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.

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New York's No-Fault Divorce Law

Until recently, if you wanted to get a divorce in New York you had no choice but either to prove adultery, abandonment, or cruel and inhuman treatment by your spouse or to be legally separated from him or her for at least a year. Under New York’s no-fault divorce law, which went into effect in October 2010, you can now procure a divorce by stating, under oath, that the marital relationship has “broken down irretrievably for a period of at least six months.” This means that neither spouse is assigned the blame for causing the marriage to end.

In theory, this should make for smoother separations and less expensive divorces. There is, however, one catch: under the new law a court cannot grant a no-fault divorce until the economic issues of equitable distribution of marital property, the payment of spousal support, child support, counsel and experts’ fees and expenses, as well as the custody of and visitation with the children of the marriage have been finally resolved.

In the real world of divorce litigation, the grounds for divorce usually are not what couples end up fighting over. Most of the time, both parties want out of the marriage and they find a way to agree on the grounds. It is usually the economic and child-related issues that cause divorces to become contentious, lengthy, expensive and emotionally debilitating for the parties. Unfortunately, this will not change under the new law.

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Fault and Finances

For reasons that remain shrouded in the impenetrable fog of Albany politics, New York, alone among all of the states, still does not recognize “no-fault divorce.” Not surprisingly, the requirement that a spouse demonstrate abandonment, adultery, or cruel and inhuman treatment proves to be no impediment, particularly when (as is typically the case) both sides want to be divorced in the first place. What may be surprising, though, is the fact that fault is almost completely irrelevant to the financial issues involved in a divorce, such as spousal maintenance, child support, and equitable distribution of marital property.

Exhibit A is the recent decision of the First Department in Howard S. v. Lillian S., involving a wife who, after several years of marriage and two children, had an extramarital affair and became pregnant. The husband, who was unaware of the affair, had no reason to suspect that his youngest child was not, in fact, his. Later, when he became suspicious, he arranged for a DNA test that established he was not the father. He promptly filed for divorce and argued that, because his wife's conduct constituted “egregious fault” under New York’s Domestic Relations Law, it should be considered as a factor against her in determining equitable distribution.

The Appellate Division, however, disagreed. They concluded that, while the wife’s alleged misconduct cannot be condoned and clearly violates the marital relationship, it did not rise to the level of “egregious fault,” since she neither endangered the lives or physical well-being of family members, nor deliberately embarked on a course designed to inflict extreme emotional or physical abuse upon them. Twisting the knife, the Court also held that the husband was not entitled to recover the money that he had spent supporting the child because he could not establish that he would have immediately filed for divorce had he learned the truth earlier.

The lesson here is simple. Unless he or she has hired a hit man in a botched attempt to rub you out, it just doesn’t matter how bad or nasty or [fill in the blank] your spouse is when it comes to the question of who gets what. So, even though New York doesn’t have no-fault divorce, at least it has no-fault equitable distribution. You might call that progress.

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What Not To Do In A Divorce

Sometimes, what you don't do in your divorce can be as important as, or even more important than, what you do. Here are some tips to make your divorce a little easier and to reduce the stress that is invariably part of this difficult process.

Don’t Get Caught Unprepared. If a divorce is on the horizon, you should make sure that you have copies of all of the important financial records from the marriage. These can include such things as bank and brokerage account statements, credit card bills, tax returns, and receipts. If you believe that your spouse may try to appropriate or dispose of assets such as the money in a joint bank account or the cash value of a life insurance policy, notify the holder in writing and, if necessary, get a restraining order from the court.

Don’t Try to Punish Your Spouse. Except in extremely egregious cases, divorce settlements are determined by equitable distribution laws. A court will not penalize your spouse financially or otherwise for being a nasty person. If you give you attorney orders to “go after” the other side, your legal fees will go through the roof. High divorce costs mean less money will be leftover for living. Treat divorce like the unwinding of a business arrangement. The best revenge is living well post-divorce.

Don’t Underestimate Your Budget. Invariably, clients underestimate or omit expenses when they produce their initial budget for temporary maintenance and later on find themselves unable to pay bills. Particularly, where children are involved, use a financial professional to help you produce an accurate and complete budget. The effects of inflation on the cost of a child's college education 15 years in the future or retirement 20 years hence, can be dramatic.

Don’t Ignore the Taxman. Work together with a financial planner or accountant to minimize the total taxes you and your ex will pay during separation and after divorce and share the money you save. The bottom line is you only get to share the marital assets left over after the taxman gets his cut.

Don’t Use Your Lawyer as a Therapist. One woman I spoke with ran up over $10,000 in legal fees in one month just in telephone calls complaining about her spouse. Attorneys are not cheap and billable hours pile up quickly. If you need emotional support, utilize qualified professionals and save big money in lawyer's fees.

Don’t Jump At A Settlement Offer That Looks Too Good. Both spouses and children must make compromises in their life styles after a divorce. One indisputable fact of divorce is that two households cost more to operate than one, but income is unchanged. A settlement that does not give one spouse enough money to live on is likely to go into default in the future. The result will be more litigation and legal fees. Where possible and appropriate, get payments up front even if you get less in total. Secure all payments with assets and insurance.

Don’t Forget to Update Estate Documents. After heavily contested divorces, many people forget to change the beneficiaries on their life insurance policies, IRA's and Will. The result is that their ex-spouse ends up inheriting their estate, which they really wanted to leave to their children, new partner or favorite charity.

Don’t Fail to Adequately Insure the Divorce Settlement. Premature death or disability of your ex-spouse can result in loss of maintenance, child support, college tuition or property settlement. Life and disability insurance can guarantee your payments and your family's security. Also, don't ignore the high cost of purchasing individual health insurance.

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