02/15/2024
A few weeks ago, the Family Law Section of the New Jersey State Bar Association held its annual symposium. The lectures spanned a variety of subjects and included dozens of presenters, but one of the subjects provoked starkly differing opinions. The subject: Whether an alimony payor can be forced to use assets that were distributed in equitable distribution as a source of income to continue to pay alimony after retirement.
The visceral reaction to this question is typically: “Of course not—that is a ‘double-dip.’” The issue, however, is much more complicated and far less clear. First, consider these principles from Innes v. Innes, 117 N.J. 496, 503 (1990):
“‘The basic purpose of alimony is the continuation of the standard of living enjoyed by the parties prior to their separation.’ Mahoney v. Mahoney, 91 N.J. 488, 501–02 (1982). The supporting spouse’s obligation is set at a level that will maintain that standard. Lepis v. Lepis, 83 N.J. 139, 150 (1980). Although the supporting spouse’s current income is the primary source considered in setting the amount of the award, his or her property, capital assets, and ‘capacity to earn the support awarded by diligent attention to his [or her] business’ are also proper elements for consideration. Bonanno v. Bonanno, 4 N.J. 268, 275 (1950).”
Next, consider that N.J.S.A. 2A:34-23(b)—the section of the statute setting forth the alimony factors—provides: “When a share of a retirement benefit is treated as an asset for purposes of equitable distribution, the court shall not consider income generated thereafter by that share for purposes of determining alimony.” However, N.J.S.A. 2A:34-23(j)(4) provides: “The assets distributed between the parties at the time of the entry of a final order of divorce or dissolution of a civil union shall not be considered by the court for purposes of determining the obligor’s ability to pay alimony following retirement.” Did you notice that N.J.S.A. 2A:34-23(b) references “income generated” from “retirement assets” that have been distributed shall not be considered, while N.J.S.A. 2A:34-23(j)(4) states that “assets distributed” shall not be considered as part of the payor’s obligation to pay alimony upon retirement. But what does this really mean?
At the easy end of this spectrum is the attempted use of a payor’s defined benefit plan (e.g., a police, fire, or teacher’s pension) at the time of retirement. Where spouses divide a pension either through the immediate-offset method (i.e., a buyout or asset offset based on the present value of the pension) or where each party receives the defined portion of the benefit to which each is entitled (i.e., the pension goes into pay-status and distributes the income), the payor’s share of the income derived from that pension cannot be “double-counted” at the time of the payor’s retirement application. Innes, 117 N.J. at 505; see also D’Oro v. D’Oro, 187 N.J. Super. 377 (Ch. Div. 1982), aff’d, 193 N.J. Super. 385 (App. Div. 1984). This approach also applies to “annuity payments purchased with the proceeds of an equitable-distribution award … to the extent that they reflect return of the principal as opposed to income generated by the principal.” Id. at 514.
The issue becomes murkier when “other” assets are distributed at the time of divorce. For example, what if the payor owns a business; the business is valued during the divorce; and the payee receives a buyout of his/her/their interest in the business as part of a divorce settlement? It is well-established that the payor’s stream of income from that business is “fair game” for both the business valuation and as a source of alimony, see Steneken v. Steneken, 183 N.J. 290, 298 (2005), (rejecting the double-dip argument attendant to business valuations and rejecting the notion that that “because alimony and equitable distribution are interrelated, a credit on one side of the ledger must perforce require a debit on the other side”). But consider the following:
--What if the payor sells that business in connection with a “good faith” retirement, see generally N.J.S.A. 2:34-23(j)?
--Can the gross proceeds from the sale of that business be considered as part of the payor’s ability to pay?
Is the analysis limited to the capital gains from the sale of the business?
--What if the business value remained stagnant between the division of the asset in the divorce and the later sale of the business?
--What if the business grew by a multiple of 10?
--Does it matter if the payor somehow “altered” the business to generate a greater value (i.e., the business is not the “same” business)?
--Does it matter if market forces alone created the increase in value (i.e., the business is the “same” but more valuable)?
If a 401(k) is divided in a divorce, can the payee look to the payor’s 401(k) at the time of the payor’s retirement?
--Are the additional, post-divorce contributions considered as part of the payor’s ability to pay alimony?
--What if the alimony award included a savings component that was tethered to the payor’s marital contributions to a 401(k)(i.e., it was contemplated in the alimony award that both parties would save)?
--Is it fair then to force the payor to pay alimony and “tap into” the payor’s post-divorce retirement (i.e., savings) contributions?
Are the gross, post-divorce contributions excluded, but the income derived from those contributions considered?
Again, the visceral response to these questions tends to be that “once divided=forever excluded.” That approach is an incorrect over-simplification of the issue. It is clear that N.J.S.A. 2A:34-23(b)(stating “[w]hen a share of a retirement benefit is treated as an asset for purposes of equitable distribution, the court shall not consider income generated thereafter by that share for purposes of determining alimony”) was enacted to adopt the holding in D’Oro. See Innes, 117 N.J. at 503. It, therefore, appears to be limited to those (pension) circumstances. However, Innes includes additional analysis that may answer the question:
“Had the plaintiff shoved the $24,000 in a friend’s mattress and asked that friend to start sending him $200 a month, there is no question that those payments could not be considered ‘income’ for purposes of altering an earlier alimony award. The same is true of the portion of the annuity payments that reflect return of the principal. On the other hand, income generated by the principal and given to the plaintiff on a monthly basis is ‘income’ for purposes of determining ‘changed circumstances.’ That portion of the payment constitutes an increase in his income and aggregate resources. Thus it is eligible for inclusion in the calculus used to arrive at a modification of the alimony award.” Id. at 513.
Although the above-passage references the payments derived from annuity-based assets that had been divided (or acquired, post-divorce with a divided asset), the focus on the additional income derived from the asset is important. So, too, does Staver v. Staver, 217 N.J. Super. 541, 545 (Ch. Div. 1987), provide some guidance: “The portion [of a pension] which accrued after the date of the complaint can be considered income for purposes of determining alimony.”
There are few cases that apply the principles of Innes to other assets. One, however, Flach v. Flach, 256 N.J. Super. 333 (Ch. Div. 1992), does provide some guidance. There, the court wrestled with the following question: Where a litigant (defendant) seeks to terminate alimony, “whether the capital appreciation received by defendant in the sale of a real property asset equitably distributed to him at the time of the divorce … is to be considered in addressing alimony?” Id. at 334-36. The court answered the question as follows:
“[The] Innes court expanded upon the ‘double-dipping’ concept by its holding, above, that annuities purchased with equitable distribution proceeds are likewise immune, to the extent of return of principal, even though there be no legislation specifically addressed to annuities. This court will take both of these factors to their logical conclusion by stating that Innes should be read for its conceptual ruling as well as its specific rulings, i.e., retirement benefits and annuities. Therefore, this court holds that, on an alimony modification application, all previously equitably distributed assets and all assets acquired with, by or through equitably distributed assets, when repaid, are not to be deemed to be income for the purpose of determining alimony, as that is actually the return of principal, although all income generated by that principal is to be considered.” Id. at 335-36; see also Sowell-Zak v. Zak, A-0472-17T1, 2019 (App. Div. Apr. 8, 2019)(prohibiting “double” use of proceeds from sale of ex-husband’s business where ex-wife received buyout in equitable distribution); cf. Slayton v. Slayton, 250 N.J. Super. 47, 50-51 (App. Div. 1991) (holding that “an item which was equitably distributed may indeed be tapped as a fund out of which otherwise calculated alimony may be satisfied. Such a state of affairs does not involve the double-counting prohibited by Innes and the statute and furthers the aim of our family law on support by subjecting to ex*****on assets of a contumacious payor spouse to satisfy a legitimate alimony obligation”).
Maybe the answers are much simpler, courtesy of our Supreme Court: (i) “We start from the bedrock proposition that all alimony awards and equitable distribution determinations must—both jointly and severally—satisfy basic concepts of fairness,” Steneken, 183 N.J. at 298; and (ii) “[a] supporting spouse’s potential to generate income is a significant factor to consider when determining his or her ability to pay alimony.” Miller v. Miller, 160 N.J. 408, 420 (1999). In a similar vein, we can look for guidance at how income derived from an inheritance, Aronson v. Aronson, 245 N.J. Super. 354, 363 (App. Div. 1991), may be considered when determining alimony:
“We note that there is nothing about plaintiff’s inheritance income which entitles it to insulation from a Lepis motion. Although the inheritance itself is exempt from distribution under N.J.S.A. 2A:34–23, the income generated by it is no different from income generated by any other asset, exempt or otherwise, for an alimony analysis. It may thus be used for the purpose of determining changed circumstances to the extent that it constitutes an increase in plaintiff’s income and aggregate resources.” (Citing Innes, 117 N.J. at 513.)
With those additional principles in mind:
--Would it be fair to consider the gross proceeds from the payor’s sale of a business attendant to a retirement if the payee received a “buy-out” of that business at the time of the divorce and the business did not increase in value? This hardly seems like a fair result.
--What if that same business grew by a multiple of 10, the payor sold the business, and the payor received a stream of income from the sale proceeds that would allow the payor to live far above the marital lifestyle and the payee to live at the marital lifestyle? Are there other facts to consider? Is the payor remarried? Does the payor have additional children from the new marriage? Did the payor invent a new product or service that was not the source of the value of the business as of the date of distribution? The more the facts change, perhaps the “fairer” it may be to look to the proceeds of the sale of a business.
Or, is the answer to all of the questions presented in this article: It depends on who I represent. If that is the answer, then you should negotiate retirement (including sources of income at retirement) with more definite guideposts than provided in N.J.S.A. 2A:34-23.
Should an alimony payor can be forced to use assets that were distributed in equitable distribution as a source of income to continue to pay alimony after retirement?
