June 11, 2012

Advisory Flash – When Johnny Comes Marching Home

By Michael Molder, Consultant, Advisory Services

Advisory Flash – When Johnny Comes Marching Home Tax & Business

Recent Equitable Distribution Ruling Affirmed
In a recent ruling on equitable distribution, the Pennsylvania Superior Court affirmed the trial court’s ruling that the increase in value of non-marital assets are distributable as part of the marital estate. While that decision may seem positively unremarkable, the assets involved were funds from veterans disability payments which are subject to special provisions. With the ending of the dual wars in the Middle East, there will be more veterans returning home and a, likely, greater incidence of divorce among them. Accordingly, the court’s ruling in Goodemote v Goodemote, 2012 PA Super 94 (May 1, 2012) will prove helpful in the analysis of equitable distribution.

In Goodemote, Husband was a veteran of Viet Nam. He was injured in battle and received monthly disability benefits following his discharge in 1969. From 1971 through 1978, he deposited his disability checks into an “Investment Account.” After 1978, he deposited the disability checks into a personal checking account and used the funds, along with other income sources for regular living expenses. From that point in time, he never added to or deducted from the Investment Account, but did reinvest all of the earnings in that account. By the time of his marriage in 1991, the value of the Investment Account was approximately $74 thousand. During the marriage, the value of the account more than doubled, and at separation, the value was approximately $159 thousand.

The court appointed Master prepared a report excluding the Investment Account from equitable distribution based on language in Section 3501 of the Pennsylvania Divorce Code which exempts “Veterans’ benefits exempt from attachment, levy or seizure pursuant to the act of September 2, 1958 (Public Law 85-857, 72 Stat. 1229), as amended.” The trial court ruled in favor of Wife’s exceptions to the Master’s report and determined that Husband had converted the benefits into permanent investments, the gain on which is a marital asset.

The Superior Court analyzed the situation in the context of Porter v. Aetna Casualty & Surety Co., 370 U.S. 159 (1962) which, it said, established a three part test to evaluate the protected status of veterans’ benefits: (1) the funds are readily available, as needed, for support and maintenance, (2) they actually retain the quality of money (as opposed to being converted into tangible assets) and (3) they have not been converted into permanent investments. In Goodemote’s case, the purchase of stocks, mutual funds and other investments, subject to wide value fluctuation in the form of capital gains and losses, converted the veterans’ disability benefits into investments, and they lost the statutory protection. Had Husband left the funds in a simple savings account, they would have likely retained exempt status, albeit they would have likely not gained as much in value either.

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