPs, TSPs And Other Beasts

In addition to homes, automobiles, bank accounts and furniture, retirement plans may be “marital property,” subject to an equitable divisionamong the parties to a divorce.

Many twenty-pound books have been written about the methods of valuing, and dividing, retirement interests. In fact, some lawyers make their living handling only the orders associated with slicing and dicing retirement plans, for two key reasons. First, this stuff is rather confusing, even to the most qualified divorce attorneys, making specialization critical. Second, many family lawyers don’t wish to test the strength of their malpractice coverage by lurking in dark places.

A few key terms to understand:

  • Qualified Domestic Relations Orders (QDRO): An order drafted after entry of a divorce decree that splits ownership of a retirement plan. The plan administrator will have sample language to follow. Learn more about Qualified Domestic Relations Orders.
  • Certified Judgment and Decree: A copy of a final divorce decree that contains the seal of the court administrator, validitating authenticity of the decree.

In an effort to help you get your arms wrapped around retirement interests, we offer the following: (1) common plan descriptions; and (2) method utilized to divide them:

  • 401(k) Plan: An employee contributes a percentage of income to the plan, pre-tax. The employer may match the contribution of the employee in part, or full. Withdrawals are taxed as ordinary income. Withdrawal before 59 1/2 usually results in additional penalties. Divided pursuant to a QDRO. Learn more about 401(k) plans.
  • 403(b) Plan: Similar to a 401(k) plan, but offered by public education organizations and other non-profits. Divided pursuant to a QDRO. Learn more about 403(b) plans.
  • 457 Plan: Similar to a 401(k) plan, but offered by some government employers. Divided pursuant to a QDRO.  Learn more about 457 plans.
  • Deferred Compensation: A portion of an employee’s income is paid at a future date, tax-deferred until payment is received. Many municipal employees, such as police officers, participate in deferred compensation plans. Divided pursuant to a QDRO. Learn more about deferred compensation plans.
  • Employee Stock Ownership Plan (ESOP): A portion of the employee’s salary is used to purchase company stock. The company holds the stock, in trust, for the employee. The employee receives cash, or shares, at time of termination of employment. Divided pursuant to a QDRO. Learn more about ESOPs.
  • Profit Sharing Plan: The employer makes a contribution to an employee’s account, if the company yields a profit, based on a formula. Divided pursuant to a QDRO. Learn more about profit sharing plans.
  • Pensions: Arrangement in which a retired employee receives periodic payments from their former employer, whether a private company, union, the military or government agency. Divided pursuant to a QDRO, or non-qualified DRO. Learn more about pensions.
  • Roth IRA: Individuals contribute to an account held in their name, on a post-tax basis. Growth on investment distributed tax free. Divided pursuant to a certified Judgment and Decree. Learn more about ROTH IRAs.
  • Simple IRA: An employee contributes a pecentage of income to the plan, pre-tax. The employer may match the contribution of the employee in part, or full. Similar to a 401(k), but less expensive to administrate. Divided pursuant to a QDRO. Learn more about Simple IRA accounts.
  • Simplified Employee Pension (SEP): An employee contributes a pecentage of income to the plan, pre-tax. The employer may contribute to the plan. Divided pursuant to a certified Judgment and Decree. Learn more about SEP plans.
  • Social Security: Individuals receive periodic payments from the government when they reach a specific age. Benefits are non-marital and, therefore, not subject to division among the parties. Learn more about social security benefits.
  • Thrift Savings Plan (TSP): Defined contribution plan for federal civil service employees. Similar in nature to a 401(k) plan.  Divided pursuant to a QDRO. Learn more about TSP.
  • Traditional IRA: Individuals contribute to an account held in their name, on a pre-tax basis. Divided pursuant to a certified Judgment and Decree. Learn more about Traditional IRAs.

Any number of other plans may be available to a particular employee, but these are by far the most common. If you have a question about another type of plan, such as a deferred annuity, TSA, money purchase plan or SARSEP, I invite you to contact me at your convenience.

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Maryland Judge Awards Couple Joint Legal Custody Of Lucky The Dog

Michelle Lore, a contributing author to the Minnesota Lawyer Blog recently authored a post about the custody decision in Maryland involving…a dog. She reports:

A judge in Maryland recently decided a custody battle with a twist — it was over a beloved pet.

A childless couple heading for a divorce could not agree on who would have the right to keep Lucky, their 16-pound Lhasa apso.

Maryland treats pets as jointly owned marital property that must be sold if the divorcing couple can’t agree on who gets to keep them. The parties split the proceeds of the sale.

But retired Prince George’s County Circuit Judge Graydon S. McKee III, a dog owner himself, didn’t like that solution so he fashioned his own. After hearing testimony from both parties — Gayle, who lives in Alexandria, Va., and Craig, who resides in Dunkirk, Md. — McKee decided that the couple would split custody. Lucky will alternate homes every six months.

Comments seem to make great reading. No exception here. Law Lacky said, “That is nothing. I worked on a divorce case a decade ago that involved ferrets. The divorce decree included weekly visitations and “ferret support.”

In Minnesota, pets are viewed as property, with no clear answer on how to “divide” them.

Minnesota attorney Barbara Gislason, a nationally recognized animal rights lawyer has this to say about pets and custody:

It is an interesting phenomenon that they seem almost invisible in Family Law. Because about 2/3 of households have pets and spend in excess of 40 billion per year on them, and a majority of owners consider animals to be family members, should this continue?

Barbara’s position seems to make sense. I can’t imagine it would take the legislature more than a few minutes to adopt a quick set of standards for the court to consider, including who has been the primarily caretaker of the animal.

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