Monday, March 21, 2011

Enhanced Earning Capacity

Most divorces in New York involve the division of what is called “marital property.” Marital property includes all of the assets acquired by a couple after their marriage and before one of them files for divorce. Because marital property is broadly defined under New York’s Domestic Relations Law, since 1995 courts have construed it to include a spouse’s “enhanced earning capacity.”

Enhanced earning capacity is defined as the additional income that is theoretically available to a spouse as a result of his or her having acquired a degree or license during the course of the marriage. In simplest terms, it is the value of the additional income a party is expected to earn over his or her lifetime as the result of receiving an education or obtaining a license related to his or her business activities.

Basically, if one spouse earns a college or advanced degree or a professional license while married, the other spouse can make a claim for a portion of the potential economic benefit that is assumed to flow from that degree or license. As part of the distribution of marital property in a divorce, the parties are required to value and divide up this potential future income.

The process of valuing enhanced earning capacity is complicated, and usually requires the assistance of an economic expert. Typically, the expert will determine the owner’s lifetime working expectancy, what his or her projected earnings are over that lifetime, and what the projected earnings would be for a person with a similar education, but not the advanced degree or professional license. The difference between these figures is then reduced to a present dollar value. The problem of valuation becomes geometrically more complex where the licensed spouse is part of a professional practice or has used the license to establish a well-grounded professional career.

Often, the value of a party’s enhanced earning capacity will run into the hundreds of thousands or even millions of dollars. In some marriages, particularly short-term marriages of new professionals, such as doctors, lawyers and accountants, the enhanced earning capacity of one of the party’s is the most valuable asset available for equitable distribution.

A spouse seeking a share of the other’s enhanced earning capacity must be able to demonstrate that he or she made a contribution to the titled party’s acquisition of that marital asset. Where only a limited or modest contribution was made toward the other spouse's acquisition of a degree or license, and the attainment was more directly the result of the titled spouse's own ability, tenacity, perseverance and hard work, the court will award a relatively small percentage of the total value.

Even in those situations where the portion awarded is low, the dollar figures nonetheless can still be staggering. Because the Courts recognize that people generally do not have hundreds of thousands of dollars immediately available from earnings they will not realize for many years, they often make the enhanced earnings award payable in installments over time.

Requiring a party to pay for his or her enhanced earning capacity can be unfair. For example, what happens to a divorced spouse who subsequently loses that capacity? What happens if he or she decides to pursue some other type of employment that does not require the degree or license? Unfortunately, they can’t go back to court and try to modify the divorce judgment retroactively. So they are stuck with having to pay for potential income that they will never earn.

New York’s highest court has described the case law surrounding enhanced earning capacity as “experimentation and creative problem-solving.” Others might more accurately describe it as sheer speculation and guesswork. Currently, New York is the only state that handles enhanced earning capacity in this manner. Although there have been calls for the legislature to change the law in this area, it has not yet done so. Until they do, married persons who want to improve themselves and advance their careers do so at their peril.