Pennsylvania is referred to as an “equitable distribution” jurisdiction as opposed to a “community property” jurisdiction. Most community property states are west of the Mississippi, California being the most notable. Equitable distribution does not mean equal distribution but rather it means a fair distribution of marital property which requires the court to consider fourteen (14) statutory factors in determining how to divide marital property. These factors include the length of the marriage, the health of the parties, the income and income capacity of the parties including access to perks such as retirement benefits, health insurance, etc., whether or not there are minor children, etc., etc. Marital fault however is not a consideration in the distribution of marital property. Because Pennsylvania allows a divorce on “no-fault grounds” fault is specifically excluded as a factor on which the courts can consider in determining how to divide marital property. (Note however that fault is a relevant factor in determining post-divorce alimony. Pennsylvania law recognizes two categories of property: marital property and separate property. Marital property is subject to being equitably distributed in a divorce case; separate property is not.
Identification of Marital Property
There are basically three steps in the equitable distribution process. The first is to identify the property as marital property. Is it really marital, is it instead separate property, or perhaps it is even property of someone else. Generally speaking all property acquired during the course of the marriage, regardless who “owns” the property is considered marital property (however there are a number of exceptions). So, for example, if a couple buys a house during the marriage even if it is titled only in the Wife’s name, it will be generally considered marital property. A Husband’s pension, even though only in his name, if earned during the course of the marriage, is marital property. The cash surrender value of life insurance acquired during the marriage, even though only in one party’s name, is marital property. On the other hand property inherited by one party, property owned by one party at the time of marriage (and still owned only in that party’s name) are categories of separate property (except for the increase in value during marriage which is marital property) and the separate property component belongs to the owner and cannot be equitably divided or shared with the non-earning spouse.
Valuation of Marital Property
Once the marital property is identified, it must be valued. In most cases the identity of the property is fairly easy but the valuation of the property can present a host of problems. Some types of property are very easy to value, for example a marital bank account. If you look at the amount in the account on the date of valuation, that’s the value. Frequently the parties will agree on the value of assets; the marital residence for example (unless a particularly unique type of dwelling) is not a complex asset to value. If the parties can’t agree on the value real estate appraisers can be employed at relatively low costs to assist the parties in determining value. If they still can’t agree, the experts can testify at the hearing and the court will determine the value. Businesses can present greater problems. What is the fair market value of the ABC Widget Company? In other words, what would a willing buyer pay for a widget company in a hypothetical situation where the owner was a willing seller? Here, the earning spouse may say that no one knows this business as well as I do, nobody is going to pay more than “X” dollars for this business and I am not willing to value it for more than that amount. On the other hand, the non-owning spouse may say that my expert thinks that my spouse’s business is a gold mine, readily saleable, and is worth 4 times “X”. If agreement cannot be reached on the value of the business the litigation to determine the value can be complex, lengthy, and quite expensive.
Some businesses involve elements of personal services; professional practices (lawyers, accountants, doctors, etc.) are prime examples. Businesses frequently have a component of the value identified as “good will.” If the “good will” is dependent upon the personal reputation and personal skill of one of the parties (the Husband or the Wife) that type of good will is referred to as personal good will and is not divisible in a divorce case. On the other hand, institutional good will, or traditional business good will, is an asset which is very much divisible between the parties. There are a host of issues that must be considered in valuing businesses.
Other Issues
The law also requires the court to consider the tax implications and costs of sale in valuing marital assets. By way of simple example, $100,000 in cash sitting in a bank account is not the same as a house that is worth $100,000. In order to realize the value of the house it must be sold and a real estate commission of (for example) 6% and a 1% transfer tax will have to be paid. In some circumstances there might be a capital gain tax (although this is rare for a marital residence). Thus, even if only considering the cost of sale, right away the house is only worth $93,000. In valuing businesses one must also consider the costs of sale, potential tax consequences, and other possible discounts such as a marketability discount (how long would the business have to stay on the market before it could be sold) and minority discounts (Wife only owns 1/3 of the ABC Widget Company and therefore any willing buyer is going to demand a discount for her 1/3 ownership because she does not have control of the business).
Distribution
The third step in equitable distribution after identifying the asset and valuing the asset is the actual distribution of the asset of itself. This is when the various factors come into play. Should the asset be divided 50/50 or should the Wife get 60% of the value of the assets and the Husband 40%. The law does not require that all assets be sold and converted into cash in order to be divided. For example, in a simple case, assume that there is a marital residence that has a marital value of $100,000 and the Husband’s pension that has a marital value of $200,000. Assume further that the court has determined that a fair (“or equitable”) means of distributing all of the assets would require the Wife to get 55% of the assets or $165,000. The court will not require the house to be sold in order to create cash but rather award the house to Wife along with $65,000 from the Husband’s pension leaving the Husband with $135,000 of his pension or 45% of the estate. Nor does the law require that all assets be distributed in the same percentage. For example, a court could distribute all the bank accounts 50/50 but distribute a different asset (or group of assets) 60% to one party and 40% to the other.