October 7, 2021

Imputation of Income on Investable Portfolio Assets

What is a Reasonable Rate of Return? Who is able to provide it?

By James Godbout, Partner, Advisory Services

Imputation of Income on Investable Portfolio Assets Marital Dissolution

In any divorce, the income of both parties is a crucial financial element. Without knowing the income, it is difficult at best to determine support, whether in the form of alimony or child support. Equally important is understanding what each party is capable of earning.

Most family law practitioners are familiar with the concept of imputed income, especially when it relates to employment. Often, one party may have been out of the workforce for some time. In order to set support amounts, income is imputed to the current non-working spouse based on certain factors. Frequently, a vocational expert provides an evaluation for one of the parties or to a trier of fact in a divorce case.

A vocational expert is trained to determine someone’s earning capacity. There are a number of factors a vocational expert may consider when conducting an evaluation, such as job skills, work history, education, and the overall job market. The role of a vocational expert is to provide a clear picture of a person’s earning capacity for the court. That helps the trier of fact set support amounts.

Why is a vocational expert used? Why not leave it up to the attorneys, the parties, or the judge? The most likely answer is because the vocational expert is trained in this field, has significant experience, and is much better qualified to present an opinion on this subject.

So, when it comes to estimating the earnings capacity on a portfolio of investable assets, who is best qualified to present an opinion about the reasonable rate of return on these types of assets? Is it the attorney, one of the parties, the judge, or an accountant? How about a financial expert, like a CPA or certified financial planner (CFP)? Perhaps the answer depends on which state is hearing the divorce case.

New York: Sykes v. Sykes (Supreme Court New York) 2014

Both parties provided expert testimony in this matter. The defendant’s expert opined on a 5.3% rate of return while the plaintiff’s expert opinion was 8%. The judge pointed out various issues with the rates provided and ultimately determined a reasonable rate of return of 6%.

Illinois: In re Marriage of Lugge, 2020 IL App. (5th) 190046

The Appellate Court affirmed the Trial Court’s decision to consider income generated from a cash award in determining child support and maintenance. The Trial Court applied a rate of return of 6.5% to the cash assets awarded to one of the parties. The Appellate Court indicated the Trial Court acted within its discretion by reducing the historical rate of 9.93%, which was presented at trial on one of the parties’ investment accounts, to 6.5%.

California: In re Marriage of Destein (2001) 91 Cal. App. 4th 1385

In California Trial Courts, it appears the Trial Court has the discretion to attribute a rate of return to parties’ assets that are not producing a reasonable rate of return. The theory appears to be that since a court has the discretion to attribute earning capacity to a party, so too can it attribute earning capacity to assets.

The Appellate Court held that the rate attributable to the assets is based on the concept of “a return that can be realized currently….without any risk of loss of investment.”

California: In re Marriage of Ackerman (2006) 146 Cal. App. 4th 191

The Appellate Court affirmed the Trial Court’s decision use a reasonable rate of return on investable assets when establishing support. The rate of return was based on government bonds.

California: In re Marriage of Dietz (2009) 176 Cal. App. 4th 387

The Appellate Court held there was no evidence to support an attribution of the 5% rate of return used by the Trial Court.

New Jersey: Miller v. Miller (160 N.J. Supreme Court of New Jersey) 1999

The Miller case held that a reasonable rate of return can be imputed to a payor’s investment assets, which may be different from the actual rate of return. This requirement is now codified with N.J.S.A. 2A:34-23 (b) (11), which says that the income available to either party through investment of any assets held by that party is considered in the alimony calculation.

In Miller, the Court concluded there was no difference between imputing income to an underemployed spouse versus an underperforming investment. The Court held that Mr. Miller could invest his substantial investments to yield more than the 1.6% he was earning. Further, the Court was clear that Mr. Miller did not have to invest his assets in a particular fashion, but no matter how Mr. Miller chose to invest his assets, reasonable income would be imputed for purposes of the alimony calculus. Ultimately, the Miller case established some guidance as to a reasonable rate of return based on corporate bonds and U.S. Treasuries.

New Jersey: Overbay v. Overbay 376 N. J. Super 99 (App. Div. 2005)

The Trial Court imputed income based on Miller. However, the Appellate Court held that Miller was fact-sensitive. Mr. Miller was an experienced investor, whereas Ms. Overbay was not. The Appellate Court determined that there should be a prudent balance between risk and investment return.

At trial or during negotiations, it is easy to see that the party seeking maintenance may use a low rate of return while the party seeking to avoid paying maintenance may use a high rate of return. Is a court qualified to determine the rate of return, especially without the aid of an expert?

I think if a trained individual, such as a vocational expert, is used to aid a court in assessing employment income, a trained individual such as a CFP should be used to aid the court, the attorneys, and parties in accessing the reasonable rate of return on investable assets.

The process a CFP uses in estimating a reasonable rate of return is similar to the process used by a vocational expert. In addition, as referenced in Overbay, “There should be a prudent balance between risk and return.” As outlined in the CFP Board Code of Ethics and Standards of Conduct, “a CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client’s goals, risk tolerance, objectives, and financial and personal circumstances.”

The CFP will likely take into consideration various factors such as an individual’s age, health, risk tolerance, time horizon, etc. By analyzing these factors, and relying on his/her experience and training, the CFP will produce an analysis by formulating a credible opinion on the estimated reasonable rate of return for income imputation on investable assets.