Family Law

DID THE "INCREASE IN VALUE" CASE JUST SINK INTO THE SWAMP?

By Fox Rothschild

We are litigating several cases currently where much of the value that is subject to equitable distribution comes from an increase in the value of assets that were in the hands of one spouse prior to marriage or gifted to one spouse only during the marriage.  In contrast to the view of most other states (including New Jersey and Delaware) Pennsylvania includes the value of this any increase in value of non-marital property that came about during the marriage.  Assuming that you were married on January 1, 2000 or inherited property on that date, as of December 31, 2007 chances are that there was a pretty heft increase in the value of that asset if was invested in real estate or equities.  In some situations, the increase might even outstrip the value of the underlying gift.  A fair example would be if you had inherited shares of the retailer Target in late 2000.  The stock was worth $33 a share.  If you separated in late 2007 the stock was up almost one-third to $50. If you inherited 1,000 shares, the underlying $33,000 would be your non-marital estate and would not be subject to division in equitable distribution.  But the $17,000 increase in the stock would be “in” the marital pot and could be divided either in value or in kind.

When the market last crashed (November 2000-September 2001) many litigants who separated before the tumble found themselves in trouble because the statute referred only to the increase between the date of the gift or marriage (in the case of pre-marital property).  Any subsequent decrease was not referenced in the statute.  So a part could find him or herself subject to an order dividing gain that no longer was around to divide. The 2005 amendments to the Divorce Code addressed that with Section 3501(a.1).  That Section stated that the increase subject to distribution was the lesser of (a) the increase from date of marriage or gift to date of separation or (b) the increase from marriage or gift to the date of distribution.

Target offers a great example.  Mr. X inherits or marries already holding his $33,000 of Target stock.  The couple separates when the price is $50 and Mrs. X lays claim to half or more of the $17,000 increase.  But, alas, the case did not settle on the date of separation and today (11/10/08) Target closed at $36 a share.  If they are dividing the estate tomorrow, the “increase “ is 1,000 shares x $3 a share ($36-33).  The increase in value case is no more.  Need a more extreme example.  If the Chairman of Lehman Brothers married on January 1, 2004 and owned a million shares he had $40,000,000 in premarital assets.  By January 1, 2007 he had doubled his net worth and risked an equitable division of another $40,000,000 in value.  Today his 1,000,000 shares are worth $60,000.  Can he ask his bride to share in his loss? Not the way the statute reads today.  Of course, had he margined his stock to buy a $10,000,000 unit at Trump Tower in Manhattan, we may have some marital debt to divide once the property is sold.

With the markets being as volatile as they are, it is tough to settle cases.  But today it pays to watch the ticker while your in the room dividing.

Full post as published by Pennsylvania Family Law on December 11, 2008 (boomark / email).