A court may require a spouse in a marriage dissolution to put a property settlement to work as part of determining whether a maintenance award is necessary, the Supreme Court has ruled.
That means that the spouse may be required to convert the assets to another form, and if so, the court then must consider the tax consequences of the reallocation, the court also held.
That was the result of the case Curtis v. Curtis, decided by the Supreme Court on Nov. 16, 2016. Justice David Stras wrote the opinion for a unanimous court, with Justices Margaret Chutich and Anne McKeig recused.
The case was remanded, leaving the Brown County District Court and/or the parties to figure out how to pay the approximately $150,000 in taxes that would be incurred if the existing accounts were liquidated. The court may not order Christine Curtis to invade her principal to pay them, it said.
Unusually, both parties said they were satisfied with the result. Andrew Tatge of New Ulm, who represented Christine, said the bar needed guidance on spousal maintenance as more older couples with significant marital estates get divorced.
Gregory Curtis’ attorney, Roger Hippert of New Ulm, said that he and his client were satisfied with the decision and that he believes the District Court judge did consider the tax burden. The record reveals that the court took notice of the taxes and that may be why Christine’s property settlement was larger than Gregory’s he said. But the court did not make a specific finding on the tax bill, Hippert said.
The opinion may require attorneys to reconsider what is the proper evidence in their cases. “Assessing income generated from a property award is nothing new but Curtis reveals another dimension to that analysis. The court is not limited to accepting assets in their current form and may consider their income-producing potential if invested differently. But this is discretionary determination; the court is not going to become an arm-chair financial adviser and it will be up to the parties to present evidence,” said Minneapolis family law attorney Jaime Driggs.
Multimillion marital estate
Christine Curtis filed for divorce from Gregory Curtis in 2012 after about 22 years of marriage. The parties stipulated to a property division which awarded Christine about 57 percent of the marital property, about $2.8 million. Gregory’s property distribution was about 43 percent, or $2.17 million. The parties’ marriage was dissolved without resolving Christine’s request for spousal maintenance.
Assets awarded to Christine include an Ameritrade account worth roughly $2.038 million and a certificate of deposit worth about $171,000. At the trial on spousal maintenance, Gregory stipulated that he could pay spousal maintenance in any amount ordered by the court. Based on Christine’s evidence, the court determined that her reasonable monthly expenses were $7,761. At the time of trial, the parties had one unemancipated child but it appears his expenses were not part of the calculation.
The District Court judge did not award maintenance, reasoning that Christine could exchange her Ameritrade account and other assets for higher-yield investments that would produce income in excess of her monthly expenses. The judge estimated that 7 percent would be a reasonable return on the investment, but did not consider taxes. The Court of Appeals affirmed. The Supreme Court reversed and remanded.
Assets under the mattress
Spousal maintenance is determined under Minn. Stat. sec. 518.552, subd. 1 based on a showing of need. Only after need is established will a court determine the amount and duration of an award under subdivision 2 of that statute. The decision to award maintenance is within the broad discretion of the trial court.
Christine’s assets were producing less than $3,000 per month income and the District Court estimated she could earn about $9,500 per month.
But Christine argued that converting the portfolio from growth-oriented to income-oriented funds would result in significant tax consequences. She argued that this was an “invasion of the principal” and deprived her of an equal property division.
The Supreme Court said that it has long recognized that a spouse could be expected to invest liquid assets, including non-cash holdings, to meet monthly expenses. But it has not addressed requiring a spouse to reallocate assets to generate income.
Christine urged the court to consider investments “untouchable” when considering whether to award maintenance, and to adopt a bright-line rule that a District Court can never consider the income-earning potential of already-invested assets. The court declined.
That does not mean a spouse can be required to invade principal to meet living expenses, the court said. But neither does it mean that the court must assume that distributed property will remain forever in the same form, particularly when it is “under the proverbial mattress.”
Nothing is certain but taxes
The court then considered guidelines to the trial court’s exercise of its discretion. An important factor is the nature and especially the liquidity of an asset. A court should rarely, if ever, expect a spouse to sell residential real estate to meet day-to-day needs. That would likely trade long-term stability for short-term liquidity, the court said.
Christine’s assets were less liquid than cash but more liquid than real or personal property. She did not present any evidence on the expected yield and therefore the court adopted the District Court’s findings of a 7 percent estimated yield.
The Supreme Court also said the person’s age and the nature of the investments during the marriage should be considered. The District Court appropriately exercised its discretion when it found that reallocation was appropriate to take into account the changed circumstances of the investor.
The District Court also must consider the tax consequences of the reallocation of assets. The Supreme Court said that the trial court inappropriately relied on Maurer v. Maurer, a 2001 Supreme Court decision, when it ignored tax consequences. Maurer concerned the equitable distribution of the estate, not a maintenance award, and whether the tax rates would have changed by the time the parties reached retirement, Stras wrote.
Secondly, the Supreme Court has otherwise said that a judge should consider tax consequences. The decision to ignore taxes is questionable when the transaction creating the tax is ordered, the court said.
The taxes, based only on Gregory’s evidence, would likely amount to about $155,000, about 5.5 percent of the total property distribution to Christine. That would require her to invade principal, “which is something we have said that a court considering a maintenance request may not order,” Stras wrote.
“If on remand the court concludes that a reallocation of Christine’s assets is still justified, it must account for those consequences without requiring Christine to pay capital-gains taxes from the principal of her assets. The district court may also reconsider its decision not to award maintenance to Christine, if it ultimately concludes that the proposed reallocation no longer makes sense,” the court concluded.