New York divorce courts will uphold unambiguous terms of a pre-nuptial agreement even if enforcing the agreement seems harsh. 

How would you decide this case if you were the judge? (I will try and hide the genders of the parties so you can impartially rule.) 

In a recent case, decided by a New York Appellate Court, a couple executed a pre-nuptial agreement that defined marital property as:

(a) any property that is jointly owned by the parties, and (b) all household furniture and furnishings owned by either party, whether heretofore or hereafter acquired and regardless of the form in which title is held.

Everything else was defined as separate property, including:

real property purchased by either party during the marriage using their own separate property, as well as the appreciation of such property during the marriage "whether caused by the efforts of a party or a third party, or by inflation, or by any other cause or stimulus.

After the parties wed, B purchased what became the marital residence for $295,000, making $150,000 down payment using from the proceeds of separate property.   C took out a mortgage for the balance. Title to the home was in B’s name.  (I do not how the mortgage was in C’s name, if C did not have title.)   

B was not employed after the parties were married so C paid the mortgage and all the carrying costs for the house.

The parties divorced.  What should the court do with the house?

The prenuptial agreement defined marital property as any property that is jointly owned.  Here, title to the property was solely held by B, who purchased it using separate property.    C’s payment of the mortgage and carrying costs did not “convert” the property from separate to marital. 

The home is separate property and not subject to equitable distribution.

That very issue recently confronted one New York couple living in a rent controlled apartment. In Cudar v. Cudar, the husband leased a rent-controlled apartment in 1960. In 1969, the parties wed and the wife moved into the apartment. The parties resided together in the apartment for thirty five (35) years, until 2004, when the husband was forced to leave after the wife obtained an order of protection. Since 2004, the wife solely paid rent and resided in the apartment.

The husband claimed that the apartment was his pre-marital separate property and that he was entitled to retain possession of it.  As part of a divorce, property is broadly defined as either marital or separate property.

 As detailed in the courts decision:

Domestic Relations Law § 236(B)(1)(c) defines marital property as "all property acquired by either or both spouses during the marriage and before . . . the commencement of a matrimonial action, regardless of the form in which title is held.

. . . Separate property, on the other hand, is defined, in part, as "property acquired before marriage or property acquired by bequest, devise, or descent, or gift from a party other than the spouse" (Domestic Relations Law § 236[B][1][d][1]). Separate property is required to remain separate for the purposes of equitable distribution. 

At issue in Cudar was how the rent controlled apartment lease should be qualified- was it separate or marital property? The Court through a curve and declared that the lease was neither. The Appellate Division stated that:

A leasehold interest in a rental apartment, even one subject to the rent control law, which is not expected to be converted into a form of ownership such as a cooperative, is neither marital nor separate property as defined by the Domestic Relations Law.

This is a logical conclusion, The lease to rental property does not give the tenant an ownership interest, but instead confers the right to occupy the premises and to pay rent, albeit in the case of a rent controlled apartment at a rate substantially below market level.

Though the apartment cannot be distributed as part of the divorce, the court is empowered as part of the divorce to determine who may occupy and possess the apartment. While the Appellate Court remanded the matter to the trial court of consideration, if I was the husband in this case, I would not be making plans to move into the apartment anytime soon.   In Cudar, the Court cited a single case where, like the case at bar

the husband was excluded from the apartment because of his violent acts, the divorce was granted based upon those acts, the wife was the sole occupant of the apartment for eight years, and had paid the rent during that time. The Court specifically noted the trial court’s conclusion that “it would be inappropriate to "uproot" the wife” to give occupancy to the husband.

When it comes to marital property rights, timing is everything.   Generally, whatever property a party owns or possesses prior to the marriage remains separate property.   Property acquired after a marriage is marital property and may be subject to the other spouse's claims.    It is no wonder then that the Zuckerberg wedding occurred only after  Facebook went public. 

 As Tara Siegel Bernard pointed in the New York Times,

          . . .  the lines between community and separate property can get fuzzy pretty quickly after that, particularly over many years of marriage. Separate property, for instance, remains separate unless that money is commingled with “community,” or joint, money and the couple does not keep records of where the money came from or who paid what. . .

Perhaps the biggest issue is what will happen to the anticipated increase in value of the separate property- millions of dollars of Facebook stock.    Normally, appreciation of separate property would remain separate.   But, because Zuckerberg is actively engaged in the business of increasing Facebook’s stock value, his  direct efforts  (and his wife’s indirect efforts) during the marriage may be enough to convert the appreciation  of the separate asset into a marital asset. 

The best protection would, of course, be a  pre-nuptial agreement which could address the parties prospective rights should the parties’ marriage end in divorce.    The parties could, for instance, agree that all or some part of the appreciation in value of the Facebook stock would remain separate property.     

Just as I am guessing that the timing of the marriage after stock offering was not coincidental, I am sure that the Zuckerbergs did not leave anything to chance and defined their rights in a pre nuptial agreement.   

If you are not the person who earned the degree or obtained the license, one appellate court answered, not that much.  In Esposito-Shea v. Shea, the wife earned a law degree during the marriage and was only obligated to pay her husband 10% of her resulting enhanced earning capacity.    

An enhanced earning capacity is the difference between the earning capacity of the party before and after earning the degree or attaining the license. 

According to the court’s decision:

[A] nontitled spouse seeking a portion of the enhanced earning potential attributable to a professional license or degree of a titled spouse is required to establish that a substantial contribution was made to the acquisition of the degree or license . . .[w]here only modest contributions are made by the nontitled spouse toward the other spouse's attainment of a degree or professional license, and the attainment is more directly the result of the titled spouse's own ability, tenacity, perseverance and hard work, it is appropriate for courts to limit the distributed amount of that enhanced earning capacity.

The husband in Esposito-Shea v. Shea maintained that he was entitled to a large portion of  the wife's law degree because he was the family's primary wage earner during the parties' marriage and arranged his work schedule so that he could care for their children while the wife attended law school. However, said the court:

these sacrifices represented "'overall contributions to the marriage rather than an additional effort to support [the wife] in obtaining [her] license."  In addition, the wife's own efforts in obtaining her law degree cannot be minimized. For example, she worked in part-time positions throughout the marriage and was employed during the summer months while attending law school. She earned merit scholarships and paid a significant part of her law school tuition with an inheritance she received during the marriage. Under the circumstances, it cannot be said that Supreme Court abused its discretion in limiting the husband's distributive share of the wife's law degree to 10% of its overall value.

The trend, as highlighted by this decision, is for courts to award the lion’s share of degrees and licenses to the person who has the “ability tenacity, perseverance, and hard work to actually earn the degree, not their spouse. 

In the current economic environment, the marital home may not be a desirable asset.   Traditionally, the marital home was viewed as getting money in the bank; pay the mortgage and related expenses for a couple of years and you could cash out with a large profit.    However as Forbes contributor Marcelle Sussman Fischler points out in her article House Regret: Among Divorcing Couples, The House Is Now A ‘Hot Potato’, the marital home is now is viewed as a an albatross” that is sinking in value. 

If  the depreciating value of the marital home was an insufficient deterrent to seeking it as part of the divorce, issues of liquidity and affordability may be.    It would be imprudent as a single person to seek an asset that took two incomes to support, particularly when it may be unsellable in a glutted real estate market.  “If you lived towards the top of your means when married, you can’t divide that lifestyle in half and both afford the same kind of house.”

There may be very valid reasons for seeking to remain in the marital residence after a divorce; for example, when one parent desires to provide a sense of continuity for children and to allow them to complete their high school education in their home community.  In such cases parental responsibility may trump economic practicality.     However, in the absence of this type of issue, and particularly when I represent the economically dependent spouse, I suggest the person divorce the marital residence, cash out and run.  

When the non-monied party, in particular, is insistent on keeping the marital residence, I may suggest they meet with a financial planner who can plot out the carrying costs of the maintaining the home against current income and anticipated cash flow.  The demonstration may show that party may be house poor, or even worse, broke and unable to afford the house within in a foreseeable time; at a minimum the party can make a informed decision. 

Which gets me back to may point, be careful what you wish for. . .

 Entrepreneur.com offers a guide to divorce proof your business:

1. Maintain good records, and keep the family's finances separate from those of the business.

2. Pay yourself a good salary.

3. Fire your spouse.

The more prominent the ex's role and the longer he or she worked in the business, the stronger the case a lawyer could make that this spouse helped build the enterprise and should profit from its growth.

4. Sacrifice other assets.

Try to retain 100 percent ownership of the business by forfeiting other assets instead, such as retirement accounts, the family's home, vehicles or collectibles.

5. Get a fair valuation.

6. Arrange to make any payments over time.

A buy-out of the spouse’s interest can be made over time instead of a lump sum payment.

7. Raise capital by selling a stake.

8. Sign a pre-nup or a post nup

You and your spouse can “agree” that your business is your separate assets and will not be subject to equitable distribution if the marriage ends in divorce.

9. Place the business in a trust.

This keeps the business from being counted as a marital asset as you no longer personally own it..

10.   Create a buy-sell agreement.

A buy-sell agreement defines what happens to a business should any owner's status change, as is the case in a divorce. 

Mark Gotttlieb in his blog Forensic Perspectives offers four examples of how the right business valuation expert makes a difference in properly distributing assets in a divorce. 

• The business valuation expert will opine as to all relevant factors, necessary to determine a business’s true value, including, assessing the marketability and minority aspects of the husband’s interests as well as any contractual restrictions. 
• The business valuation expert will facilitate discovery and trial preparation.   The expert would not only have the evidence that supports his conclusions, but would also possess the evidence on which the other spouse is relying.  Your team would be then be prepared to explain away any differences in the parties’ valuations.  
• The expert could educate the court as to factors that must be taken into account- including the tax impact of any asset distribution.
• The expert would be prepared to refute the other spouse’s expert or a neutral court appointed expert’s errors, false assumptions and methodologies. 

In short, the business valuation expert provides the attorney with the factual analysis to achieve the client’s goals in a contested equitable distribution case.  

Disagreements can arise over a multitude of issues, including the selection of a broker, setting and negotiating the sale price, apportioning responsibility and the costs of preparing the property for sale and, of course, distributing the sale proceeds.     Any one of these issues can erupt aborting the sale.        

Well crafted settlement agreements address these issues, in detail, in an attempt to pre-empt disputes. But, in reality, if a dispute arises, by the time a court rules on one party’s breach of contract, the buyer will have walked away from the deal.    

Sara Lerner of NPR  reports that there is a new breed of real estate agent, specializing in sale of homes owned by divorcing couples.   "Really it's a simple, singular goal, and that's to, as efficiently as possible, get to the end of the road, which is the sale of their home."

One broker reports his strategy is:

I never try to force them to communicate together, which means a lot of separate and duplicate communication, so that neither ever has the impression that I'm trying to force the agenda of one on the other..

My role at that point, when someone needs to get something off their chest, is simply to let that happen. Because if people aren't able to express themselves, then it causes frustration," he says. "And the last thing that I need is for a husband or a wife to be frustrated with me because they are perceiving that I'm not ... that I don't get it.

Even though both parties’ interests should be aligned in selling the marital home so that they could “cash out” and move on, selfish desires or just the need to assert control over the other, often prevent the parties from acting in concert.    Any real estate broker who is willing to enter fray and bring the adversarial parties together to facilitate a sale deserves his commission.  

 According to Stacey Napp, the founder of one funding company, Balance Point, “Everybody knows somebody where at the end of the day, the divorce was not equitable,” she said. “We want to help those people, the underdog, to make sure they get their fair share.”

So, is there a need to have a third party to invest in a divorce action?   Perhaps!

Recently, New York amended its law regarding awards of attorney’s fees in divorce and other matrimonial actions.  The law was intended to even the playing field in divorce actions between the money and non-moneyed spouses.   According the law, judges are to presumptively award attorneys’ fees and expert expenses to the non-moneyed or economically dependent spouse.

 In most cases, an award of attorneys’ fees is sufficient to even the playing field between moneyed and non-moneyed spouses in a divorce.   However, in the extreme cases, where money and assets have been secreted or the moneyed spouse is employing a strategy of delay and obfuscation intended to economically wear the other party out, third party financing may be useful.  

 Indeed, Napp conceded that third party funding is not for everyone. 

The company wants to focus on people with marital assets between $2 million and $15 million, a bracket Ms. Napp described as “the lower end of the high end.” She said that investing in smaller disputes was not worthwhile. Wealthier people, she said, seemed to resolve divorces more easily — perhaps because they still felt wealthy in the aftermath. 

 Another concern is control of the case. 

Most lawsuit lenders avoid any role in the management of cases, seeking to disarm critics who worry that lenders seeking profits will corrupt the pursuit of justice. Ms. Napp, by contrast, sells the benefit of her own experience.

Ms. Napp said that as she decided to create Balance Point, she realized that she could not settle her own case. “I had to win,” she said. “Because I don’t know that, if you don’t have a happy ending, that people are going to think it’s such a fantastic idea.”

It is no secret that mounting legal fees and the costs of litigation often facilitate the settlement of a divorce.   No one wants to pay legal fees.    If the case is resolved, the hemorrhage of seemingly endless legal fees stops.  On the other hand, if the costs of going forward are removed, there would no incentive to settle.  

The “divorce loans” are not free.   The litigant has to pay an undisclosed percentage of the “winnings” to the lender.      

Divorce funding would be appropriate in limited circumstances.   It would only be appropriate it cases where the marital estate is sizable and one spouse is economically dependant on the other.   Obviously, this type of financing would not be appropriate where the issues are non-economic, like custody or access to children.

1.   a new procedures for setting awards of temporary maintenance while a divorce is pending;

2.  a procedure for reviewing and modifying child support awards; and

3.    a law making it easier for the less monied spouses to receive an award of attorneys’ fees during the divorce.  

Here are the highlights of the new laws:

• No Fault Divorce

            The law creates a new cause of action for divorce. Couples can now seek a divorce when the marriage has irretrievably broken down for a period of six months preceding the commencement of the divorce action.    

• Temporary Maintenance 

The new law provides that maintenance is to be awarded during the divorce when one parties’ income is less than 2/3’s of the other spouse’s income.  

The amount of maintenance is to be the lesser of a) 30% of the payor’s income minus 20% of the non-payor’s income or b) 40% of the combined income minus the non payor’s income.  (New York Temporary Maintenance Calculator)

• Counsel Fees

  The  counsel fee bill creates rebuttable  presumption that the “monied”  spouse should pay to the “non-monied” spouse interim counsel fees in all divorce or family law case.  The purpose of the law is to
”even the playing field.” 

•  Modification of Child Support

The Family Court Act ("FCA") was amended to allow modification of an order of child support due to "substantial change in circumstances".

In addition, unless parties specifically opt out, the court can modify a post October 13, 2010 order where three years have passed since the last order was entered, modified, or adjusted. Substantial change in circumstances is generally defined in a change in either party's gross income by 15% or more. A reduction in income shall not be considered as a ground for modification unless it was involuntary and the party has made diligent attempts to secure employment.

 As reported by the American Academy of Matrimonial  Lawyers, increasing numbers of women are asking for  pre-nuptial agreements.  

More women are working now than in precious decades and they are earning higher salaries. Women comprised 46.8 percent of U.S. workers in 2009, according to the U.S. Department of Labor and that number is expected to rise to 46.9 percent in 2018.

"In our historically male-dominated culture women didn't control money and now they need to plan as much as the men. More women have more assets these days and have more control over funds," said Moses, a family lawyer with 30 years of experience.

While marriage is supposed to be forever, the sad reality is that one half of all marriages will end in divorce. A pre-nuptial agreement can limit the acrimony at the time of a bitter break-up as assets and liabilities can be distributed in a pre-determined manner.  In most cases, New York courts will enforce a properly executed pre-nuptial agreement so long as it was not procured as a result of fraud, coercion or duress.    

Justice Ellen Gesmer ruled that such statements as "I will always take care of you" and "everything that we put in, we will enjoy together" do not constitute legally binding promises.

"Indeed, even if [the defendant] had made an explicit promise that, upon separation, [the plaintiff] would be entitled to 'equitable distribution' of their assets, it would be unenforceable, as it would be contrary to the long-standing law and policy in New York that unmarried partners are not entitled to the same property and financial rights upon termination of the relationship as married people," Justice Gesmer wrote in Ericson v. Baron.

The plaintiff, Malin Ericson, alleged that her boyfriend,  Fabien Baron, in addition to promising to always take care of her, assured her if they broke up he would treat the separation as if the couple had married.

But the absence of a marriage is the determinative factor of her property rights. Judge Gesmer noted that “Unless and until the law imposes equitable distribution on unmarried couples, in New York, as least, the legal status of marriage remains vitally important to establishing the economic rights of members of a couple."
 

It was for this very reason that a law was enacted two  years ago (and discussed here)  requiring parties to a divorce to acknowledge that following the entry of divorce that they would no longer be eligible to a continuation of medical benefits derived solely by virtue of their marriage. I suppose too many people were caught off guard without medical coverage following a divorce.

Effective September 21, 2009, the loss of health insurance benefits will  be be one of the enumerated factors to be considered in determining maintenance and equitable distribution. The other factors contained in Domestic Relations Law 236 Part B include,

a) the income and property of the respective parties including marital property distributed;
b) the duration of the marriage and the age and health of both parties;
c) the present and future earning capacity of both parties;
d) the ability of the party seeking maintenance to become self supporting and, if applicable, the period of time and training necessary therefor;
e) reduced or lost lifetime earning capacity of the party seeking maintenance as a result of having foregone or delayed education, training, employment, or career opportunities during the marriage;
f) the presence of children of the marriage in the respective homes of the parties;
g) the tax consequences to each party;
h) contributions and services of the party seeking maintenance as a spouse, parent, wage earner and homemaker, and to the career or career potential of the other party;
i) the wasteful dissipation of marital property by either spouse;
j) any transfer or encumbrance made in contemplation of a matrimonial action without fair consideration; and
k) any other factor which the Court shall expressly find to be just and proper.

While the consideration of the loss of insurance benefits is the first amendment to the equitable distribution law since it was enacted almost thirty years ago, I am not certain that this is a significant development.

From my experience, most attorneys have long recognized that the cost of medical coverage must be considered in settlement negotiations. No responsible adult can afford to be without health coverage and the insurance premiums can be potentially prohibitive.

In fact, the continuation of medical coverage under a “family plan” is a prime reason why many couples agree to a legal separation even after they sign a settlement agreement.

Even though the consideration of the cost or loss of medical insurance was not expressly provided for in the Domestic Relations Law, courts were always empowered to consider it under the catch-all "any other factor . . .  the Court found to be proper"  contained DRL 236.   The new law  makes consideration of the cost of health insurance mandatory.

At the end of marriage, whether by divorce or death, disputes over money and the disposition of marital assets may be inevitable. However, a pre-nuptial agreement can help lessen the potential for conflict by clearing identifying the parties separate property and defining the parties’ rights to the marital property.

A recent article illustrated why a Pre-Nup may be a smart money move. 

1. Why are pre-nuptial agreements beneficial?

"One of the common reasons to get a pre-nup is to protect the interests of children from a prior marriage. A sizable portion of assets (called the elective share) may automatically go to a spouse upon death in most states, but this can be avoided by using a pre-nup."

This elective share can be waived in a pre-nup. This is an important consideration, particularly where there are children from a prior marriage.

"Another scenario when a pre-nup makes sense is when there's a significant disparity in wealth. It's also worth considering if you or your spouse-to-be owns a small business or a stake in a family business; a pre-nup can ensure ownership isn't contested in a divorce."

2. Cost

While a pre-nup may be expensive to draw up, the cost of litigating a contested divorce is even greater.

3. What should a pre-nuptial agreement include?

The main purpose of a premarital agreement is sort out who owns what in the event of a divorce.
The agreement may not only define what is a person’s separate property, but it will also specify what assets or debts will be joint or marital and direct how they will be split in the event of divorce.

The agreement can also direct if, and how, alimony or spousal maintenance will be paid.
 

Some agreements even go as far as to provide how household expenses will be paid during the marriage.

It is important to note that the agreement cannot be procured by fraud, coercion or duress and the terms of the agreement cannot be unconscionable.  Crying to the court that “I only signed the agreement because he would not marry me otherwise” is not duress.
 

In short, the divorce court should only consider the assets and liabilities existing at the time of the divorce.

The Court in Mahoney-Buntzman v. Buntzman declared that:

Courts should not second-guess the economic decisions made during the course of a marriage, but rather should equitably distribute the assets and obligations remaining once the relationship is at an end.

The Court recognized that if a trial court were to scrutinize every transaction during the marriage, the result would be a cumbersome review by a court, forced to review the reasonableness of every expenditure, measuring the benefit to each of the parties. Instead, the Court declared that “The parties’ choice of how to spend funds during the course of the marriage should ordinarily be respected.”

This same conclusion was reached in Johnson v. Chapin, decided the same day.

In reaching this conclusion, the Court noted that:

There may be circumstances where equity requires a credit to one spouse for marital property used to pay off the separate debt of one spouse or add to the value of one spouse's separate property . . .Further, to the extent that expenditures are truly excessive, the ability of one party to claim that the other has accomplished a "wasteful dissipation of assets" (DRL 236 [B][5][d][11]) by his or her expenditures provides protection.

In other words, questionable or wasteful expenditures may be examined, child support and maintenance payments may not.

In the same week Governor Paterson announced that he was introducing legislation to recognize same sex marriage, a couple decisions involving the custody rights of same sex marriages were announced.  

In the first, Debra H. v. Janice R., the Appellate Division, First Department, held that the same sex partner of a woman who gave birth did not have standing to assert parental rights after the parties broke up.   The Court ruled that although Debra H., the non biological parent,

 [S]erved as a loving and caring parental figure during the 2 ½ years of the child’s life, she never legally adopted the child. 

Based upon this reasoning, the court held that a party who is neither the biological nor the adoptive parent of a child lacks standing to seek custody or visitation rights under Domestic Relations Law §70.  

 In another case, a woman whose donated egg was implanted in her same-sex partner was permitted to adopt the resulting child. The parties were lawfully wed in Holland.  

  This case presented the novel issue whether a party, who was not legally married to the child’s mother at the time of conception, but who is genetically the mother can legally adopt the child. 

 In Matter of Sebastian, the Surrogate granted the petition, even though alternatives to adoption may have been available.   Two viable alternatives were obtaining an order of filiation or being listed as a parent on the child’s birth certificate. 

 The parties sought an adoption because they felt only an order of adoption would ensure that all the states and the federal government would recognize the adoptive mother as the child’s parent.  

 The Court specifically noted that

 Although it is true that an adoption should be unnecessary because Sebastian was born to parents who marriage was legally recognized in this state, the best interests of this child require a judgment that will ensure recognition of both Ingrid and Mona as his legal parents throughout the United States.

 These cases further highlight complex child custody issues faced by same sex couples in the absence of legally recognized marriage.

Question- I'm about to break up with my wife. While we are separated I do not want to be responsible for debts she may incur. Will I be responsible for her debts?

Answer - You are really asking two distinct questions about debts. The first questions how debts will apportioned between you and your spouse as part of a divorce; the second question asks what is your responsibility for debts to your creditors.

All property acquired during the marriage may be equitably distributed. That means, both the assets and liabilities will be equitably divided between you and you wife. If your wife ran up credit card debt in anticipation of the divorce or wasted marital assets, that will addressed in the distribution of the remaining marital property.

Whatever agreement you and your wife reach about the responsibility for the marital debts, it is not binding on your creditors. Regardless of how you and your wife apportion the debts, your creditors can enforce their contracts against whoever is principally liable. If the obligation is in joint names, the creditor can attempt to collect from either or both of you.

So, for instance, if you have a joint credit card or your wife runs up debt on your charge card, even if your wife agrees to pay the debt for you, the credit card issuer could look to you to make payments.
 

The National Law Journal reports that:

At its core, the defendant's claim inappropriately equates human organs with commodities," Referee A. Jeffrey Grob wrote in Batista v. Batista, Jr., 201931/05. Grob noted that while the term "marital property" is "elastic and expansive ... its reach, in this Court's view, does not stretch into the ether and embrace, in contravention of this State's public policy, human tissues or organs.

Public Health Law §4307 makes it a felony for "any person to knowingly acquire ... for valuable consideration any human organ for use in human transplantation.”

While morally repugnant and questionably legal, the doctor’s claim for compensation for “sacrificing” his kidney is creative. Even the court noted that while it will not directly compensate the husband for his kidney, his “altruism” may be considered in distributing other marital assets.

While the court order provides that  Dr. Batista may not offer economic proof of the value of his organ donation, the Court did  "not suggest that the sacrifices, magnanimity and devotion, which arguably and logically attend [to the organ donation], are beyond the pale or lack relevancy."
 

A couple of weeks ago, I noted that as the economy worsened, my practice became busier. Time seems to confirm my observations and even offers some possible explanations for this phenomenon:

There's the lawyer theory, that money provides the soft fatty tissue that insulates the marital skeleton; once it's cut back and people get a good look at the guts of their relationship, they want out. And there's the marriage-counselor theory, that couples who were never quite on the same page in the checkbook finally get pushed off the ledger by endless bickering over their dwindling resources. And the therapist theory, that financial worries cause stress, stress can cause depression, and depression is a total connubial buzz kill.

The article notes that the recession affects the upper and middle classes differently. For the wealthy, the recession offers an opportunity to end the marriage at bargain basement prices as property will be distributed at lower valuations. The article points to the case of Summer Redstone to illustrate this point:

Sumner Redstone filed for divorce on Oct. 17, when his more than 16 million Viacom shares were at $18.85, down from $39.40 six months ago; his CBS shares had dropped about $288 million in value in the same period. . . Mrs. Redstone divorces a poorer man than she would have six weeks ago.

For the majority of the population, the principal marital assets, the 401(k) and the marital home have lost much of their value. Without equity in the marital home and encumbered by substantial credit card debt, the parties are oft left to fight about who gets stuck paying the bills. In some cases, unable to distribute the debt or sell the marital home, the estranged spouses are forced to become unwilling room-mates.

To put the recession and divorce in perspective, I am reminded of the punch-line of a bad joke –where “Pat” complains that the recession is worse than divorce. Pat, continues, “I lost half my assets but I still have my spouse.”
 

I read an interesting article in Sunday’s Times about how the credit crunch has resulted in more people borrowing money from their friends and families in order to purchase a home.   There is really nothing new about this phenomenon.   Parents have long gifted or loaned their children money for a home down-payment. 

There is also nothing new about the myriad of problems that arise when the parties divorce.  Since the down payment generally represents a significant portion of the marital assets, all involved, husband, wife and their parents, may claim the down payment to be theirs. 

The threshold question is –was the “advance” from the parents a gift or a loan?  If it was a gift, was it a gift to one or both of the parties?  

One of the parties may claim that the “advance” from his/her parents was a loan, which must be repaid when the marital home is sold.   In such case, inquiry must be made as to whether there was there a note or a mortgage?   Was there any documentation or acknowledgment of the loan?  Were there any loan payments made during the marriage? Was interest on the loan declared as income?     

In the absence of a writing or loan re-payments it may be hard to prove that the advance was a loan.   The fall back position is generally that the advance was a gift  to only one of the parties.  Assuming that the gift was made by check, the face of check should be determinative-(i.e., a check to Mr. and Mrs. Jones is a gift to both parties but a check to Mrs. Jones may be a gift to only the Wife).   

 Many lenders require a “gift letter” confirming that the down payment was a gift, not a loan.  This letter certainly may of value in determining purpose of the advance.  Likewise, did the gift trigger the filing of a gift tax return?   

In order to avoid future disputes, when the home purchase is made, there should be a writing, signed by all involved, clearly defining the terms of the transaction, identifying it as a loan or a gift, and, if it is a loan, setting forth the payment terms.