May 20, 2008
JANET B. KRAFT, PLAINTIFF-RESPONDENT/ CROSS-APPELLANT,
JOSEPH M. KRAFT, DEFENDANT-APPELLANT/CROSS-RESPONDENT.
On appeal from Superior Court of New Jersey, Chancery Division, Family Part, Hudson County, Docket No. FM-09-2327-05.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued April 22, 2008
Before Judges Grall and Chambers.
Defendant Joseph M. Kraft appeals and plaintiff Janet B. Kraft cross-appeals from a final judgment of divorce entered after a trial in the Family Part. Both object to the trial court's determinations of alimony, child support and equitable distribution. Due to errors that require modification of equitable distribution and may warrant adjustment of alimony, child support, payments for college and private school and defendant's life insurance obligation, we remand.
The parties were married on April 28, 1985. The Krafts have two children. The first was born in 1986, and the second was born in 1996. Plaintiff filed the complaint for divorce on May 9, 2005, and defendant filed an answer and counterclaim. At the time of trial, plaintiff was fifty years of age and defendant was seventy-two years of age.
When the parties married in 1985, defendant was practicing law, and plaintiff was working as an artist. There is no evidence that either party brought significant assets to the marriage, and defendant had debt.
After the Krafts married, plaintiff attended seminary school. She was ordained as an Episcopal priest in 1991. Following her ordination, plaintiff worked for several different congregations and, with the exception of a brief period in 2001, has been employed in her field. Plaintiff generally received compensation beyond her salary in the form of either a housing stipend or use of parish-owned housing. She also accrued credits toward a defined-benefit pension in which several of the congregations participate.
Defendant continued to practice law. In 1996, he elected to collect social security retirement benefits, which included benefits for the Krafts' children, but did legal work from time to time. He also managed a property in Ocean Grove, which the Krafts purchased in 1991. The property is a multi-family residence, and the Krafts rented the units they did not use.
Throughout the marriage, the Krafts sent their children to private schools. They generally vacationed at their home in Ocean Grove, and plaintiff and the children traveled to Ireland, where her family had a home. Defendant traveled with the family at least once.
At the time of trial in 2006, plaintiff was working for a congregation in Jersey City, which she had served since November 2001. She and the parties' youngest child were living in the rectory. Her salary was $48,250, and the value of the housing provided by the congregation was $20,063, which includes an estimated rental value for the rectory and all utilities other than long-distance phone calls and cable service. In addition, the congregation paid $18,275 for plaintiff's health insurance, a housing equity allowance of $4286 per year and made a pension contribution of $14,400. Compensation for travel expenses was also provided. As a consequence of defendant's social security benefits, plaintiff was receiving a benefit in the amount of $777 per month on behalf of their youngest child. The parties' oldest child was attending a university in Illinois but is no longer entitled to social security benefits.
In 2006, defendant obtained legal work through an agency that supplies temporary workers. Between January 1 and September 9, 2006, he earned $38,094. In addition, he received a social security retirement benefit of $1224 per month, after a deduction of a monthly Medicare payment of $88.50. He was living in Ocean Grove, New Jersey in one unit of a four-family residence, which the Krafts had purchased in 1991. He also received income from proceeds of a client's settlement that were held in escrow; the agreement entitled him to a share of the interest. In 2006, defendant's interest income from the settlement, which varied greatly over the years due to changes in the interest rate, was $6813.
The Krafts acquired assets and debt during the marriage. The evidence relevant to value and the trial court's determinations of value are described below.
Plaintiff and defendant reached an agreement on the distribution of the Ocean Grove property. In 2002, the Krafts refinanced the property to pay off debt. Defendant transferred his interest to plaintiff pursuant to an agreement under which she was to determine the date of sale, receive the first $57,000 from the proceeds and divide the remaining equity equally with defendant. The agreement divided responsibility for payment of the refinanced mortgage between the Krafts and provided for defendant to manage and maintain the property until it was sold.
On the last day of trial, the parties stipulated to the following agreement relevant to the Ocean Grove property: the value was $530,000; the outstanding mortgage was $307,604; the equity, $222,396 minus $57,000 defendant owed to plaintiff under their agreement, was to be divided with plaintiff and defendant both receiving $82,698. The trial court fixed each parties' share at $76,000. The discrepancy was not explained.
Plaintiff has an individual account that had a balance of $97,496.15 in May 2005. She received the money in that account in settlement of litigation she commenced against a former employer. Based on the terms of the settlement agreement and the amount of the proceeds that the Krafts reported on their joint tax return, the trial court concluded that sixty-two percent of the settlement amount was subject to equitable distribution.
Plaintiff has an individual retirement account that had a balance of $12,275.74 in May 2005. Before dividing the value, the trial judge deducted thirty-five percent for income taxes, reducing the amount available for equitable distribution to $7957.78.
Plaintiff also has an individual account, which had a balance of $361,847.29 in May 2005. She inherited that money from her mother. The trial court concluded that this asset was exempt from equitable distribution.
Plaintiff waived any equitable interest in the fund that held proceeds of a settlement, which produces income for defendant. His income from that fund was discussed above.
Plaintiff will be entitled to receive a defined-benefit pension when she reaches the age of sixty-five. Her pension has vested. The present value of the pension earned during the marriage was disputed at trial. Both parties presented expert testimony to establish the present value as of May 9, 2005, the date on which plaintiff filed the complaint for divorce.
In the opinion of defendant's expert, present value was $235,729.07. In the opinion of plaintiff's expert, present value was $153,706, when calculated in accordance with the benefit formula in place on the date of complaint, and $173,000, when calculated in accordance with the benefit formula in place at the time of trial as adjusted by plaintiff's expert to exclude the value of post-complaint service.
The difference in the experts' respective valuations was attributable to two factors. First, the experts started with different estimates of the monthly benefits plaintiff would receive at age sixty-five. Plaintiff's expert explained her calculation. Defendant's expert relied on defendant's statement of the benefit. Second, defendant's expert adjusted present value to account for increases in the retirement benefit based on cost of living adjustments that defendant told her the plan had awarded in the past. Defendant's expert did not review the pension plan. Plaintiff's expert reviewed the terms of the plan. Based on that review, plaintiff's expert did not include a cost of living increase, because the increase was not guaranteed and was simply a benefit the pension fund could voluntarily provide. The plan specifies: "[The pension fund] may, but is not required to, make voluntary increases to the benefits provided . . . to ensure that as a retiree, your purchasing power remains constant or grows over time. These increases are partly determined by inflation and have a cumulative impact on a pension benefit."
The experts were otherwise in agreement on the manner in which present value should be calculated. They both assumed, based on actuarial tables, that plaintiff would reach retirement age. They agreed that present value should be based on a portion of the projected retirement allowance attributable to service prior to the filing of the complaint. They agreed that 4.75% was a reasonable interest rate at which to discount to present value.
The trial court fixed the present value of plaintiff's pension at $173,000. The court concluded that plaintiff's expert testimony relevant to cost of living increases was persuasive, because that testimony was consistent with the terms of the pension plan that were admitted into evidence. The trial court further determined that it was appropriate to employ the benefit formula in place at the time of division, adjusted as it was by plaintiff's expert to exclude service credited after the complaint was filed, rather than the benefit formula in place on the date of the complaint. The court reasoned that the benefits would be paid in accordance with the new formula, which had been revised for all members not on the basis of plaintiff's post-complaint efforts. In distributing the $173,000 value of the pension, the trial judge deducted thirty-five percent for income taxes and reduced defendant's share to one-half of $112,450.
Plaintiff alleged that the Krafts owed a marital debt of $203,021.39 to her brother. The alleged debt included $50,000 paid to attorneys who represented plaintiff; $180,349.01 paid for tuition, fees and expenses of the Krafts' children; and interest of $22,672.38.
The following evidence pertinent to the alleged debt was presented. In September 2001, the Krafts executed a promissory note acknowledging that they had or would receive $55,000 from plaintiff's brother. The note provides that the amount would be deemed "a direct debt due and payable on demand" with interest accruing on the outstanding principal in the amount of six percent per annum, compounded semi-annually.
Defendant acknowledged the note. He contended it was intended to cover only money plaintiff's brother advanced to fund plaintiff's employment litigation. Defendant was aware of additional moneys plaintiff's brother gave to cover the children's expenses and did not dispute the amount given, but he denied that the Krafts had any obligation to repay that money.
Plaintiff had a different understanding of the debt. The money borrowed pursuant to the note included $30,000 for education, and $25,000 for two attorneys. After the initial loan, her brother "would check in with [them] to see how [they] were doing[,] and [they] continued to borrow it."
Defendant acknowledged that he never refused or asked his brother-in-law to stop sending money for tuition payments. He, however, denied any agreement to repay money not covered by the note.
A friend of the Krafts gave testimony about the loan. According to her, in September or October 2001, defendant spoke to her about plaintiff's employment litigation and his concern about paying tuition to a private high school attended by the Krafts' oldest child. In the course of that conversation, defendant told her he was relieved that he and his wife had signed an agreement with plaintiff's brother under which the brother would loan the Krafts money to pay for that child's high school.
Between May 2001 and September 2004, plaintiff's brother paid $50,000 to his sister's attorneys and $67,923 for educational and other expenses of the Krafts' children. The Krafts repaid $50,000 on September 30, 2004. Between September 30, 2004, and April 13, 2005, plaintiff's brother paid an additional $19,449 toward the children's expenses, a total of $87,372.
After plaintiff filed her complaint for divorce on May 9, 2005, plaintiff's brother continued to make payments on behalf of the children. By September 12, 2005, he paid an additional $37,813, which brought the total to $125,185 for the children's expenses.
By letter dated October 10, 2005, five months after plaintiff filed the complaint for divorce, an attorney representing plaintiff's brother demanded payment. Plaintiff testified that her brother made the demand after she told him the she had filed for divorce. In the letter of demand, the debt was described as including "the 2001 promissory note amount and additional disbursements through this date which including interest total $147,857.38." Defendant did not respond.
After the demand for payment was made but not met, plaintiff's brother paid an additional $55,164.01 toward the expenses of the Krafts' children. An account statement introduced into evidence reflects a total balance of $203,021.39, which includes a single charge for interest in the amount of $22,672.38, recorded between December 2005 and March 2006, and an unpaid principal in the amount of $180,349.01.
On the basis of the foregoing evidence, the trial court concluded that the parties owed $203,000 to plaintiff's brother.
The trial court determined that an equal division of marital assets and debt was appropriate. The court reached that determination after carefully considering the statutory factors relevant to equitable distribution, N.J.S.A. 2A:34-23.1. Neither party disputes that determination. The claims of error relate to the trial court's findings on the following: the amount of plaintiff's litigation settlement subject to equitable distribution, raised by plaintiff on cross-appeal; the debt to plaintiff's brother, raised by defendant on appeal; and the present value of plaintiff's pension, raised by both parties.
Equitable distribution of marital assets is left to the sound exercise of the trial court's discretion. Borodinsky v. Borodinsky, 162 N.J. Super. 437, 443-44 (App. Div. 1978). A judge must identify the assets subject to distribution, determine their value and consider the factors enumerated in N.J.S.A. 2A:34-23.1 to achieve a fair and equitable division. Rothman v. Rothman, 65 N.J. 219, 233 (1974). This court's role is limited to determining "whether the result could reasonably have been reached by the trial [court] on the evidence, or whether it is clearly unfair or unjustly distorted by a misconception of law or findings of fact that are contrary to the evidence." Perkins v. Perkins, 159 N.J. Super. 243, 247 (App. Div. 1978); see Valentino v. Valentino, 309 N.J. Super. 334, 339 (App. Div. 1998).
Plaintiff claims that the trial court erred in "calculating the amount of the litigation settlement subject to equitable distribution." The entire cash component of the settlement, including economic and non-economic damages, was deposited in one account. Plaintiff argues that the trial court should have assumed that all of the dollars plaintiff withdrew from the account were attributable to the distributable economic portion of the award and none from dollars attributable to her award for non-economic loss, which are exempt from equitable distribution. This argument lacks sufficient merit to warrant more than brief comment. R. 2:11-3(e)(1)(E). A party claiming that a portion of marital assets is exempt from equitable distribution has the burden of proving its immunity. Painter v. Painter, 65 N.J. 196, 214 (1974); Valentino, supra, 309 N.J. Super. at 338. When grounds for exclusion are not demonstrated, the entirety is subject to equitable distribution. Landwehr v. Landwehr, 111 N.J. 491, 504 (1988). Plaintiff points to no evidence or legal authority that supports her claim of selective withdrawal, and the trial court properly assumed that withdrawals were made in the same proportion as the award, which she determined to be as stated by the parties on their tax return.
The trial court found that the present value of the pension benefits plaintiff earned during the marriage was $173,000. That finding is supported by adequate and substantial credible evidence in the record, which is set forth above. Defendant's expert could not explain the benefit amount or the cost of living increase upon which she based her opinion. In contrast, plaintiff's expert provided a reasonable explanation for excluding a cost of living increase and for each factor she utilized to formulate her opinion on present value. The record includes little competent evidence on the likelihood of regular cost of living increases, and, on that basis, this case is distinguishable from Moore v. Moore, 114 N.J. 147, 163 (1989). Further, the trial court did not err, as plaintiff contends, by applying the pension plan's revised benefit formula after excluding service credits earned after the marriage. Although the formula was revised after the complaint of divorce was filed, the resulting increase in the value of the benefit plaintiff earned during the marriage had nothing to do with her post-complaint efforts. See Scavone v. Scavone, 230 N.J. Super. 482, 486 (Ch. Div. 1988), aff'd, 243 N.J. Super. 134 (App. Div. 1990); see generally Valentino, supra, 309 N.J. Super. at 338.
Defendant questions whether the trial court erred in considering income taxes plaintiff would pay upon receipt of the benefits during retirement. We see no legal error or abuse of discretion. The Supreme Court has discussed the relevance of future taxes in a similar context. In Stern v. Stern, 66 N.J. 340 (1975), the Court considered the value of an attorney's partnership interest in his law firm that was subject to equitable distribution. One element of the value was the partnership's accounts receivable. Id. at 347. The husband argued that the value should be reduced by the tax he would be required to pay when he received his share. Id. at 347. The Court rejected that argument and held that payment of taxes could be relevant to determining the spouses' respective distributive shares of the value and alimony but did "not affect the value." Id. at 348. The trial court's determination is not inconsistent with the approach approved in Stern. After determining present value, the court took taxes plaintiff would later pay into consideration when distributing the asset. We cannot conclude that the result "is clearly unfair or unjustly distorted by a misconception of law . . . ." Perkins, supra, 159 N.J. Super. at 247.
For the foregoing reasons, we affirm the trial court's determination of present value.
Defendant contends that the evidence does not support a finding that the Krafts were required to repay $203,000 to plaintiff's brother for money he advanced for the education of the Krafts' children. We agree.
There is no question that a court dividing marital assets also must consider marital debt. Monte v. Monte, 212 N.J. Super. 557, 567 (App. Div. 1986). Where the debt alleged is one claimed to be owed to a member of one spouse's family, the spouse seeking to divide responsibility for repayment has the burden of establishing a bona fide obligation to repay. Ibid. In this context, "[l]oans from close family members must be closely scrutinized for legitimacy." Jenkins v. Jenkins, 545 S.E.2d 531, 540 (S.C. Ct. App. 2001). Scrutiny is warranted by the potential for inequity, especially in a case where the generous family member has not appeared or intervened to establish or recover the debt. See Monte, supra, 212 N.J. Super. at 568. If there is no obligation to repay, the spouse who seeks contribution to repay money given by a member of his or her family may well receive a windfall if that family member withdraws the demand for repayment or accepts the payment and returns it to his or relative as a gift after the judgment is entered.
For the foregoing reasons, the trial court's determination that the Krafts owed $203,000 to plaintiff's brother is reversed as unsupported by the evidence. The only evidence of an obligation to repay is the $55,000 note, $50,000 of which was repaid. That debt is $5000 plus any interest due under the terms of the note.
The equitable distribution of two additional assets must be corrected. With respect to the Ocean Grove property, the court should eliminate or explain the discrepancy between defendant's share as stipulated by the parties, $82,698, and the share awarded, $76,000. With respect to the IRA, the tax adjustment was inappropriate. This inter-spousal transfer is not taxable, and if the value of the IRA attributable to contributions made during the marriage is divided by way of rollover into a separate IRA for defendant, there will be no need to adjust for taxes. On appeal, plaintiff concedes that distribution by way of rollover is appropriate.
This court's adjustment of the distribution of marital assets and debt requires a remand, because the trial court distributed the assets and debt by way of offset and credits. Accordingly, the trial court's carefully crafted scheme for distribution must be reconsidered. While we express no opinion on the issue, we note that the trial court may well conclude that the marital assets, absent offsetting debt, are inadequate to permit immediate distribution of the present value of plaintiff's pension and that deferred distribution is appropriate in this case. See Risoldi v. Risoldi, 320 N.J. Super. 524, 539 (App. Div.) (noting that present value distribution "is only appropriate when there are sufficient other marital assets against which to offset the non-pensioner's equitable distribution interest in the pension, or sufficient income available to facilitate a reasonable buy-out of the non-pensioner spouse's interest"), certif. denied, 161 N.J. 335 (1999).
The adjustment to equitable distribution required by this decision will have an impact on the parties' respective financial positions that is relevant to a proper determination of alimony, child support and contributions to the children's education. Thus, while our review of the record convinces us that the trial court's findings concerning the parties' respective earned income are supported by the record, their income from investments and their ability to contribute to their children's education and maintain life insurance will be altered by the redistribution of marital assets and debts. For that reason, the trial court should reconsider those matters after finalizing the equitable distribution.
Defendant argues that there were errors in the trial court's determination of plaintiff's income. The record does not support his claim that the trial court failed to consider plaintiff's investment income. The court included interest on investments. Defendant also suggests error in the court's evaluation of plaintiff's taxable income.*fn1 Because defendant does not explain why he believes the assessment of taxes was incorrect or identify the impact of the alleged error, he has failed to establish grounds for this court to disturb the trial court's finding.*fn2
We also reject plaintiff's claim that the trial court erred in assessing defendant's capacity to earn. Plaintiff argues that the trial court should have imputed annual income as if defendant could maintain steady employment through temporary assignments. The trial court's imputation of income was based on the court's conclusion that full-time employment for defendant through temporary assignments was not realistic. This determination was a product of the trial court's conscientious appraisal of defendant's capacity to earn and the availability of work. See Storey v. Storey, 373 N.J. Super. 464, 474 (App. Div. 2004). It was supported by evidence that defendant had not acquired such employment.
The trial court's decision on equitable distribution is modified, and the matter is remanded for distribution of assets and debts in accordance with this opinion. The trial court also must reconsider alimony, child support, defendant's life insurance obligation and allocation of responsibility for educational costs taking into account the impact of the modified equitable distribution.