Double Dipping in Tennessee Divorce Means Double Trouble (Part II)

In the first segment of this series, the double dipping debate in family law cases was introduced with several Tennessee examples illustrating the potential for trouble. Double dipping, or double counting, occurs when an asset that is divided as marital property in divorce is also included as a source of income in calculating alimony or child support. (Read Part I and Part III.)

More about double dipping in asset division and income allocation in Tennessee divorce law.

Needless to say, the double-dip debate continues with plenty of pros and cons from both sides. Many lawyers, judges, and accountants argue that any attempt to double-dip in a divorce or post-divorce modification unfairly taps one party’s resources. Others argue that including a divided marital asset is justified, even necessary, when calculating support obligations. (If not with alimony, then at least with child support.)

Tennessee enacted a ‘no double-dipping’ amendment to T.C.A. § 36-4-121 – that’s our marital property division statute. The amendment went into effect July 1, 2015. The statutory excerpt below includes the prohibition on double dipping in Tennessee divorce:

“(a)(1) In all actions for divorce or legal separation, the court having jurisdiction thereof may, upon request of either party, and prior to any determination as to whether it is appropriate to order the support and maintenance of one (1) party by the other, equitably divide, distribute or assign the marital property between the parties without regard to marital fault in proportions as the court deems just.

…

(b)(1)(E) Property shall be considered marital property as defined by this subsection (b) for the sole purpose of dividing assets upon divorce or legal separation and for no other purpose; and assets distributed as marital property will not be considered as income for child support or alimony purposes, except to the extent the asset will create additional income after the division;

…

T.C.A. § 36-4-121 [Emphasis added.]

Our discussion continues with a look at how a few sister states have addressed double counting for alimony and child support.

Double Dipping in Other States

In general, there are two schools of thought on whether divided marital property should ever be included to also calculate support for a former spouse or a child. Take a look at alimony and pensions.

Double Dipping into Pensions and Retirement Plans for Alimony

More often than not, one spouse’s pension or retirement plan is at the heart of the double dip dispute over alimony. When deferred compensation is divided as part of the marital estate, the spouse seeking alimony will look to that asset as a potential source of “income” from which the participant-spouse may pay more support. Although some states have rejected double counting for alimony (presented below as the minority view), other states allow double dipping into a divided marital pension or retirement account for alimony purposes (the majority view). T.C.A. § 36-4-121 as amended may place Tennessee in the group of jurisdictions holding the minority view, discussed below.

Minority View: Divided Marital Asset Not Income for Alimony

With regard to alimony, a minority of jurisdictions have held against the double dip in divorce where a marital asset is divided between the spouses and is also considered an income source for the payment of alimony. See “Double Dipping,” 14 No.5 Equitable Distribution Journal 49, May 1997.

In these states, once a marital asset is classified, valued, divided, and equitably distributed as property it cannot be included as a source of income when calculating alimony. (As you will see, child support is handled quite differently.) Because the outcome is uncertain in any divorce, in these jurisdictions it would be wise to have a bifurcated legal strategy that treats a retirement plan as either property or income and which lays out the potential consequences with each path. In Tennessee, the same could be achieved through the parties’ Marital Dissolution Agreement (MDA) where they have decided by agreement what is and is not marital property.

The following cases are from states adhering to the minority view. That once an asset, such as a pension, is divided as marital property, it should not be included as income in spousal support calculations.

Wisconsin:

In 1963, the Wisconsin supreme court ruled against double counting husband’s share of the cash-value of his interest in his employer’s profit-sharing trust. The spouses were married in 1928. The husband had been on Social Security Disability following a heart attack in 1962. In their legal separation, the trust was a marital asset divided nearly equally with the wife. The court held that once the trust was “included as a principal asset in making division of the estate,” it could not be included as income when calculating permanent alimony for the wife. Kronforst v. Kronforst, 21 Wis.2d 54, 123 N.W.2d 528 (1963).

In the Wisconsin Supreme Court’s opinion, the trial court’s inclusion of husband’s profit-sharing trust in the couple’s net marital estate was entirely correct. However, to also include the trust as income in determining permanent alimony was clear error. “We view the matter no differently than if the [trust] had constituted cash in a bank deposit standing in [husband’s] name.”

Although Kronforst came out clearly against double dipping for alimony, the court pulled away from double dip theory with regard to child support.

Florida:

In 1986 the Florida Supreme Court came to a similar conclusion, prohibiting division of the husband’s pension in the distribution of marital property and then including that pension again in determining his ability to pay alimony. Choose one or the other, but not both. “Obviously … injustice would result if the trial court were to consider the same asset in calculating both property distribution and support obligations.” Diffenderfer v. Diffenderfer, 491 So.2d 265 (Fla. 1986)

If so obvious an injustice, then why has the majority of jurisdictions arrived at a completely different conclusion? The double-dip debate continues!

New Jersey:

In New Jersey, legislation prohibits double counting a divided marital asset as an income source for alimony. N.J. Stat. Ann. § 2A:34-23 provides that when any portion of a pension or retirement plan “is treated as an asset for purposes of equitable distribution, the court shall not consider income generated thereafter by that share for purposes of determining alimony.” Note, however, there is no mention of child support.

With Innes v. Innes, a New Jersey marriage of 31 years ended following a period of continuous separation. The value of husband’s pension was equitably distributed as a marital asset and, therefore, could not be included as income for calculating post-decree alimony for the former wife, even though she was on Social Security Disability. Innes v. Innes, 117 N.J. 496, 569 A.2d 770 (1990).

Following a plain language interpretation of the statute, prior case law, and the spouses’ agreement, New Jersey’s highest court held that allowing a double dip would result in inequity. Why? Because the wife would benefit by counting husband’s pension twice, first as property and second by “inclusion in his cash flow determination of an alimony base.” Citing D’Oro v. D’Oro, 187 N.J. Super. 377 (Ch. Div. 1982), codified in N.J. Stat. Ann. § 2A:34-23.

Among the minority states, dipping into a divided pension asset twice by also calling it “income” for spousal maintenance would give the non-participant spouse more from the division of property than the divorce court intended. See Kruschel v. Kruschel, 419 N.W.2d 119 (Minn. Ct. App. 1988).

Applying the rule against double dipping to every couples’ circumstances could also lead to inequitable results. Without going into specifics, be mindful that courts have carved numerous exceptions out of the basic minority rule in the name of equity.

All Resources Factored into Ability to Pay Spousal Support

Some states include all resources when factoring a spouse’s ability to pay alimony and some allow double dipping, in a sense.

Some states, such as Colorado, side-step the double dip issue by factoring all resources into a decision on spousal maintenance. Although not determinative, divided marital assets are an important factor to consider in setting the amount of maintenance to be awarded. There being no abuse of discretion by the trial court, the Colorado appeals court determined that:

“Absent extraordinary circumstances, a trial court may not order the use of property awarded to one party in a dissolution proceeding in order to pay maintenance awarded to the other party. … However, in setting the amount of maintenance, the court must take into consideration all relevant factors, … the [trial] court considered all of the husband’s assets, those acquired in the property division and those subsequently acquired, in determining his total resources available to meet the maintenance obligation.” In re Marriage of Gray, 813 P.2d 819 (Colo. Ct. App. 1991). [Emphasis added.]

Arizona’s statutory spousal maintenance factors also mandate consideration of “[t]he financial resources of the party seeking maintenance, including marital property apportioned to that spouse” in the divorce. A.R.S. § 25-319(B)(9).

In Tennessee, the factors the court will consider in determining alimony include the financial resources of each party, including income from a pension, profit-sharing plan, or retirement plan and all other sources. See T.C.A. § 36-5-121(i) and the discussion on Alimony Factors in Tennessee Divorce Law for more details.

What about non-pension assets as marital property? Some minority states go beyond pensions and retirement assets in prohibiting an alimony double-dip. Some non-retirement assets, such as income-producing real estate, could not be both property and an income source for alimony. By contrast, the majority states have been consistent in allowing double counting with non-pension assets, such as the capitalization of excess earnings used to value business goodwill.

Minority States View on Child Support

Only a few states holding the minority view prohibit double counting for child support purposes as well. Unlike alimony, prohibition on double dipping is less likely to occur with child support determinations because children are not recipients of the first dip. The child takes nothing away from the parents’ divided marital estate.

Even among a minority of minority states, child support is treated differently from alimony. In part, because each child has the right and need to be supported. And in part, because the child does not receive anything in the division of marital assets. In these jurisdictions, there may still be confusion as to what the applicable rule should be.

For instance, the Wisconsin Supreme Court pulled back from a rule prohibiting inclusion of an award of the capital gain on a real estate sale in the non-custodial parent’s income for child support calculations. The court recognized the need for a more flexible, case-by-case approach that might allow double dipping for child support purposes. In Wisconsin, the rule against double dipping into a party’s pension to fund alimony does not apply to child support because the child was not party to the property division, or the first dip. Cook v. Cook, 560 N.W.2d 246 (1997), citing In re Marriage of Maley, 186 Wis.2d 125, 519 N.W.2d 717 (Wisc. Ct. App. 1994).

Where Does Tennessee Stand?

As noted regarding amendment to T.C.A. § 36-4-121, today Tennessee leans toward the minority position on the double-dip debate, both with alimony and child support. Recall from Part I the 2013 Tennessee case of Ghorashi-Bajestani v. Bajestani wherein the father’s deferred compensation was divided as a marital asset in the divorce and, therefore, was not to be included when calculating his modified child support obligation. Ghorashi-Bajestani v. Bajestani, No. E2013-00161-COA-R3-CV (Tenn. Ct. App., Sept. 24, 2013), appeal denied.

Overall, minority states are most concerned with double dipping for alimony because both spouses already benefited from an equitable distribution of the marital estate. But with child support, minority states are more willing to draw upon all assets, even marital assets divided in divorce. Despite T.C.A. § 36-4-121(b)(1)(E) and the holding in Bajestani, that may still influence child support calculations in Tennessee.

Majority View: Divided Marital Asset Not Income for Alimony

The majority of states do recognize marital property as both a divisible asset and an income stream for calculating support obligations, thus permitting double counting. Not surprisingly, pensions and retirement accounts are frequently at the focus of the search for income sources in spousal support cases.

California:

Coming in strongly against double dip theory, the California Court of Appeal required inclusion of a divided pension as income for spousal support, seeing double-dip theory as a superficial fallacy. The court’s reasoning? In every case, the source of spousal support comes from the payor’s separate property, including the portion of the marital property awarded in dissolution proceedings. Secondly, the supported spouse is not making claim to the asset itself, but is claiming the asset gives the obligor a greater ability to pay. White v. White, 192 Cal.App.3d 1022, 237 Cal.Rptr. 764 (Cal. Ct. App. 1984).

As with the next opinion, the California appeals court strikes a distinction between the purpose of alimony (future oriented) and the reason why marital property is divided (past and present oriented).

Maryland:

The court in Riley v. Riley also came in strongly against a prohibition on double counting assets for alimony. The Riley court condemned double-dip theory as ignoring the distinctly different purposes of alimony and property division in divorce. Alimony looks to the future and provides for the economically dependent spouse. Marital property division looks to the past and present to provide for an equitable distribution. Riley v. Riley, 82 Md.App. 400, 571 A.2d 1261 (Md. Ct. App. 1990).

Majority View on Divided Marital Asset as Income for Child Support

With child support, it would be wise to focus on ability to pay and not on the source of funds.

Massachusetts:

In a 2006 Massachusetts child support modification case, an unemployed father sought to reduce his support obligation. The trial court included the father’s portion of the divided IRA as an income source for paying child support, ordering him to pay $118,640.76 in accrued support. The appellate court affirmed, pointing out how the trial judge should look to the equities of the circumstances and not be bogged down by double-dip theory. There is no prohibition on double dipping as a matter of law in Massachusetts, despite the seeming injustice noted by commentators when “property is awarded to one spouse in an equitable distribution of marital assets and is then also considered as a source of income for purposes of imposing support obligations.” Croak v. Bergeron, 856 N.E.2d 900 (Mass. App. Ct. 2006).

Illinois:

In a 1997 Illinois case, the appeals court held that double counting a spouse’s military pension from his service in the U.S. Air Force for purposes of income for child support was appropriate. Why? Because doing so was necessary to satisfy a primary objective of the state’s child support act. The father’s argument – that a military pension classified as marital property and equitably distributed in the divorce could not be reclassified as income for child support – was “simply wrong.” Consequently, father’s military retired pay was income for calculating his child support obligation. In re Marriage of Klomps, 676 N.E.2d 686 (Ill. Ct. App. 1997).

What is the take away from these cases? First, know the state’s view on double dipping into pensions and retirement assets in order to anticipate alimony obligations. Second, understand that the purpose of child support requires that the courts dig deep for resources that can provide for the child’s needs. In most instances, that reach is not likely to be entirely thwarted by any prohibition on double dipping into a previously divided marital asset, particularly retirement assets.

In our final segment, we look at how double dip theory has been applied to businesses and professional practices that are equitably distributed as marital property. This is an area of special concern for many Tennessee business owners who find themselves contemplating divorce.