Divorce Property Division and Alimony Needs Analysis - "Breakin' Up is Hard to Do" - Article...

Breakin’ Up Is Hard to DoBut these formulas fordividing marital assets will make your job easier

ALSO: What Attorneys Need to Know About Insurance

You Might Be a Problem Client If ... (with apologies to Jeff Foxworthy)

AU G U S T 2 0 0 9 | VO L U M E 4 5 , N O . 8 T B A . O R G

COVER STORY

12 Breakin’ Up Is Hard to DoBut These Formulas for Dividing Marital Assets Will Make Your Job Easierby Robert Vance

FEATURE STORIES

22 What Attorneys Need to Know About Insuranceby Bllly L. Akin

37 Interrogatory Answers: You Might Be a Problem Client If ...by Andrew R. Tillman

3 PRESIDENT’S PERSPECTIVEFeel the Loveby Gail Vaughn Ashworth

4 JEST IS FOR ALLby Arnie Glick

5 WHAT YOU NEED TO KNOWNEWS: Governor Signs Judicial Election Plan | Court Makes IOLTA Mandatory |Convention Coverage | PEOPLE | DISCIPLINARY ACTIONS

25 WHERE THERE’S A WILLHow to Beat the New Mortality Tableby Dan W. Holbrook

27 BOOK REVIEWSPicking Cotton: Our Memoir of Injustice and Redemption by Jennifer Thompson-Cannino and Ronald Cotton | Our Undemocratic Constitution by Sanford Levinson

29 NEW COLUMN! SENIOR MOMENTSBusting Myths About Veteran’s Benefits and Medicaidby Monica Franklin

35 PAINE ON PROCEDURETwo Long-Arm Statutesby Donald F. Paine

40 BUT SERIOUSLY, FOLKS!The Right to Bare Arms ... Bare Butts and Big Belliesby Bill Haltom

42 CLASSIFIED ADVERTISINGRead the Tennessee Bar Journal at www.tba.org

A U G U S T 2 0 0 9 V O L U M E 4 5 , N O. 8

ON THE COVER

Love hurts — liketrying to figure outreasonable needs

and the ability to payalimony in a divorce.

This article, withdetailed illustrations,

will help. With thefiguring, not with the

heartache. Cover design byLandry Butler.

But theseformulas for

dividing maritalassets will

make your jobeasier

COVER STORY

In a divorce engagement, attorneys strive to discover methods of

dividing the marital estate in their client’s favor and justify an

alimony figure that is low if they represent the obligor and high if

they represent the obligee. Explaining either side to the trier of fact is

best accomplished with a straightforward, logical and businesslike

approach, rooted in facts, with documentation and analysis to

support the positions. From my understanding, most states that allow

alimony typically base awards on one spouse’s reasonable need and

the other spouse’s ability to pay, with Tennessee following this

premise.1 The proposed equitable division of the marital estate

should be a central factor before alimony is considered as this will

affect the need.

This article features two methods or “steps” that assist in the divi-

sion of the marital estate and figure alimony need and the ability to pay

that alimony. The steps follow a case study that illustrates the primary

Breakin’ Up Is Hard to Do By Robert Vance

12 | TENNESSEEBARJOURNAL AUGUST2009

factors the attorney should be consid-ering and the knowledge and servicesthat should be expected from a forensicaccountant (hereinafter “expert”). Step1, Dividing the Marital Estate, describesa method to facilitate marital estatedivision in an understandable mannerwhile highlighting several commonissues that typically arise during theprocess, such as the valuation ofpensions and other retirement assets,the value and nature of separate prop-erty, documenting dissipation andfactoring in the tax characteristics ofassets. Step 2, Figuring ReasonableNeeds and the Ability to Pay Alimony,introduces a method to calculate andjustify the reasonable need for alimony(or lack thereof) and the ability to payalimony (or lack thereof). The alimonyanalysis is based upon both spouses’income, proposed child support,personal living expenses, taxes, retirement draws and future incomegenerated from the divided assets. Theanalysis illustrates a simplified lifetimefinancial plan for all of the remainingyears of each spouse’s life expectancy sothe court can understand the impact ofa proposed settlement on each spouse’scash flow and the ability to accumulatewealth as the years pass.

Hiring ExpertsAn expert can be hired by both partiesas a mutual expert with the settlementdetails being negotiated andcontributed by both parties. Themutual expert method is the wave ofthe future since it offers the ability toreduce conflicts and professional fees.Of course, an expert is most oftenconsulted by an attorney who asks thatthe parties’ financial situation bereviewed in order to frame a favorablesettlement for their client and thenpresent that at mediation or trial. Inthose situations, the expert must havecold, hard facts to support the position

so as not be labeled a complete partisanor hired gun. In highly complexmatters or in cases with opposingexperts holding polar opposite opin-ions, the court can appoint an expert asits own witness or as a special master.In all three types of employment, theexpert’s analytical and communicationskills are critical.

Case StudyThis article features a case study thatillustrates the concepts discussed. Mr.Smith (“Husband” and “money spouse”)and Mrs. Smith (“Wife” and “non-money spouse”) have two children, ages15 and 13, and seek to end an 18-yearmarriage. Both spouses are financiallyconservative and have amassed asizable amount of investments andretirement savings with the net maritalestate exceeding $2.2 million. Alimonyis a definite possibility because of thelength of the marriage, disparity in eachspouse’s future income earning capacityand Husband’s admitted fault.Husband, age 48, is an airline pilotwith income greatly exceeding that ofWife, who is also age 48 and works at anonprofit agency.

Wife desires to stay in the Tennesseemarital residence which has 20 yearsremaining on the mortgage. TheSmiths own an expensive rental housethat is listed for sale, which was theformer marital residence located in theWashington D.C. area. Husband isvested with a defined benefit pensionfrom his current employer and themilitary, but he joined the militaryseveral years before marriage and thusclaims some of that pension to be hisseparate property. Husband spentsignificant assets on a paramour, alongwith other questionable financial trans-actions and transfers, but claims noneof it to be dissipation.

Continued on page 14

AUGUST2009 TENNESSEEBARJOURNAL | 13


STEP 1. DIVIDING THE MARITAL ESTATE The attorney or expert usually beginswith the classification and organizationof the assets and debts into a spread-sheet known as the Marital BalanceSheet (MBS). In the property divisioncontext, “balance sheet” refers to thelisting of separate and marital assets anddebts in a single table representing theentire estate with a proposed division ofeach item. The table “balances” the netestate into one version of an equitabledivision and serves as the foundationfor an alimony needs analysis. SeeExhibit 1.

In a perfect world, a proposed divi-sion would be based upon reasonableand sensible factors. Of course, “reason-

able” is defined in the mind of the oneproposing the idea. Some sensiblefactors include the spouses’ desire for aparticular asset (e.g., mother wants tostay in the house until children go tocollege), the practicality, legality ornecessity of one spouse owning an assetor owing a debt (e.g., Wife is a dentistand thus cannot split ownership of thepractice or its line of credit with herhusband), the tax consequences (e.g.,an IRA is taxable if withdrawn but amoney market is not) and the futureincome earnings from an asset (e.g., thecash and IRA settlement may be largeenough to generate enough income tocancel the alimony need). The proposedsettlement does not have to be equal,only equitable; however, neither party isserved well if a proposal is rendereddead-on-arrival by containing extreme

assumptions or positions.The MBS is a flexible presentation.

The MBS should be constructed usingformulas in an electronic spreadsheet,such as Excel, which allows an attorneyor expert to easily make changes andadapt to new scenarios and proposals.Several scenarios may be needed onhand during negotiations. Including thefollowing features in the MBS will allowit to be more useful: 1) relating debts tosecured assets and showing the netequity as in Exhibit 1 line numberss 1-5; 2) displaying property claimed asseparate in whole or in part so as toestablish the separate claim; 3) offsettingthe present value of a pension or fairmarket value of a small business withother estate assets; 4) grouping assetand debt categories such as real estateand investments; and 5) displaying the

Marital Estate continued from page 13

Smith v. SmithExhibit 1-Marital Balance Sheet

Child orSeparate

No. Description Title FMV Debt Equity Account Marital Husband Wife NotesREAL ESTATE

1 Rental Property-1234 Maple Cove J 410,000 0 Appraisal dated 11/30/07; listed for sale2 Estimated Sales Comm. on Rental Prop. Sale J (24,000) 0 Estimated3 Estimated Income Tax on Rental Property Sale J (35,000) 351,000 351,000 175,500 175,500 Estimated4 Marital Residence-4567 Main St. J 250,000 0 Appraisal dated 11/30/075 Marital Residence-Mortgage #05-227 J (119,000) 131,000 131,000 131,000 Statement dated 2/28/08

CASH & INVESTMENTS6 Checking Account #5689 H 2,500 2,500 2,500 2,500 Per statement as of 2/28/087 Checking Account #9876 W 3,500 3,500 3,500 3,500 Per statement as of 2/28/088 Savings Account #1234 J 11,500 11,500 11,500 11,500 Per statement as of 2/28/089 ABC Corporation Stock-200 shr H 20,000 20,000 20,000 20,000 Per statement as of 2/28/0810 Amer. Century I #3698 W 20,000 20,000 20,000 20,000 Per statement as of 2/28/0811 Amer. Century-Money Market #5678 J 31,000 31,000 31,000 31,000 Per statement as of 2/28/0812 Amer. Century-II #6543 J 36,000 36,000 36,000 36,000 Per statement as of 2/28/0813 Jones Fund #1478 J 7,000 7,000 7,000 7,000 Per statement as of 2/28/0814 Janus-Wordwide #9998 J 2,000 2,000 2,000 2,000 Per statement as of 2/28/0815 Janus-Twenty $8889 J 9,000 9,000 9,000 9,000 Per statement as of 2/28/0816 eTrade Account #2589 H 4,000 4,000 4,000 4,000 Per statement as of 2/28/08

RETIREMENT17 ABC Co. Pension Plan #AB-123 H 428,959 428,959 428,959 428,959 PV of future benefits as of 1/31/0818 Military Pension Plan H 190,000 190,000 20,000 170,000 170,000 PV of future benefits as of 1/31/0819 Money Purchase Pension Plan #XY-9876 H 140,000 140,000 140,000 140,000 Per statement as of 2/28/0820 Retirement Savings Plan #JK-6543 H 550,000 550,000 550,000 550,000 Per statement as of 2/28/0821 IRA #02-3456 H 11,000 11,000 11,000 11,000 Per statement as of 2/28/0822 IRA II #98-7654 H 122,000 122,000 122,000 48,800 73,200 Per statement as of 2/28/08;40%/60%23 403b Plan #9876 W 38,000 38,000 38,000 38,000 Per statement as of 2/28/0824 IRA III #6543 W 35,000 35,000 35,000 35,000 Per statement as of 2/28/08

PERSONAL PROPERTY25 1982 Mercedes J 12,000 12,000 12,000 12,000 NADA Average retail value as of 1/31/0826 1994 Toyota W 3,200 3,200 3,200 3,200 NADA Average retail value as of 1/31/0827 1998 Chevrolet PU Truck H 8,800 8,800 8,800 8,800 NADA Average retail value as of 1/31/0828 Personal Property J 20,000 20,000 20,000 10,000 10,000 H & W Estimate29 Husband's Dissipation of Marital Assets H 109,538 109,538 109,538 109,538 CPA Analysis

OTHER DEBTS29 Visa #4529 J (4,000) (4,000) (4,000) (4,000) Per statement as of 1/31/0830 Amex #1234 W (8,500) (8,500) (8,500) (8,500) Per statement as of 1/31/0831 Discover #6549 W (9,500) (9,500) (9,500) (9,500) Per statement as of 1/31/08

TOTALS 2,474,996 (200,000) 2,274,996 20,000 2,254,996 1,012,596 1,242,40044.9% 55.1%

3/31/08Proposed Division

proposed division of each and everyitem along with the total net percentageto each spouse. Judges often ruledirectly from an MBS and attach it as anexhibit to the decree since they find itto be simple, concise and unambiguous.Occasionally, a judge will ask for ablank copy of the spreadsheet templateso as to fill in the division pursuant tothe ruling.

What sort of supporting documen-tation is needed? The expert andattorney must collaborate to gather thesupporting documents that evidenceeach line item in the MBS. One or theother should accumulate a document orwork paper representing backup foreach listed asset and debt, dated as closeas possible to the date of the finaldivorce hearing.2 Exhibit 2 provides abasic list of documents or analysisneeded for the most common MBSitems. If the case is continued, adiscovery request for updated docu-ments should be issued if allowable.

Request for Production ofDocuments (RPD) and Other Discovery TipsAccount numbers and the name of theasset or debt should be included in anRPD if known. Using a truncatedversion of those numbers on the MBSallows for easier identification. For

mediation and trial, the documentsthat identify and value the assets anddebts should be labeled with exhibitnumbers that correspond with the linenumbers in the MBS and then placedin a three-ring binder with severalidentical copies. If an expert is to behired, he should be engaged early inthe divorce process and used to assistin formulating the RPD. In the casestudy, Wife’s attorney sent an RPDwhich resulted in production ofmonthly or quarterly statements formost, but not all, of Husband’saccounts containing cash, investments,retirement and debts. Wife’s attorneyhad hired an expert who reminded herto request the couple’s tax returns forthe last five years. The expert discov-ered dividend income on the taxreturns that identified an on-linebrokerage account that Husband failedto “remember” in the RPD andInterrogatories. A subpoena was issuedfor this account and it was discoveredthat, during the months leading up toseparation, Husband made severallarge profitable trades of stocks andwired the proceeds to another uniden-tified account.

When requesting personal taxreturns, always specify five years ofForm 1040, including all schedules sinceForm 1040 is actually only two pages in

length. If the spouse is also a small busi-ness owner, request five years of thatbusiness’s tax returns with all schedules.The form numbers are Form 1065 for apartnership or LLC, Form 1120 for acorporation and Form 1120S for an Scorporation. The owner’s incomereporting form known as Schedule K-1from a 1065 or 1120S, unlike a W-2,will not be attached to an individualform 1040. Request the K-1s for allbusiness owners of the entity even ifdiscovery of the full business returns isdenied. A K-1 can reveal valuable infor-mation such as changes in ownershippercentages, nontaxable cash distribu-tions and capital contributions that canbe used as a method of “parking” orhiding funds until the divorce is final.

The attorney should considersending a subpoena to all banks that aspouse may use, especially if thatperson owns a small business and mustperiodically renew loans and substan-tiate good credit. Request the entire loanfile, including personal financial state-ments (PFS) and loan applications. In aPFS, owners often list their “estimate” ofthe value of a small business and arerequired to list details of all assets anddebts. Assets might appear in a PFS thatmight be unknown to the other spouse



Exhibit 2-Common Documents/Analysis for Marital Balance Sheet

Asset/Liability Related Document/AnalysisGeneral 5 Years of business & personal tax returns, with W-2sMarital Residence Real estate appraisalMortgage Payoff or monthly statementChecking/Savings Accounts Latest bank stmnt & canceled checks (may need 24 months)Investment Accounts Latest monthly/quarterly statementDefined Benefit Pension Vested benefit statement & plan documentDefined Contribution Plans-401(k) Savings Plan, etc. Latest monthly statementStock Options Vested & unvested grant statement & plan documentIRA Latest monthly/quarterly statementVehicles NADA valuation from InternetOther Personal Property List & estimates from parties; personal property appraisalSmall Business Business valuation from qualified expertDissipation of Marital Assets Receipts, canceled checks, CC stmnts, depo. excerpts, etc.Credit Cards Latest statement (may need 24 months)


and are often valued higher than thatclaimed for divorce purposes since theloan applicant is motivated to inflatevalues in order to renew the loan. InTennessee,3 a person can be held tovalues listed in a PFS issued to a banksince it is a document that is generallysubject to federal bank fraud provisions.

The RPD should also request elec-tronic file copies or access to all elec-tronic ledgers, including passwords,maintained by the spouse or the busi-ness, such as Quicken for personalrecords and QuickBooks for businessrecords. Access to electronic filesallows the expert to easily and inex-pensively sort data a number of ways,discover previously unknown activitiesof the spouse, and extract the trueincome, expenses, and fringe benefitsfrom the data.

Pensions and Other Retirement AssetsThe most common types of retirementassets are Defined Benefit Plans,Defined Contribution Plans andIndividual Retirement Accounts.

Defined Benefit Plans. These typesof plans do not usually have an invest-ment “balance” that can be withdrawnand are often characterized as the classicpension whereas the spouse accruingthe benefit, the employee-spouse, vestsin the plan over time and draws amonthly benefit for life during retire-ment. The nonemployee-spouse canoften request, through a QualifiedDomestic Relations Order (“QDRO”),that an account be segregated ormonthly payments allocated to him/her,often with many of the same rights asthe employee-spouse.

What if the pension cannot bedivided? The future monthly pensionbenefit stream can be discounted topresent value by an expert and placedon the MBS as if a lump-sum, cash-equivalent balance existed in anaccount. The present value can then beoffset against other estate assets. Seeline item #17 on the MBS, Exhibit 1,

for the present value conclusion ofHusband’s defined benefit plan.Husband’s military pension was alsopresent-valued and placed on the MBSas line item #18. Tennessee, like manyother states, has allowed present valuepension offset in property divisions.4

Offset may be the most practical andthe only legal remedy to deal with apension division, assuming other assetsof equal value exist to offset the hypo-thetical pension balance.

The attorney will want to know themonthly pension benefit amount that isvested and accrued to date whether ornot the plan is present-valued. Whenthis document is obtained through RPDor subpoena, remember to order thevested benefit assuming a hypotheticalretirement as of the required valuationdate near the divorce, not a projection ofthe benefit to retirement age. Post-divorce future vesting of benefits is notusually available as marital property tothe nonemployee-spouse. If thependency of the divorce is drawn out,pension benefits may increase; there-fore, the attorney should obtain anupdated benefit statement.

Unvested Pension. In some cases, acoverture fraction is an acceptablemethod to value the marital portion ofunvested pensions that may require thecourt to retain jurisdiction so as todivide the monthly payment once theemployee vests and begins to draw onthe plan. The marital property interest isoften expressed as a fraction or apercentage of the employee-spouse’smonthly benefit. Under one variation,the percentage may be derived bydividing the number of months of themarriage during which the benefitsaccrued by the total number of monthsduring which the retirement benefitsaccumulate before being paid.

Defined Contribution Plans andIndividual Retirement Accounts(IRAs) These types of assets do have atangible investment balance that can bewithdrawn (usually with tax andpenalty if age and other requirementsare not met) and are comprised ofcontributions made by the individual.

The 401(k) is the most well-knowndefined contribution plan, which isoften matched or contributed to by anemployer. Note that an IRA is theinvestment “vehicle” that receives arollover balance from a defined contri-bution or defined benefit plan; there-fore, IRAs can be created by thetraditional annual contribution of$5,000 (2009 limit) or from a rollover.

Both types of assets generally doallow for division in divorce and can betransferred or rolled over tax-free to anIRA in the other spouse’s name. Notethat in lines #19 and #20 of the MBS,two of Husband’s retirement assets areproposed to be transferred to Wifethrough a rollover. The assets do notbecome taxable to Wife until she beginsto draw funds from the accounts.

The attorney or expert must confirmthat the retirement plan allows forsegregation or distribution and willaccept a QDRO. Avoid being caught inthe malpractice web of negotiating adeal with the client receiving some ofthe benefit plan, but the plan itself doesnot allow for the provisions of the nego-tiated deal. Read the plan organizingdocument! Private and union plans areusually covered by ERISA and thus aresubject to QDROs. Government, publicschools and the military are generallynot subject to ERISA and do not acceptQDROs, but may have developed theirown version.

Separate Property IssuesTennessee defines marital property toinclude “income from, and any increasein value during the marriage of, prop-erty determined to be separate property… if each party substantiallycontributed to its preservation andappreciation.”5 The courts have gener-ally determined that a spouse cancontribute to the preservation andappreciation of the other spouse’s sepa-rate property through a number ofways, including running a household asa homemaker, payment of propertytaxes by one spouse on property ownedseparately by the other, filing a joint taxreturn with one spouse paying federal


income taxes through withholding orpaying estimated tax payments on theother’s separate income, one spouse“allowing” the other to contributemarital income to a separate, pre-marital retirement account, and onespouse operating a farm or small busi-ness owned separately by the other,among many others. Tennessee courtsdo not generally allow purely market-driven separate property appreciation tobecome marital.6

When figuring the premarital sepa-rate portion of a pension account,consider the fact that a valuation thatuses a monthly retirement benefit thatwas derived based on a plan’s prescribedcompensation formula may render aresult that is dramatically different thanapplying a coverture fraction based onthe months married. The facts of thesituation may give guidance as to whichmethod to use. Note the militarypension on line #18 has a separateelement since the Husband joined themilitary three years before the marriageand military pensions vest after 20years; thus the pension was fully vestedafter year 17 of the 18-year marriage.The calculated present value using theplan’s own compensation formula tofigure the hypothetical monthly benefitaccrued at date of marriage was$20,000 and the date of divorce valuewas $190,000, resulting in a $170,000marital value appreciation. Had thecoverture fraction been used, the sepa-rate value would have been $28,500($190,000 x 3/20).

Commingling and Transmutation.Concepts that are often difficult to illus-trate include identifying propertyacquired in exchange for separate prop-erty and determining whether fundshave been commingled and/or trans-muted. Exchanges of assets occurringover multiple financial accounts andmultiple years can be especiallyconfusing. A typical example mightinvolve a premarital 401(k) plan thatwas rolled over into an IRA that is witha brokerage house that has merged andchanged names a few times. Theattorney should avoid assuming an

account or other asset that exists todaythat seemingly did not exist at marriageis automatically marital property. Anexpert can create a schedule that tracesthe flow of separate funds over time inorder to demonstrate if separate fundswere used to purchase other separateassets or whether separate funds thatmay have been deposited with maritalfunds are still identifiable or inseparableso as to prove or disprove comminglingand transmutation.

Proving DissipationDissipation of marital property occurswhen one spouse uses marital property,frivolously and without justification, fora purpose unrelated to the marriageand at a time when the marriage isbreaking down.7 The factors thatTennessee courts frequently considerwhen determining whether a particularexpenditure or transaction amounts todissipation include whether the expen-diture benefited the marriage or wasmade for a purpose entirely unrelated

to the marriage, whether the expendi-ture or transaction occurred when theparties were experiencing marital diffi-culties or were contemplating divorce,whether the expenditure was excessiveor de minimis, and whether the dissi-pating party intended to hide, depleteor divert a marital asset. The timing ofthe expenditure or transaction isextremely relevant. Expenditures thatwere typical or commonplace duringthe marriage will be difficult to prove asdissipation, especially when the otherspouse acquiesced in them.8

After the party alleging dissipationestablishes a prima facie case thatmarital funds have been dissipated, theburden shifts to the party who spent themoney to prove that the challengedexpenditures were appropriate. Exhibit3 illustrates a table containing a list ofwhat Wife alleges were highly question-able, frivolous and wasteful expendi-tures that were not typical during the



Barbara Mendel [email protected]

4521 Sharon RoadS u i t e 2 2 5Charlotte, NC 282118 6 4 . 4 2 0 . 5 1 5 9

K e n n e t h E . Yo u n [email protected]

www.youngmayden.com

A legal search firm specializing in placing:Lateral Partners . In House Counsel . Senior Associates

4414 Herbert PlaceS u i t e 1 0 0 0Nashville, TN 372156 1 5 . 8 2 3 . 7 3 3 8


marriage of the Smiths. Through theRPD, Wife’s attorney had requestedchecking account statements, withcanceled check copies, along with creditcard statements for the two years beforethe marital problems surfaced. The cashATM withdrawals were atypical forHusband during the marriage as werethe travel and meals expenditures sincehe enjoyed a generous expense accountfrom his employer and rarely incurredpersonal expenses of this nature.Husband also incurred numerous newloans around separation time with noapparent need for the proceeds.

An organized table, such as thatpresented as Exhibit 3, along with prop-erly referenced copies of checks,receipts, deposition excerpts, etc., is apowerful tool to use in presenting theprima facie case. The total balance ofdissipated funds should be placed on

the MBS as an asset as if the funds stillexist and the non-dissipating spousewill receive an offset of another maritalasset. A similar asset offset can be usedto obtain credit for marital funds usedto pay divorce attorney fees since thiscould be considered a form of dissipa-tion. Line item #29 of the MBS, Exhibit1, represents the total dissipation as asingle figure as if the funds still existed.

If marital funds were spent on a frivo-lous or wasteful asset that does still exist,such as a car for a girlfriend, or the fundsare suspected of being diverted to anunknown account, consider placing theasset as a single line item on the MBSrather than on the dissipation schedule.Dissipation is often perceived as subjec-tive in the eyes of the court; thus mini-mizing the entries and dollar amounts onthat schedule is often more beneficial.

Tax Characteristics of an AssetAssets of similar gross fair market value

may result in different amounts of taxdue if sold and, therefore, havedifferent net intrinsic values, i.e., anasset with a higher tax basis9 will resultin lower taxes. When dividing up themarital estate, the attorney or expertshould consider whether or not aparticular asset is of a taxable natureand, if so, determine the tax basis.Some assets, like checking accounts,would not be taxable if spent, but amutual fund may be taxable if sold.The personal residence may or may notbe taxable if sold, but most retirementaccounts will be taxable if liquidated.

In the Smith MBS, the proposed divi-sion transfers item #9, ABC CorporationStock-200 shares, with a value of$20,000 to Husband, and #10, Amer.Century I (a mutual fund), with a valueof $20,000 to Wife. Husband purchasedABC five years ago at $20 per share;thus his tax basis is $4,000 and willhave a $16,000 capital gain if sold. Wife


Smith v. SmithExhibit 3-Dissipation of Marital Assets by Husband

Clothing Travel,Check & Dept. Meals & Loans to Bank Cosmetic

Date Num Description Memo Totals Stores Ent. G'friend Cash Loans Medical10/1/05 Refinance of H's Paid-for Car Per H's Depo 15,000.00 15,000.0010/1/05 Disney World Trip Per Answers to Interrog. 5,000.00 5,000.0010/13/05 1032 Sports Tickets Etc. Per Answers to Interrog. 3,000.00 3,000.0011/1/05 1016 Check to Girlfriend 2,500.00 2,500.0011/1/05 Credit Union Loan #12345 Unknown purpose 20,000.00 20,000.0011/1/05 1045 Sports Tickets Etc. Per Answers to Interrog. 3,000.00 3,000.0012/20/05 1053 Check to Girlfriend 415.00 415.0012/27/05 Miguelas Clothing Women's clothing shop 692.48 692.4812/29/05 Miguelas Clothing Women's clothing shop 567.00 567.00

1/3/06 Airline 915.14 915.141/3/06 Airline Chicago trip 915.14 915.141/3/06 Apple Store 398.00 398.001/18/06 Ruth's Chris Steak House H seen out w/ Girlfriend 341.00 341.001/31/06 Cash Advance on cc Vegas trip 402.00 402.002/2/06 Over-the-counter W/D Vegas trip 400.00 400.002/2/06 SunTrust Cash Vegas trip 402.00 402.002/5/06 Cash Advance on cc 402.00 402.002/15/06 Cosmetic Dentist Inc. Per H's Admission 7,890.00 7,890.002/15/06 Hair Plugs R Us Per H's Admission 12,107.00 12,107.002/23/06 Banana Republic 1,095.76 1,095.763/4/06 Delta Air Trip w/ Girlfriend 678.00 678.004/5/06 Delta Air Trip w/ Girlfriend 678.00 678.005/10/06 Victoria's Secret Women's clothing shop 789.00 789.005/19/06 Girlfriend's Diamond Ring Per H's Depo 20,000.00 20,000.006/8/06 Atm Cash Withdrawal 2,000.00 2,000.007/10/06 Victoria's Secret Women's clothing shop 150.00 150.008/17/06 Over-the-counter Withdrawal 7,300.00 7,300.009/8/06 1283 Cash 2,500.00 2,500.00

Totals 109,537.52 23,692.24 16,133.28 2,915.00 11,800.00 35,000.00 19,997.00

3/31/08Girlfirend Expenses Other

purchased the Amer. Century I fund lastyear for $22,000; thus it will have a$2,000 capital loss if sold. Husbandwould owe $2,400 in capital gains taxesand Wife would owe nothing; therefore,Wife’s asset possesses a higher netintrinsic value.

STEP 2. FIGURING REASONABLENEEDS AND THE ABILITY TO PAY ALIMONYA property division must be consideredbefore figuring one spouse’s needs andthe other spouse’s ability to payalimony since the divided assets anddebts each carry their own future cashflow implications. Attorneys need amethod to calculate and justify thereasonable need for alimony (or lackthereof) and the ability to pay alimony(or lack thereof) after a working prop-erty division is on their table. TheAlimony Needs and Ability to PayAnalysis illustrates a simplified, lifetimefinancial plan covering all of theremaining years of each spouse’s lifeexpectancy. The court and the partiescan use the analysis to understand theimpact of the proposed settlement oneach spouse’s cash flow, along with theaccumulation or dispersion of wealth asthe years pass.

Foundation for AlimonyTennessee’s statutes and case lawprovide for and define the foundationfor alimony based upon the nature ofthe case and circumstances of theparties. The courts must consider manyfactors in setting alimony, but generallyit is appropriate when one spouse iseconomically disadvantaged relative tothe other spouse.10 No absolute formulaexists; however, numerous cases and theTenn. Code Ann. provide that “the courtshall consider the financial needs ofeach spouse and the financial ability ofeach spouse to meet those needs…”11

The Tennessee Supreme Courtexpounded upon the Tenn. Code Ann.and set out several guiding principlesregarding the foundation for alimony,including: 1) the real need of the spouseseeking the support is the single most

important factor; 2) in addition to theneed of the disadvantaged spouse, thecourts most often consider the ability ofthe obligor spouse to provide support;3) further, the amount of alimonyshould be determined so that the partyobtaining the divorce is not left in aworse financial situation than he or shehad before the opposite party’s miscon-duct brought about the divorce;12 and4) while alimony is not intended toprovide a former spouse with relativefinancial ease, we stress that alimonyshould be awarded in such a way thatthe spouses approach equity. Thus,need, ability to pay, status, and fault arethe primary considerations.13

Standard of Living. As the courtsassess the real or reasonable need of anon-money spouse, most attempt tomake the post-divorce standard of livingreasonably comparable to that experi-enced during the marriage, whileconsidering the standard that the moneyspouse will enjoy post-divorce. Standard

of living is broadly defined as “a level ofmaterial comfort as measured by thegoods, services, and luxuries availableto an individual, group, or nation”.14

Considerations can include the valueand furnishings of the marital residence,models of cars driven, schools attendedby the children, social or club member-ships, types of vacations enjoyed, etc. Igenerally define the term as the level ofexpenses that a family could afford toenjoy during their marriage, not neces-sarily what they did enjoy, since manyfamilies today spend more than theymake and pile on the credit card debt.

Figuring Reasonable NeedsA majority of attorneys I encounter usea single-month financial statementformat for “proving” alimony need orability to pay since most people tend tothink in terms of monthly budgets:thus it is easier to comprehend.Additionally, many courts require thistype of monthly income and expense




illustration in the form of an affidavit.The article presents an alternative solu-tion since single-month formats areoften flawed for these reasons: 1) use ofa single month representing a snapshotin time, not a realistic, forward-lookingprojection of the actual incomes andexpenses the spouses expect over theirremaining lifetimes, 2) gross under-statement of income by self-employedand commission or bonus-dependantspouses,15 3) use of expense figuresthat appear to be an accurateaccounting of the historical standard ofliving, although the future expenseswill inevitably be different because ofnew housing arrangements, additionalchild care expenses, duplications, etc.,4) failure to incorporate the use ofinvestment earnings available from thedivided property, 5) failure to incorpo-rate the use of retirement assets orpensions at retirement date or for useimmediately if necessary, 6) overstate-

ment of monthly expenses due to a lackof knowledge of the real details, and 7)overstatement of monthly expensesafter listing those ordered to pay astemporary support such as the housenote, utilities and car note; theseexpenses may be misleading as to themoney-spouse’s future ability to pay ifthey will transfer to the non-moneyspouse or change to a new amount afterthe divorce is final.

A Forward-Looking Projection.The goal in “proving” alimony needshould be to illustrate the non-moneyspouse’s real and reasonable need basedon a forward-looking projection ofincome and expenses. A logical andbusiness-like analysis resembling a life-time financial plan is very useful if themarital estate contains diverse financialand retirement assets, the assets need tobe present-valued or appraised andused as offset, or each spouse’s incomeand expense affidavit displays greatdisparity or negative cash flow (whichfrequently occurs).

The future income should reflect arealistic earning capacity along with areasonable return on retirement andinvestment accounts distributed in theproperty settlement. The futureexpenses should reflect those that thespouse actually expects to incur. Thecourt needs to be informed of the possi-bility that a spouse might become desti-tute by receiving too little support, orby paying too much, or that one spousemay have the ability to accumulate aconsiderably larger amount of futurewealth and therefore experience agreatly superior post-divorce standard ofliving to that of the other spouse.

Steps for Figuring Reasonable NeedsCalculate the remaining life expectancyof each spouse based upon age andother factors. An often cited source isthe United States Life Tables, NationalVital Statistics Reports, compiled by theNational Center for Health Statistics.

For alimony and child supportpurposes, generally use earnings fromW-2s or the tax return, or determine thetrue income of the self-employed andcommission or bonus-dependant moneyspouse through forensic examinations oftax returns, company books, bank state-ments, etc. A multiple-year average maybe appropriate along with cost-of-livingadjustments. Consider hiring a voca-tional expert to examine the unem-ployed or underemployed spouse todetermine a fair and attainable futureearning capacity, if any.

Allow for contributions to retirementplans and/or IRAs based on past prac-tices. One or both spouses will mostlikely need to rebuild retirement assetspost-divorce. Incorporate an investmentrate of return on the retirement assetsfrom the proposed settlement in theMBS, thereby allowing for an accumula-tion of funds until retirement age atwhich point the assets should be drawndown. The availability of retirementassets and Social Security as a futuresource of income is often a forgottenaspect, or at least one that is difficult toquantify, unless a lifetime illustration is


presented. A reasonable return basedupon financial planning portfolio theoryshould be used.

Incorporate an investment rate ofreturn on the non-retirement financialassets like brokerage accounts, moneymarket accounts, cash and rental proper-ties from the proposed settlement in theMBS. The accumulation becomes the “goto” or emergency fund if cash flow isnegative in a particular year. A reason-able return based upon financial plan-ning portfolio theory should be used.

Factor in the receipt of child support.Note that child support is often theelement that produces the short-termfaçade of well-being for the obligee andpain for the obligor. The attorney mustconsider and be prepared to illustratewhat occurs to each spouse once theobligation ceases.

Since at least one of the spouses willbe moving to a new residence, figurethe new mortgage note or rent based on

an approximation of the pre-divorcestandard of living while being realisticas to the proposed new home(s). Intoday’s economy, many couples arehouse poor in that they are “upsidedown” in the marital residence equityand have too few financial and retire-ment assets. Affordable future housingplays much better with a judge than thesame old financial irresponsibility thatprobably contributed to the marriagebreakdown in the first place.

Analyze the personal living expensesfrom the bank statements, canceledchecks and credit card statements.Having a detailed accounting or generalledger of actual historical expenses is apowerful rebuttal to an over-statedexpense affidavit. Inflation is anotherelement of the future expenses thatshould be factored into any projection,that, when ignored, can produce afaçade of future well-being for bothspouses. Beware of the double-dip

expense list or affidavit that detailsroutine expenses, such as clothingreplacement, groceries, entertainment,gas, etc., along with the nebulous item:“credit card payments.” Who pays cashor writes checks for clothing, groceriesand gas these days?

Calculate federal and state taxes onthe projected earnings, other taxableincomes, itemized deductions and thetax consequences for paying/receivingalimony. Avoid the mistake of using thewithholding amounts from the spouses’pay checks or the tax liability from thelatest tax return as these tax amountswill change with the newdeduction/inclusion of alimony.

Explanation of Wife’s Need forSupport AnalysisThe Needs Analysis, Exhibit 4, repre-sents the result of scientific and method-ical calculations and analysis using the



Smith v. SmithExhibit 4-Wife's Need for Support

(A) (B) (C) (D) (E) (F) (G) (H) (I) (J) (K) (L) (M) (N) (O) (P) (Q)+ - - + + + + = - = - - = = *

Earnings & PersonalEmployment Social Principal Federal Net Living Exp. Annual Monthly Monthly

Earnings Retirement Child Draws From Security Draws From Total Income Disposable Mortgage 2.5% (Deficit) (Deficit) AlimonyYear Age 2.0% COLA FICA Deductions Support Retirement 2.5% COLAInvestments Income Tax Income Prin & Int Inflation or Surplus or Surplus Need

1 48 45,000 (3,443) (15,000) 38,400 0 0 0 64,958 (12,941) 52,016 (23,400) (85,588) (56,972) (4,748) 5,0002 49 45,900 (3,511) (15,000) 25,200 0 0 12,000 64,589 (16,967) 47,621 (23,400) (87,728) (63,507) (5,292) 5,0003 50 46,818 (3,582) (15,000) 25,200 0 0 14,000 67,436 (17,678) 49,758 (23,400) (89,921) (63,563) (5,297) 5,0004 51 47,754 (3,653) (15,000) 0 0 0 24,000 53,101 (18,341) 34,760 (23,400) (74,724) (63,364) (5,280) 5,0005 52 48,709 (3,726) (15,000) 0 0 0 25,000 54,983 (18,816) 36,168 (23,400) (76,592) (63,824) (5,319) 5,0006 53 49,684 (3,801) (15,000) 0 0 0 26,000 56,883 (19,242) 37,641 (23,400) (78,506) (64,265) (5,355) 5,0007 54 50,677 (3,877) (15,000) 0 0 0 27,000 58,800 (19,619) 39,181 (23,400) (80,469) (64,688) (5,391) 5,0008 55 51,691 (3,954) (15,000) 0 0 0 28,000 60,737 (19,946) 40,790 (23,400) (82,481) (65,090) (5,424) 5,0009 56 52,725 (4,033) (15,000) 0 0 0 30,000 63,691 (20,222) 43,470 (23,400) (84,543) (64,473) (5,373) 5,00010 57 53,779 (4,114) (15,000) 0 0 0 31,000 65,665 (20,444) 45,221 (23,400) (86,656) (64,835) (5,403) 5,00011 58 54,855 (4,196) (15,000) 0 0 0 34,000 69,658 (22,724) 46,935 (23,400) (88,823) (65,288) (5,441) 5,00012 59 55,952 (4,280) (15,000) 0 75,000 0 0 111,672 (43,551) 68,121 (23,400) (91,043) (46,323) (3,860) 5,00013 60 0 0 0 0 150,000 0 1,000 151,000 (36,733) 114,267 (23,400) (93,319) (2,453) (204) 014 61 0 0 0 0 150,000 0 3,000 153,000 (36,901) 116,099 (23,400) (95,652) (2,953) (246) 015 62 0 0 0 0 150,000 0 6,000 156,000 (37,034) 118,966 (23,400) (98,044) (2,478) (207) 016 63 0 0 0 0 150,000 0 8,000 158,000 (37,130) 120,870 (23,400) (100,495) (3,025) (252) 017 64 0 0 0 0 150,000 0 11,000 161,000 (37,186) 123,814 (23,400) (103,007) (2,593) (216) 0

3/31/08

18 65 0 0 0 0 150,000 15,000 2,000 167,000 (40,769) 126,231 (23,400) (105,582) (2,752) (229) 019 66 0 0 0 0 150,000 15,375 4,000 169,375 (41,032) 128,343 (23,400) (108,222) (3,279) (273) 020 67 0 0 0 0 150,000 15,759 6,000 171,759 (41,264) 130,496 (23,400) (110,927) (3,832) (319) 021 68 0 0 0 0 150,000 16,153 0 166,153 (41,460) 124,693 0 (113,701) 10,993 916 022 69 0 0 0 0 150,000 16,557 0 166,557 (42,042) 124,515 0 (116,543) 7,972 664 023 70 0 0 0 0 150,000 16,971 0 166,971 (42,605) 124,367 0 (119,457) 4,910 409 024 71 0 0 0 0 150,000 17,395 0 167,395 (43,143) 124,252 0 (122,443) 1,809 151 025 72 0 0 0 0 150,000 17,830 0 167,830 (43,657) 124,174 0 (125,504) (1,331) (111) 026 73 0 0 0 0 150,000 18,276 0 168,276 (44,143) 124,133 0 (128,642) (4,508) (376) 027 74 0 0 0 0 150,000 18,733 3,000 171,733 (44,598) 127,135 0 (131,858) (4,723) (394) 028 75 0 0 0 0 150,000 19,201 6,000 175,201 (45,020) 130,181 0 (135,154) (4,973) (414) 029 76 0 0 0 0 150,000 19,681 9,000 178,681 (45,406) 133,275 0 (138,533) (5,258) (438) 030 77 0 0 0 0 150,000 20,173 12,000 182,173 (45,753) 136,420 0 (141,997) (5,577) (465) 031 78 0 0 0 0 150,000 20,678 15,000 185,678 (46,058) 139,620 0 (145,546) (5,927) (494) 032 79 0 0 0 0 150,000 21,195 18,000 189,195 (46,317) 142,878 0 (149,185) (6,307) (526) 033 80 0 0 0 0 150,000 21,724 22,000 193,724 (46,526) 147,198 0 (152,915) (5,717) (476) 034 81 0 0 0 0 150,000 22,268 25,000 197,268 (46,683) 150,585 0 (156,738) (6,153) (513) 035 82 0 0 0 0 150,000 22,824 28,000 200,824 (46,782) 154,043 0 (160,656) (6,613) (551) 0

603,544 (46,171) (180,000) 88,800 3,525,000 335,795 430,000 4,756,968 (1,228,732) 3,528,236 (468,000) (3,861,195) (800,960)


same process as in the section, “Steps forFiguring Reasonable Needs,” fromabove. The table is constructed with thelines representing years of remaining lifeexpectancy and the columns repre-senting the incorporation of variousincomes, deductions, expenses, etc. Thefigures add (or subtract) going from leftto right with a subtotal of Total Incomein column J, a subtotal of NetDisposable Income in column L, and theultimate goal of figuring the Annual(Deficit) or Surplus in column O. TheAnnual (Deficit), if any, is divided by 12to result in the Monthly (Deficit) orSurplus which approximates the spouse’smonthly need.

The following steps explain theprocess for compiling the need forsupport of Wife from the case study.These steps are embodied in Exhibit 4with incomes illustrated as positivenumbers and expenses as bracketed ornegative numbers.

Wife is 48 years old and in goodhealth. Women in her family tend tolive into their mid-80s. The life tablesuggests a 35-year remaining statisticallife expectancy, thus Exhibit 4 contains35 lines, one for each year of Wife’s esti-mated remaining life, which arereflected in Columns A and B.

Wife is primarily a homemaker, buthas worked a part-time job for a non-profit agency for the past 10 years of themarriage earning around $18,000 peryear. Husband’s attorney received acourt order to have Wife tested by avocational consultant in order to deter-mine whether her income earningpotential was higher, but in today’seconomy, the ability even to obtain anew job could be questionable. She hasa master’s degree in finance and scoredhigh in intelligence and vocational abili-ties on the test; thus the consultantdetermined her earning ability to be$45,000 per year. Wife corroborated inher deposition testimony that thisincome level was achievable. Column Creflects the $45,000 earnings with a 2percent cost-of-living/raise adjustment

per year with the mandatory FICA with-holdings deducted in column D.

Wife will need to maximize her retire-ment contributions as reflected inColumn E. These contributions areadded to the “pool” of other retirementassets she is proposing to receive in theproperty settlement (lines 17-24 in theMBS, Exhibit 1). The term “pool” is usedto describe the various retirement assets,like 401(k)s, 403(b)s, IRAs and othersimilar accounts that either remain in

the spouse’s name as originally titled orare rolled over from the other spouse’sownership into an IRA. Although notillustrated here, all of the accounts arepooled together in a single table as if allof the assets were invested in onegeneric account for ease of explanationto the court.

As illustrated in Column G of Exhibit4, the plan calls for Wife to begindrawing $150,000 annually from theretirement assets (which could all be inone IRA or in several different accounts)at age 59 ½. The Social Security income

is estimated and presented in Column H.Without illustrating the compoundedearnings on the investments in the retire-ment accounts in a table, it might bedifficult to imagine that Wife could draw$150,000 per year for 23 ½ years. Hadthe impact of this element been ignored,Wife might have seemed to have a needfor long-term or lifetime alimony.

Column I illustrates draws of earn-ings and principal from the non-retire-ment investment asset pool Wife isproposing to receive in the propertysettlement (lines 6-16 in the MBS,Exhibit 1). In this particular case, thedraw amount was crafted so that Wife’stotal investment balance would not dipbelow its original principal balance.Although not illustrated here, all of theaccounts are pooled together in asingle table as if all of the assets wereinvested in one generic account, just aswith the retirement assets above, forease of explanation to the court. Aseparate calculation of this sort is alsouseful when attempting to illustrate theimpact of a non-recurring item, such asthe sale of the Smiths’ rental propertyand splitting of the net proceeds (line 3in the MBS). Wife will have an addi-tional $175,500 to invest after the saleof the property, and the availability ofthe earnings on this new investmentprincipal should not be ignored.

The child support income presentedin Column F was calculated pursuant tothe state child support guidelines.Additional child-related expenses paid byHusband will be reflected in his personal


“If I had a dime for everytime I heard the statement‘business is way-off thisyear’ during the pendency

of a divorce, I would be a rich man.”

living expense schedule and identifiedspecifically in the parenting plan.

Wife desires to remain in the maritalresidence since it is the only house thechildren have ever known and itprovides for less disruption to theirlives. The principal and interest of thefixed-rate mortgage is presented as adeduction in Column M for the 20years remaining on the note and wereseparated from the other personal livingexpenses since they will not inflate. Theescrowed property taxes and insurancewill inflate, thus they are included withthe other personal living expenses.Husband will have a new mortgage onhis proposed new residence, and thiswill be reflected in The Ability to PayAnalysis, Exhibit 5.

Wife’s personal living expenses werecompiled and documented from herbank statements, canceled checks andcredit card statements since historicalfigures should usually be the startingpoint from which to project the future

expenses. Adjustments will need to bemade for changing expenses, like thoseof the children that will be paid byHusband, new health insurance,different expenses reflecting a change ofresidence (taxes, insurance, utilities,etc.), vacations, etc. Although not illus-trated here, the personal livingexpenses were were summarized in atable and are totaled in Column Nalong with an annual increase of 2.5percent for inflation. Note the drop inexpenses after year three, which repre-sents the decrease as the childrenemancipate and leave the household.

Finally, Column K reflects the federaland state income taxes, calculated on ayear-by-year basis, that Wife will paywith the newly projected employmentearnings, retirement deductions whileemployed, retirement and SocialSecurity income once retired, earningsfrom investments, itemized deductionsand exemptions and, of course, thealimony income.

The alimony “need” is reflected as a(deficit), or shortfall, in Column O and issimply the result of adding andsubtracting the elements from 1 - 8above (i.e., Columns C - N in Exhibit 4)as if it were a formula. Courts tend toaward alimony as a monthly figure, soColumn P reflects one-twelfth of ColumnO, with the figure rounded to $5,000 permonth in Column Q. The table illustratesthe need or shortfalls throughout the life-time of the non-money spouse, whichhelps the court to understand whetherthe non-money spouse will enjoy areasonable post-divorce standard ofliving or become destitute after childsupport and alimony end.

Local jurisdictional custom maydictate the length of time alimony ispaid — or it can be based in economicreality. In Wife’s case, the proposedalimony (i.e., the need) ceases after yeartwelve as this coincides with Husband’smandatory retirement age of 60 and


Smith v. SmithExhibit 5 - Husband's Ability to Pay Support

(A) (B) (C) (D) (E) (F) (G) (H) (I) (J) (K) (L) (M) (N) (O) (P) (Q)+ - - - - + + + - + = - - = =

ABC & Military Defined Def. Benefit Federal PersonalEmployment Contribution Plans Social & State Net Living Exp. Annual Monthly

Earnings 401(k) Child Plans & Military Security Income Draws From Disposable Mortgage 2.5% (Deficit) (Deficit)Year Age 2.0% COLA FICA Deductions Alimony Support Draw Draw 2.5% COLA Tax Investments Income or Rent Inflation or Surplus or Surplus

1 48 225,000 (9,103) (15,000) (60,000) (38,400) 0 0 0 (30,199) 20,000 92,298 (28,354) (63,516) 428 362 49 227,250 (9,136) (15,000) (60,000) (25,200) 0 0 0 (32,755) 8,000 93,160 (28,354) (65,104) (298) (25)3 50 195,000 (8,668) (15,000) (60,000) (25,200) 0 0 0 (24,030) 33,000 95,102 (28,354) (66,731) 17 14 51 196,950 (8,696) (15,000) (60,000) 0 0 0 0 (24,418) 8,000 96,836 (28,354) (68,400) 82 75 52 198,920 (8,725) (15,000) (60,000) 0 0 14,412 0 (29,258) 0 100,349 (28,354) (70,110) 1,885 1576 53 200,909 (8,754) (15,000) (60,000) 0 0 14,412 0 (30,230) 0 101,337 (28,354) (71,863) 1,121 937 54 202,918 (8,783) (15,000) (60,000) 0 0 14,412 0 (31,190) 0 102,357 (28,354) (73,659) 344 298 55 204,947 (8,812) (15,000) (60,000) 0 0 14,412 0 (32,139) 0 103,408 (28,354) (75,501) (447) (37)9 56 206,996 (8,842) (15,000) (60,000) 0 0 14,412 0 (33,077) 1,000 105,490 (28,354) (77,388) (252) (21)10 57 209,066 (8,872) (15,000) (60,000) 0 0 14,412 0 (34,004) 2,000 107,603 (28,354) (79,323) (73) (6)11 58 211,157 (8,902) (15,000) (60,000) 0 0 14,412 0 (34,919) 3,000 109,748 (28,354) (81,306) 88 712 59 0 0 0 (60,000) 0 55,000 146,412 0 (31,749) 2,000 111,663 (28,354) (83,338) (29) (2)13 60 0 0 0 0 0 55,000 146,412 0 (51,935) 0 149,477 (28,354) (85,422) 35,702 2,97514 61 0 0 0 0 0 55,000 146,412 0 (53,126) 0 148,286 (28,354) (87,558) 32,375 2,69815 62 0 0 0 0 0 55,000 146,412 0 (54,299) 0 147,113 (28,354) (89,746) 29,013 2,41816 63 0 0 0 0 0 55,000 146,412 0 (55,455) 0 145,957 0 (91,990) 53,967 4,497

3/31/08

17 64 0 0 0 0 0 55,000 146,412 18,000 (62,246) 0 157,166 0 (94,290) 62,876 5,24018 65 0 0 0 0 0 55,000 146,412 18,450 (64,398) 0 155,464 0 (96,647) 58,817 4,90119 66 0 0 0 0 0 55,000 146,412 18,911 (66,577) 0 153,746 0 (99,063) 54,683 4,55720 67 0 0 0 0 0 55,000 146,412 19,384 (68,786) 0 152,010 0 (101,540) 50,470 4,20621 68 0 0 0 0 0 55,000 146,412 19,869 (71,025) 0 150,255 0 (104,078) 46,177 3,84822 69 0 0 0 0 0 55,000 146,412 20,365 (73,296) 0 148,481 0 (106,680) 41,801 3,48323 70 0 0 0 0 0 55,000 146,412 20,874 (75,600) 0 146,687 0 (109,347) 37,340 3,11224 71 0 0 0 0 0 55,000 146,412 21,396 (77,935) 0 144,873 0 (112,081) 32,792 2,73325 72 0 0 0 0 0 55,000 146,412 18,000 (79,203) 0 140,209 0 (114,883) 25,326 2,11126 73 0 0 0 0 0 55,000 146,412 18,450 (81,520) 0 138,342 0 (117,755) 20,586 1,71627 74 0 0 0 0 0 55,000 146,412 18,911 (83,869) 0 136,454 0 (120,699) 15,755 1,31328 75 0 0 0 0 0 55,000 146,412 19,384 (86,249) 0 134,547 0 (123,716) 10,831 90329 76 0 0 0 0 0 55,000 146,412 19,869 (88,661) 0 132,620 0 (126,809) 5,810 48430 77 0 0 0 0 0 55,000 146,412 20,365 (91,105) 0 130,672 0 (129,980) 693 5831 78 0 0 0 0 0 55,000 146,412 20,874 (93,583) 0 128,704 0 (133,229) (4,525) (377)

2,279,113 (97,292) (165,000) (720,000) (88,800) 1,100,000 3,029,124 293,104 (1,746,836) 77,000 3,960,413 (425,304) (2,921,753) 613,355



Wife commencing to draw on therolled-over retirement accounts.Husband was very clear that he did notwant to pay alimony after he retired. Inorder to eliminate a “drop dead” argu-ment from Husband, Wife was allocatedmore investment assets that could bedrawn upon (Column I) while alimonywas being paid so that she could enjoy areasonable standard of living similar tothat experienced during the marriage,while still allowing for alimony to ceaseat Husband’s retirement.

Explanation of Mr. Smith’s Ability to Pay Support AnalysisAn equally important flip side of thenon-money spouse’s need is the moneyspouse’s ability to pay. A need can bevery real, but the money spouse mustbe able to meet that obligation. Anattorney should not seek alimony basedon false or rosy assumptions that theobligor simply cannot pay unless theclient wants to spend time and moneyin court for a round of contempt orchange-of-circumstance hearings.

The “formula” used in Exhibit 5clearly shows that Husband does havethe ability to pay alimony of $5,000 per

month, or $60,000 per year for 12years. This table contains a deductionfor the alimony (Column F) and childsupport (Column G) that Wife shows asincome items in Exhibit 4. Similar toWife’s needs analysis, Husband’s abilityto pay analysis contains projections ofhis future employment income lessFICA, deductions for contributions tohis 401(k) plan, the eventual draws fromthe 401(k), two pensions and SocialSecurity upon retirement, draws frominvestment earnings, taxes (after payingand deducting alimony), a new mort-gage and personal living expenses. Notethat Husband is to receive 100 percentof his two future pension paymentssince they were both present-valued onthe MBS and Wife is proposed to receivean offset of assets of equivalent value ofthe property division.

Use of a Lifetime Net WorthAccumulator GraphThe non-money spouse’s attorney willprobably want the court to be informedas to the ability of each spouse to accu-mulate post-divorce wealth. Exhibit 6illustrates the values of the maritalestate assets and debts that areproposed to be divided to each spouseat the date of divorce and the values at

the statistical dates of death. Using asimple graph, the disparities in lifetimeearning ability are much more evidentand can be especially useful whenproposing an estate division that is notequal and weighted more heavily to thenon-money spouse.

Wife proposed a 55 percent or$1,242,400 net property division in herfavor plus $5,000 per month inalimony. The graph illustrates thatHusband will accumulate much morewealth than Wife during their expectedremaining lives, even after paying heralimony for twelve years. Wife’s accu-mulation assumes she will obtain thenew job and work until retirement,which may not happen; thus it is prob-ably a best-case scenario. Husband mayactually spend his assumed accumula-tion rather than save it as the graphdepicts, but he has the luxury ofmaking that choice.

ConclusionThe first half, or Step 1, of the articlehighlights a method known as theMarital Balance Sheet that attorneys canutilize to facilitate the asset and debtdivision of the marital estate. Thesecond half, or Step 2, introduces a

Smith v. SmithExhibit 6 - Net Worth Accumulation of Marital Assets3/31/08

Estimated Estimated Estimated EstimatedValue Value Value Value

At Divorce At Death At Divorce At Death

Marital Residence Equity - 2% Appreciati 0 0 131,000 549,970

New Home - 2% Appreciation 0 646,656 0 0

Investment Assets 213,500 1,826,598 284,000 445,290

Retirement Assets 658,759 11,419 836,200 809,124

Other Assets & Debts 140,338 0 (8,800) 0

1,012,596 2,484,673 1,242,400 1,804,384

Husband Wife

$1,012,596

$2,484,673

$1,242,400

$1,804,384

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

At Divorce At Death

Net

Wor

th

Net Worth Accumulationof Marital Assets

Husband's Total Marital AssetsWife's Total Marital Assets

$1,012,596

$2,484,673

$1,242,400

$1,804,384

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

At Divorce At Death

Net

Wor

th

Net Worth Accumulationof Marital Assets

Husband's Total Marital AssetsWife's Total Marital Assets




method known as the Alimony Needsand Ability to Pay Analysis that attor-neys can use to calculate one spouse’sreasonable need and the other spouse’sability to pay alimony based upon theremaining lifetime incomes andexpenses of the parties after accountingfor the asset and debt division. TheNeeds Analysis allows attorneys toavoid presenting a potentiallymisleading financial snapshot of oneyear or one month to a judge or medi-ator while educating all parties as to theaccumulation or dispersion of wealthusing the post-divorce standard ofliving for each side. Attorneys shoulduse these analyses at trial or mediationto prove the viability of their proposalor the unreasonableness of the opposi-tion’s offer, or to move a client awayfrom unfounded or entrenched posi-tions before mediation.

ROBERT VANCE is apartner in the Valuationand Litigation Servicesdivision of Lattimore BlackMorgan & Cain PC inKnoxville, where heconcentrates his practice

on business valuation, divorce litigationsupport, business and personal economicdamage calculations, civil mediation, forensicaccounting and expert witness testimony. Hehas earned the license of certified publicaccountant. He is listed as a Rule 31 GeneralCivil Mediator in Tennessee and has beenappointed several times as a Special Master.

Notes1. Tenn. Code Ann. § 36-5-121(b).

2. Tenn. Code Ann. § 36-4-121(b)(1)(A).

3. Powell v. Powell, 124 S.W.3d 100 (Tn. Ct.

App. 2003).

4. Cohen v. Cohen, 937 S.W.2d 823, 830-

832 (Tenn. 1996).

5. Tenn. Code Ann. § 36-4-121(b)(1)(B).

6. Langschmidt v. Langschmidt, 81 S.W.3d

741, 747 (Tenn. 2002).

7. Altman v. Altman, No. M2003-02707-

COA-R3-CV, 2005 Tenn. App. LEXIS 207, at

*5-6(Tenn. Ct. App. Apr. 7, 2005) (perm. app.

denied).

8. Halkiades v. Halkiades, No. W2004-

00226-COA-R3-CV, 2004 WL 3021092, at *4

(Tenn. Ct. App. Dec. 29, 2004).

9. Tax basis-the cost of the asset; when

subtracted from the sale price, the result is the

taxable gain.

10. Aaron v. Aaron, 909 S.W.2d 408 (Tenn.

1995).

11. Tenn. Code Ann. § 36-5-121(b).

12. Burlew v. Burlew, 40 S.W.3d 465, 469

(Tenn. 2000) citing Aaron v. Aaron.

13. Aaron v. Aaron, 909 S.W.2d 408 (Tenn.

1995).

14. www.answers.com.

15. If I had a dime for every time I heard

the statement “business is way-off this year”

during the pendency of a divorce, I would be a

rich man.


Divorce Property Division and Alimony Needs Analysis - "Breakin' Up is Hard to Do" - Article...

Economy & Finance

Transcript of Divorce Property Division and Alimony Needs Analysis - "Breakin' Up is Hard to Do" - Article...