In awarding alimony, the court shall consider among other factors “the equitable distribution of property ordered and any payouts on equitable distribution–to the extent this consideration is reasonable, just and fair.” N.J.S.A. 2A:34-23(b)(10).1 Income derived from property and capital assets, regardless of whether these assets were ever part of the equitable distribution scheme, is also to be considered in determining and modifying alimony awards.
Bonanno v. Bonanno, 4 N.J. 268, 275 (1950); Aronson v. Aronson, 245 N.J. Super. 354, 363-64 (App.Div. 1991); N.J.S.A. 2A:34-23(b)(11). In Miller v. Miller, 160 N.J. 408 (1999), the New Jersey Supreme Court broke new ground in holding that income can now be imputed from a supporting spouse’s investments for purposes of deciding alimony. This article will review the facts of the Miller case and then examine the implications which flow from this decision.
Facts of the Case
Mr. and Mrs. Miller were divorced in 1988 after reaching a Property Settlement Agreement ending their 20 year marriage. The Agreement provided that the husband would pay the wife alimony consisting of one-half (1/2) of his monthly take home salary (which at that time entitled the wife to a monthly payment of $3,750.00) and one-half (1/2) of the first $300,000.00 of his annual bonus. The Agreement further provided that alimony would not exceed $200,000.00 annually. As part of the settlement, the wife waived the husband’s 10,000 shares of restricted Merrill Lynch stock as well as any other shares he would receive as part of his compensation package in the future.2 The balance of the marital assets totaling $2 million were distributed equally between the parties.
From 1988 through 1992, the wife received approximately $200,000.00 per year in alimony as per the Agreement. Subsequently, the husband became ill and ultimately he was terminated by Merrill Lynch. The trial court determined that the husband’s termination from Merrill Lynch was involuntary and therefore constituted a change of circumstances under Lepis v. Lepis, 83 N.J. 139 (1980). A plenary hearing was held to determine whether the husband’s economic circumstances warranted a reduction in his alimony obligation.
After the plenary hearing, the trial court found that the husband had a net worth of approximately $6.5 million of which $4.5 million was liquid. The husband had $1.5 million invested in municipal bonds yielding tax free income of $87,500.00 per year. The husband had $3 million invested in various growth stocks paying interest and dividends of approximately $50,000.00 per year. The trial court also determined that the husband was capable of earning $100,000.00 per year through self-employment, independent consulting or regular employment.
The trial court determined that the wife earned $40,000.00 per year as an interior decorator. Her assets included a home worth about $425,000.00, an investment account worth about $725,000.00, and a $14,000.00 IRA account. Based upon the foregoing findings, the trial court reduced the wife’s alimony from $200,000.00 per year to $48,000.00 per year.
The wife appealed arguing that the trial court erred in its calculation of her alimony award because it failed to take into consideration all of the husband’s passive income. In her brief to the Supreme Court, the wife argued that “in actuality, plaintiff’s income averaged approximately $1,284,500.00.” The wife based this argument by calculating the annual capital appreciation of the husband’s investments as income. The wife demonstrated that the husband;s portfolio increased from approximately $2.5 million in 1994 to $3.6 million in 1995 to $4.9 million in 1996. The wife argued that the trial judge knew that the husband was investing his portfolio for capital growth, but made no attempt to quantify the appreciation in the husband’s portfolio or to project the growth in the portfolio into the future.
The Court analogized the fact pattern in Miller to cases involving an unemployed or underemployed spouse. In those cases, income is imputed consistent with a party’s marketable skills. Observing that the husband’s growth stock portfolio yielded only a 1.6% return, the Court concluded that “annual income should be imputed from all of [the husband’s] investments” based on a rate of 7.7%. This percentage rate was derived from the five (5) year average rate of return on A-rated long term corporate bonds.3 The Court directed the trial court to consider the imputed income on the husband’s investments the same way as income from salary and bonuses earned from employment in determining how much alimony is due under the Agreement.
The Court gave no explanation as to why it refused to consider the appreciation as to the husband’s portfolio other than to conclude that the gains therein were not “actually realized.” The Court did explain that it did not use a 12% rate of return based on the average annual growth rate of stocks because
…it would not be equitable…because of the inherent
risks involved in stock market investments. The rate
on long term A-rated corporate bonds on the otherhand
provides a prudent balance between investment risk
and investment return.
The Court emphasized that its holding did not mean that the husband “must actually invest all of his substantial assets in choice long term corporate bonds.” Rather, the husband could “diversify his investment portfolio over many different types of investments.” The Court proclaimed that it would not “deprive plaintiff of the opportunity to control his investment options.”
Miller touches off a host of implications for matrimonial practitioners to consider. The following is an attempt to identify some of the major issues which arise out of this case. This is by no means a definitive list and the answer to how these issues will ultimately be resolved must abide further caselaw.
What happens to unsophisticated investors?
In Miller, the husband was a sophisticated investor whose assets were only yielding a 1.6% return, but whose capital growth was in excess of 30% per year. As a result, the Court may have reasoned that it was not imposing an undue burden on this litigant to have income imputed on his investments at the rate of 7.7%. However, what is to become of those investors who are not savvy and who lose money on their portfolios or who do not earn the long bond rate? Is it fair to have income imputed in these circumstances? Especially when there is no evidence that poor investing is due to bad faith but mere incompetence, why should hypothetical income imputation apply? Note that even investors who put all of their investments in the long bond do not ensure against the possibility of having income imputed. This is because interest rates are a constantly moving target. For example, if a spouse dumped all of his investments into a long term corporate bond yielding 7.7% at the time of Miller, and rising interest rates over time make the average rate of the long bond increase to 10%, will income at the higher rate be imputed?4 Matching or beating the long bond rate of return will not be an easy task for most litigants. Indeed, it would require a diverse portfolio and probably a professional manager in order to achieve those returns year in and year out. The Court indicated that “in other cases, the use of an investment broker will lead to the same results.” But what of those litigants who choose not to pay for the services of an investment broker?
How does this theory apply to other “investments?”
In Miller, the Court had the luxury of addressing a relatively liquid portfolio. Assets invested in stocks and bonds can easily be traded and turned into cash. What if the asset base is real estate or a valuable coin collection or a painting? What if the asset is a family heirloom with sentimental value such as your late aunt’s silver service? What if the asset is intended to be consumed such as a wine collection? Is it appropriate to impute a hypothetical income based on the value of these assets? The Court stated that “the bench and bar will have to perform additional work in fine tuning the complex process of imputing income from some of the more sophisticated investments.” Does this imply that parties may have to sell non-liquid investments in order to achieve the imputed yield? What about a business that may be generating a loss, but which owns valuable land, equipment, and inventory? Is it fair to impute income on commercial assets which are generating no earnings in the ordinary course of business? Perhaps the issue can be completely avoided by determining that family heirlooms, principal homes,5 wine collections, businesses, and other assets are not “investments.”
Restraints on non-marital assets?
If income can be imputed on investment assets for purposes of alimony then does it not also follow that there could be restraints imposed on these assets? In other words, does the supported spouse have a right to ensure that the supporting spouse will not divest the estate which is generating the income on which alimony is based? The Court in Miller claimed that “we do not intend to deprive plaintiff of the opportunity to control his investment options.” If that is so, would restraints be prohibited? If the supporting spouse is a poor investor, can the supported spouse make application to have a trustee or conservator appointed to invest these funds in a manner which will protect the source of the alimony payment?
Does Miller apply to supported spouses?
The opinion in Miller only addresses the return on investments for the supporting spouse. But what of the investments of the supported spouse (usually the wife)? In most cases, it is the supported spouse who walks away from the divorce with the liquid assets of the marriage while the supporting spouse (usually the husband) keeps his business which is the income generator for future support payments. For years, a debate has raged as to whether it was appropriate to impute income to dependent spouses based upon assets received in equitable distribution. Previously, the Appellate Division has ruled that income earned on the assets of the supported spouse is to be taken into account in the determination of alimony. Aronson v. Aronson, 245 N.J. Super. 354 (App.Div. 1991). The New Jersey legislature recently amended the alimony statute to make clear that “the income available to either party through investment of any assets held by that party” is to be considered in the alimony determination. N.J.S.A. 2A:34-23(b)(11). If income may also be imputed from the assets of the supporting spouse, will Miller be the death knell for alimony claims by spouses who receive the bulk of the “investment” assets in equitable distribution settlements? Is it appropriate to reduce dollar for dollar an alimony award due to income to be imputed on the investments of the supported spouse?
What happened to the ban on double-dipping?
Under N.J.S.A. 2A:34-23, “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.” In Innes v. Innes, 117 N.J. 496 (1990), the Supreme Court observed that “the statute sets forth no new position and simply codifies and embodies the holding and policies of the decision in D’Oro v. D’Oro, 187 N.J. Super. 377 (Ch.Div. 1982) aff’d, 193 N.J. Super. 385 (App. Div. 1984).” Are there any public policy reasons for treating differently other assets which have been distributed in the equitable distribution scheme?
If income is to be imputed, and the “real dollar” value of assets received in equitable distribution is not preserved, is this not a double-dip of the type rejected in Innes? For example, let us assume that the “real dollar” value of $1 million in 1990 is $1.8 million in 2000. That means that if a spouse received a $1 million portfolio in equitable distribution in 1990 and the value of the portfolio did not grow to $1.8 million in 2000, then the “real dollar” value of that account could be said to have decreased. By blindly imputing income from investment assets, the Court makes no allotment for the level of growth necessary to protect the “real dollar” value of the account. If this growth is considered as income by the Court for the purpose of fixing support, then the “real dollar” value of the investment is being diminished. Is this not a “double-dipping?” Perhaps the Court should only look to the actual income earned by investment assets which exceeds the rate of inflation so that the “real dollar” value of assets can be protected.
Does Miller reward the spendthrift spouse?
If both parties start off relatively equal in terms of assets at the time of equitable distribution when alimony is first fixed, why should assets later play any role in the issue of alimony? If the supported spouse spends all of her assets on vacations, boyfriends, and good times and the supporting spouse makes his assets grow by investing prudently and living frugally, is it fair then to impute income to the supporting spouse’s assets in order to reward the spendthrift supported wife? Should parties now attempt to place provisions in Agreements barring the consideration of investment income (actual or imputed) in determining alimony?
Is the case fact sensitive?
There are clear inequities in the Miller case which may have shaped the opinion. At the time of the divorce, the husband received restricted shares of Merrill Lynch stock which ultimately were valued at almost $3 million. At least partially as a result thereof, ten (10) years after the divorce the husband had a net worth of $6.5 million while the wife’s net worth was barely over $1 million. Would the outcome have been the same if each party was worth $6.5 million when the application was made?
What effect does the Miller decision have on investments and estate planning?
Although the Court insisted that it was not dictating how parties are to manage their funds, the knowledge that income will be imputed on investments could encourage creative estate planning. Take the case of the husband who wishes to establish a trust for his children or for his new wife. Could he fund it so as to avoid income being imputed on funds he no longer controls? What about getting involved in a speculative business enterprise which makes no immediate profit, but has the potential for long term gains (i.e. open a pizzeria, establish an internet company)? What if the husband wants to take all of his money, go to Atlantic City, and make a wager? We know that this is an inappropriate way to utilize marital assets.6 But is this an inappropriate way to utilize assets that are not marital?7 If you argue that the wife has no equitable interest in these funds and cannot have restraints imposed, and if you further argue that the Court is not dictating how people are to invest their assets, why can’t parties act recklessly regarding these funds so long as they do not act fraudulently?
Capital gains vs. appreciation: Should there be a new definition of income?
In Miller, the Court observed that the wife “urges us to adopt a different definition of income for the purpose of calculating and modifying alimony awards than the one used in the taxation context.” Traditionally, governments tax growth investments when a capital gain is recognized. A capital gain occurs when a sale or exchange takes place. There is no question that a capital gain recognized for tax purposes would be viewed as income in the alimony calculus. In Miller, although the husband’s portfolio had annual appreciation of over 30%, there were no capital gains recognized for tax purposes as no sale or exchange of these assets took place. The Court ignored these potential gains because they were not “actually realized.” In ignoring this sizeable appreciation merely because there was no taxable event- wasn’t the Court honoring form over substance.
The Court borrowed heavily from Judge Fisher’s opinion in Stiffler v. Stiffler, 304 N.J. Super. 96 (Ch. Div. 1997) to determine that hypothetical income should be imputed. However, in Stiffler Judge Fisher addressed a principal home generating no income and no appreciation. Imputation of hypothetical income based on a rate of return under those facts was the only alternative. How is it appropriate to use a hypothetical rate of return when an investment portfolio has an annual appreciation that can be determined by the Court?
In rejecting the wife’s approach, perhaps the Court believed that the concept of “potential, although yet unrealized” income is too unpredictable. A party may have a $1 million paper profit in a portfolio, but when the sale actually takes place that party may in reality incur a loss. For example, shares in ABC Corporation that increase from $10.00 to $100.00 in one (1) year results in a gain on paper of $90.00 using the argument advanced by the wife. But what happens if in the next year the stock falls from $100.00 to $50.00? How is this paper loss of $50.00 to be considered in the alimony equation? Is alimony to be given back? Furthermore, if the Court is to look at portfolio appreciation it also needs to consider potential capital gains taxes and costs of sale.
Taking the Court’s approach, what is to become of the capital gain income when realized in those cases where income has been imputed as to the investment? In other words, can Mr. Miller now cash in his portfolio of growth stocks confident that insofar as 7.7% has been imputed as income to his investments the court will ignore his double digit capital gains? Would supporting spouses have a right to go back to court to readjust alimony after a sale or exchange occurs which demonstrates that the hypothetical income imputed was lower than the actual capital gains?
What is the effect of debt?
There was no debt in Miller to be considered by the Court. However, what if the husband used margin debt or a home equity loan to acquire his investments? What if he had other debt such as a mortgage or credit cards? How are debts to be considered in the alimony calculus? In Stiffler, Judge Fisher noted in dicta:
If a spouse mired in debt utilized all of [their assets] to
retire some or all of that debt it would seem inappropriate
for the court to impute income to that spouse based upon
what the [assets] would have earned if invested in a
manner calculated to generate interest. Id. at 103.
Therefore, should courts deduct all debts from investments before imputing income? Is it necessary that the debts actually be paid off to avoid income being imputed on investments which could otherwise be used to pay off the debt?
What effect does the new spouse have on these assets?
One of the complications not addressed in Miller is the inevitable situation of assets being commingled between an ex-spouse and his new family. If the husband has a $1 million stock portfolio and he gets remarried and places his new wife’s name jointly on the stock account, does this shelter any portion of the investment from the alimony calculation? What if it was agreed pursuant to a Prenuptial Agreement that the husband would transfer these assets to the new spouse? What if the husband gets divorced from the new spouse who then files a claim against these assets arguing that they have been commingled and are now part of the marital estate? Does the husband have to join the first wife as a party in these cases due to her conceivable equitable interest in these funds?
Can Miller unveil the investments made by prior existing trusts?
Can Miller be applied in a case where there is a prior existing trust where the beneficiary is either the supporting or supported spouse? In other words, do parties now have the right to examine the assets of the trust and determine whether the trustee is obtaining yields consistent with long term corporate bonds or whether income is to be imputed? Does the fact that the beneficiary spouse does not have control of the investment make a difference?
Does the case have pendente lite application?
Can Miller be argued in pendente lite applications to impute income as to assets for purposes of determining support? If the asset was never relied upon during the marriage to defray the parties’ standard of living, is it fair to utilize this source pendente lite?
Conclusion
It is too early to gauge the outcome of the many implications raised by Miller. When the case was first reported it was hailed as a victory for supported spouses. However, while imputing income at a rate of 7.7%, the decision ignores the 30% annual appreciation in the supporting spouse’s assets in determining alimony. The decision also has the potential to reduce or eliminate alimony awards should the developing caselaw interpret Miller as authorizing the imputation of income on the assets of supported spouses. In this regard, the case may prove to be only a pyrrhic victory for supported spouses. For practitioners, Miller gives rise to a host of new claims and legal arguments which must not be ignored whenever the issue of alimony is in dispute.
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1 N.J.S.A. 2A:34-23(b)(10) does not define how the equitable distribution of “property” is to be considered in the alimony equation. However, the legislature has recently enacted a separate factor providing that “the income available to either party through investment of any assets held by that party” is to be considered in the alimony calculus. N.J.S.A. 2A:34-23(b)(11). Therefore, it can be argued that under N.J.S.A. 2A:34-23(b)(10), the court is to consider more than just the income earned on these assets in determining alimony. This issue was not addressed in Miller.
2 The restricted shares were ultimately determined to be worth $2.9 million. The wife argued that the Agreement should be “reformed” based on the inherent inequity of this division of assets. The Court rejected the wife’s application to reform the Agreement.
3 The Court used the rate based upon Moody’s Composite Index on A-Rated Corporate Bonds. The Court determined that the average rates according to Moody’s Composite Index on A-Rated Corporate Bonds for the last five (5) calendar years were as follows: 1994:8.73%; 1995 : 7.83%; 1996 :7.59%; 1997: 7.54%; 1998 :6.93%. Thus, the average rate of return for the last five calendar years was 7.7%.
4 Practice tip: the current five (5) year average long bond rate (i.e. dropping 1994 (8.73%), adding 1999 (7.52%)) is actually 7.5%. Perhaps the five (5) year average should be a “weighted average” in favor of the more recent years to promote more stability in this determination.
5 In Stiffler v. Stiffler, 304 N.J. Super. 96 (Ch. Div. 1997), Judge Fisher addressed the case of a husband who used his inheritance of cash to purchase a residence for $495,000.00. The court found that the cost of the home exceeded the amount necessary to be consistent with the marital lifestyle by $200,000.00. Therefore, the Court imputed income on $200,000.00 at a rate of 6% to the husband. Stiffler made clear, however, that “plaintiff’s use of his inheritance to obtain a home consistent with the marital lifestyle was a legitimate use of the inheritance and a use which would permit an exemption from the alimony calculus.” Id. at 103.
6 See Siegel v. Siegel, 241 N.J. Super. 12 (Ch.Div. 1990) (gambling debts incurred prior to the filing of the Complaint for Divorce were chargeable solely to the husband.)
7 “The alimony statute does not prohibit a spouse from doing what he will with his [assets]. Indeed, the spouse can go and lose it all at the racetrack.” Stiffler at 102.
