This is Legal Talk Maryland, hosted by the Maryland Law Firm of Kahn, Smith & Collins, the only legal podcast focused on the issues affecting ordinary people in the State of Maryland. Kahn, Smith & Collins, representing people and labor organizations in the State of Maryland for twenty years, and found on the web at kahnsmith.com.
Andy: This is Legal Talk Maryland Episode 23. I’m Andy Spicer of razegroup.com, and I’m joined again today by David Diggs of Kahn, Smith & Collins, our host for the podcast. David leads the family law practice at Kahn, Smith & Collins and this is our fifth episode in a series of six on family law.
David, we talked in the last episode about alimony and some of the payments and things, financial terms of a divorce. What we didn’t talk about was a distribution of property and how those things get split up. I know those are complex things and there are often controversial issues in a divorce. Why don’t you tell us a bit about what the state of the law is there and what things someone ought to be thinking about.
David: Usually when I’m interviewing a client initially we get into property last, and I explain that marital property is anything acquired during the marriage. If you bought it with your earnings, or your spouse bought it with his or her earnings, it’s marital property. That of course begs the question of we’ve got premarital property, things acquired prior to the marriage are not marital property.
Also, excluded from marital property are those things that were acquired by gift of inheritance. Inevitably we end up with mixed property that may be part marital and part non-marital. To give you an example, I’ve represented lots of folks who might have had a property before they got married, they owned a townhouse in Baltimore, and they sold it and took 20,000 dollars and used it as a down payment of the house they bought with their spouse. That creates an issue of what’s marital and non-marital.
It used to be more complicated but a change in the law approximately five or six years ago said that any real property, any home, vacation home, or that sort of thing that’s titled jointly is going to be presumptively marital property. Once you title something jointly, you buy the home together and the deed is in both names, that property is marital property. You can still ask a court to consider that you took the 20,000 dollars from your premarital townhouse, but I would say in most cases a court is going to divide that evenly, if not equitably. That’s the area where it gets confusing.
Maryland law is designed to result in equitable distribution, equitable might mean evenly, but it doesn’t always mean evenly. A court is charged with what’s going to be fair in the case, and if you’re not litigating the case, if you’re not having a judge decide it, there are two lawyers negotiating and two sides negotiating over what’s going to be fair with respect to property. You can understand that the two sides of the divorce might have different ideas on what’s going to be fair when we’re talking about what’s going to happen to a pension, a house, or grandma’s china.
Andy: I guess there are two categories of things that come to mind. The first is things that have monetary value, so you talk about investments and real property and that sort of thing. Then there are the 100 other little things that make up our lives that we own, that I just want the TV because I want the TV, or I want the dog. How do we figure those out if there’s not an agreement? What does the court do?
David: That’s a good question. Let’s talk about the knickknacks and things about the house and we can even throw the dog in. Basically, we would start with what’s non-marital, which knickknacks did I bring to the marriage and those are going to be my knickknacks, and the knickknacks that my spouse brought to the marriage will be hers. Then it’s all the stuff that we acquired during the marriage.
Number one, I would suggest that 90% of the folks that are getting divorced are able to agree on how to divide the toasters, linens, and furniture. The reason for that is it makes more sense for them to divide it than to pay an attorney and go to court to fight over who’s going to get the toaster, the forks, and spoons.
If they can’t agree on what’s to be done with it, after we segregate out the non-marital property, most of the other stuff is marital property. The only thing a court can do with that is order it sold and the proceeds divided. That’s happened once in my 24 years. I told you if you’re at this point, one side is reasonable and the other side isn’t, or there might be two unreasonable sides. So your stuff is going to get sold and the proceeds will be divided evenly. Usually that doesn’t happen. There are lots of ways you can avoid that.
I had a case recently where the folks couldn’t agree on how to divide the property and they decided they would have a draft of their property. Husband would get first pick and we even negotiated his first pick would be the big screen TV. Wife would get second pick and they’d go through the house and pick everything that way. That is preferable to the court selling it all and dividing the proceeds, but 97% of the folks don’t even get to that point. What’s more difficult are the real financial assets, houses, retirement plans, and investment accounts.
Andy: Do they not by default just get split down the middle?
David: They do not by default get split down the middle. If they are titled jointly then by default they get split down the middle. You have to look at not only what’s marital and what’s non-marital but how it’s titled. If Mr. and Ms. Jones have a joint bank account with 1,000 dollars in it, the court is going to order that divided. That’s easy, but if the bank account is in Mr. Jones’ name only, then the question is what’s going to be equitable. You have to look at all the property.
The way that a court adjusts inequities is with a monetary award. At the end of the case and after having determined a title and value of everything, a court can then grant one monetary award to offset the inequities of title. The way that works, I’m going to take out the house and pensions because they’re treated differently, but if you have 100,000 dollars in assets titled to Mr. Smith and Ms. Smith doesn’t have anything for the sake of simplicity, Ms. Smith is probably asking for 50,000 dollars because that’s equitable. Mr. Smith may counter but she’s got lots of premarital things a court should consider and I worked my butt off to earn this, and by the way she was cheating on me.
Those are the factors a court can consider. Again I would say most cases equity will be equal in that situation, but not all. I segregated out the house and the pensions because they’re addressed differently. With a house, and if children are involved you’ve got to first figure out what’s happening to possession and use. Any time that a party’s awarded custody they have a right to ask the court for possession and use of the house for up to three years from the date of divorce. Remember, you’re going to be at least a year after separation to divorce, so this could be up to four years or even longer, depending upon how long it’s taking you to get to trial.
Andy: The person that is entitled to that would be the person with majority custody?
David: The statute’s unclear on that but that’s the way it happens. I think it is conceivable, although I’ve never seen it in practice, that a spouse with minority custody could ask for possession and use. I could envision a case where the majority custody spouse has another property available and the minority custody spouse does not. That’s a case where I think they could get possession use, but I’ve never seen it in practice.
Of course, the idea behind the statute is to ease the transition for kids, allow them to continue in school for a given period of time. I’ve even seen folks agree to longer periods of possession and use. The court can’t impose that but they certainly can agree to that.
After the period of possession and use ends, then in most cases a house is sold or subject to a buyout by the other spouse. A change in law three years ago allowed a court to allow a spouse to buy the other’s interest. Most folks are able to agree before a court gets involved. Until that changed three years ago, a really difficult spouse could force a sale of the house. Now a spouse who wants to buy a house from the other spouse can come in and say I have the ability to pay a fair amount, this is what it’s worth, this is what we owe on the mortgage, this is a fair amount. This is my witness, the real estate banker who will testify that I can qualify for a loan and they’ll allow me to buy the house. That was an important change about three years ago.
Andy: Again you’ve got a joint mortgage you’ve got to get one spouse off of, so you have to really remortgage the house in the one spouse’s name, that’s a part of it.
David: Again parties can agree to anything, you might have a spouse willing to stay on a mortgage for a period of time because they’re getting another benefit in the negotiation, but that’s frequently part of the bargain; how long before the other spouse either refinances, and if that doesn’t happen then in most cases the house is going to have to be sold.
Andy: We’ve talked a lot about assets. What about the debt side? Unfortunately in today’s economy there are probably quite a few people who come to the divorce table with more debt than assets. We’ve got 50,000 dollars worth of debt between us in car payments and credit card bills or student loans. There’s no money to pay them and we’re both on them. How does the court deal with that?
David: That is a very difficult and often misunderstood area of divorce law. Basically, “marital debt” has a very limited meaning under divorce law. Marital debt is debt associated with the acquisition of property, a mortgage is a standard example of a marital debt. The credit card bill for 3,000 dollars while certainly things may have been acquired, meals were bought and whatever, isn’t considered marital debt because it didn’t go to that acquisition.
The bottom line is courts are not going to get into dividing credit card debt. They will reduce the value of a home by a mortgage so that a 300,000 dollar home with 150,000 dollar mortgage is obviously valued at 150,000 at the time of divorce. A court can’t say that Mr. Jones has to pay the joint credit card to Bank of America because Bank of America has a contractual right to recover from whoever is on that debt. The bottom line is the court is not going to divide that debt, although if one spouse is paying an inordinate amount of joint debt that spouse can ask the court to consider that when it’s making its monetary award.
Andy: Again, the reality is if there are two spouses and one is wanting to continue to pay the debt so as not to affect credit rating and that sort of thing, and the other doesn’t, there’s nothing they can do to compel them.
David: The financially superior spouse is going to be most likely stuck with that debt. The credit card company knows he or she is the financially superior spouse, and they know who to come after if the credit card doesn’t get paid. As you said, that person wants to maintain a good credit rating so they’re paying it off.
Andy: Maybe this is just more tabloid than real life, but what about the scenario where there’s assets either hidden or people are trying to conceal to some degree what they’re earning? I guess business owners can play some games. What are the implications to that and how does that usually go?
David: That’s a difficult area. When we’re talking about a small business, you’ve got a fellow who runs a car detailing business, a lot of cash exchanging hands, perhaps the books aren’t as honest as they could be. You can prove what’s coming in, you can show that person’s standard of living is beyond the 20,000 dollars he or she claims to be making in the business, and judges tend to be able to smell those cases out.
The real problem is that takes money. The question is whether it’s worth hiring a forensic accountant to value that business to place the real value on it, to say his books might be saying he’s earning 20,000 but it’s clear for me he’s earning the equivalent of 80,000 dollars. If it’s done properly a court will accept that testimony.
There are also cases involving dissipation, where a really upset spouse may just start spending money, gambling, drinking or whatever. A court can determine that dissipation has reduced marital property and treats it as extant property or property that they’re still going to value. You spent 100,000 dollars on wine, women, and song. We’re going to treat that 100,000 dollars as dissipated property and we’re going to order 50,000 dollars from some other asset. There are often cases that are fought over this concept of dissipation.
Andy: The idea of money being hidden places, does that come up often?
David: It certainly is suspected often, and we’ve found money in lots of different places. The standard example is where you’ve got a cash business and you’re trying to show the worth of the business and the income is higher than reported. As far as the Cayman Islands account, I’ve never seen a Cayman Island account. I don’t know anyone with a Cayman Island account. There are investigative services out there that purport to be able to track those down for a sum. The question is whether you’re going to find more money than you’re going to spend on that tracking.
Andy: That’s interesting. You mentioned small businesses, and that probably happens quite often. What happens to a small business that’s joint — a husband or wife start a business and they’ve run it for a couple of years successfully and then a divorce comes. They may have thought about a partnership agreement with any outside partners they have, but how does the divorce play out? Who owns it in the end and who gets to run it? What happens with those businesses?
David: That’s a good question and has certainly come up in the practice. The first thing you have to ask is who owns the business. If nothing has been written down, we’re talking about a mom and pop shop, no articles of incorporation, no partnership agreement. I don’t know I’ve ever run across one of those, but they’re both working. What would it be worth and what’s it producing in income.
Andy: Suppose it was a real business, it was a corporation and one of the spouses really was the primary person, and the other either worked there part time or didn’t at all. I ask the question because there are potentially other business partners and employees that are affected now by this divorce, so what happens?
David: That is a very contested part of a divorce case where there’s a business involved. Again, you have to ask who owns the business. You could have a business where for real, valid, planning purposes even though one spouse works more and the other doesn’t, the business is titled jointly. In that case, a court can order that property disposed of or it can value that property and divide that evenly. I’ve seen that happen for valid business-planning purposes.
More often than not, the one who’s working in it fulltime is going to be the owner, perhaps with other owners. The other spouse is going to be working part time, helping with the books or whatever. In that case, that property is going to have to be valued and it’s going to be the part time working spouse who has the onus of doing that. That spouse is going to have the burden of proving that it’s marital property and what its value is. That becomes expensive. You can’t do that without a forensic accountant. You can’t do that without a lot of paperwork and opening up the books and getting a look.
The threat of that from the part time working spouse is often enough for the full owner spouse to be somewhat reasonable; the threat of opening it up, the threat of exposing it to all the scrutiny tends to make that spouse more cooperative in other areas.
Andy: When you’ve been claiming 20,000 a year and it really is 80,000 there are other issues besides your divorce proceeding, I suppose.
David: That’s right.
Andy: That’s great. In our next episode we’re going there are a bunch of topics we’re going to wrap up. We’re going to talk about who pays for the legal bills and how that works out. We’re going to talk about same-sex marriages and property rights for unmarried couples.
David: I’d also like to talk about retirement benefits as property.
Andy: Great. We’ll do all the miscellaneous things that are left on divorce law on the next episode, thank you.
David: Thank you.
As always, none of the content of this program should be considered legal advice. Please seek an attorney for specific legal guidance relating to your individual circumstances. This podcast does not create an attorney/client relationship between Kahn, Smith & Collins, and any individual.
