Massachusetts divorce lawyer Nicole K. Levy analyzes a recent Appeals Court case that provides guidance on how the liquidity of marital assets can affect a divorce.
Last week, I wrote about an unusually clear Appeals Court decision, Heystek v. Duncan (2016). In that blog, I discussed how the opinion explored how one spouse’s ability to acquire future assets from his or her wealthy family can affect the division of assets in a divorce. In this blog, I will discuss another element of the Heystek opinion, which centers on how the liquidity of marital assets can affect the divorce. In Heystek, the Appeals Court held that probate and family court judges should allocate the division of assets so that each spouse receives a share of liquid assets (like cash) and a share of less liquid assets (like real estate or qualified retirement funds).
Investopedia.com defines liquidity as follows:
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price. …. Cash is considered the standard for liquidity because it can most quickly and easily be converted into other assets. If a person wants a $1,000 refrigerator, cash is the asset that can most easily be used to obtain it. If that person has no cash, but a rare book collection that has been appraised at $1,000, they are unlikely to find someone willing to trade them the refrigerator for their collection. Instead, they will have to sell the collection and use the cash to purchase the refrigerator. That may be fine if the person can wait months or years to make the purchase, but it could present a problem if the person only had a few days. They may have to sell the books at a discount, instead of waiting for a buyer who was willing to pay the full value. Rare books are therefore an illiquid asset.
Table of Contents for this Blog
- Liquid Assets in a Divorce: Cash, Cars and Capital Assets
- Appeals Court: Don’t Just Focus on Value of Assets, Liquidity Matters Too
- Practical Planning for Divorce: Understand Your Assets and Your Future
Liquid Assets in a Divorce: Cash, Cars and Capital Assets
In the divorce context, liquidity is not always a problem. A divorce is a major life event in which major assets (such as the former marital home) are sold and retirement assets are divided via Qualified Domestic Relations Orders (QDRO). Indeed, many people are unaware that the 10% early withdrawal penalty does not apply to retirement funds transferred via QDRO (although ordinary taxes still apply). Similarly, if the former marital home is being sold because the spouses are going their separate ways, then the property does not pose a liquidity problem.
When dividing marital assets, however, it is not always enough to simply chop assets in half. Some assets are not be easily divisible while others are ripe for division. For example, a firefighter who is ten years from retirement might own a valuable asset in his future pension benefits. However, where the pension will not reach pay status for another ten years, it is fair to describe the pension as “illiquid” at the time of the divorce. Similarly, if a party is living at the former marital home at the time of the divorce, and wishes to continue living their after the divorce, the house is decided illiquid. In contrast, cash or like-case assets are always liquid. A party can use cash immediately for any purpose.
Appeals Court: Don’t Just Focus on Value of Assets, Liquidity Matters Too
Most attorneys understand it is important to review the liquidity of each asset when proposing an equitable division of assets, whether at trial or through a separation agreement. In Heystek, the Appeals Court took a close look at what assets each party retained in the division of assets and expressed its concern with the illiquid nature of the property Wife was awarded. The Court noted:
[O]f the $1,071,497 in assets awarded to the wife, only $399,048 (before payment of legal fees) were liquid. By contrast, of a total of $1,639,388 in assets awarded to the husband, $1,502,468 consisted of cash, cash equivalents, or other liquid assets.
The Court held that the division left the Wife financially strained, due to the lack of liquidity in her share of the assets. In contrast, the Husband would be able to continue to enjoy the comfortable marital lifestyle due to the highly liquid assets he received in the division of assets. Indeed, the Court concluded that by disproportionately allocating liquid and illiquid assets to the parties, Judge DiGangi‘s division of the marital estate did not represent an equitable distribution under Section 34. (Again, the decision was sparse on the facts, and we can only guess the precise nature of the assets each party received.)
Practical Planning for Divorce: Understand Your Assets and Your Future
When assessing a potential division of assets, I always work with my clients to review their real-life needs, and encourage them to take stock of practical considerations before proposing or agreeing to an asset division. Clients sometimes become so focused on the perceived “fairness” of how certain assets are treated that they lose sight of the real-world concerns they will face after the divorce, such as the potential for being house-poor or the necessity of relying on retirement assets to maintain one’s lifestyle.
It may be “easy” to divide a certain asset in a convenient manner, but that may not meet the future needs of a client living in the real world. I discussed in my blog on temporary orders for custody and support, it is critical for clients to visualize and imagine their future lives when making major decisions in their divorce case. Focusing on practical issues can be difficult for clients who are caught up in the competitive drama of a divorce. A big part of my job is drawing parties away from the “fight” and urging them to think practically about their future.
One of the many ways the Heystek decision is helpful is that it provides a clear, concise appellate decision that explains why practical considerations, like liquidity of assets, are important considerations for judges who sometimes prefer to divide assets robotically, without consideration for the unique financial position each party will face after the divorce.
About the Author: Nicole K. Levy is a Massachusetts divorce lawyer and Massachusetts family law attorney for Lynch & Owens, located in Hingham, Massachusetts.