Soshnick: The income conundrum in Indiana divorce law

Soshnick

One of the perplexing areas of Indiana divorce law is “income.” At first blush, that vexation seems out of place. Upon closer inspection, the confusion is understandable. Why? The reason is that there frequently are disputes as to whether payments are income or property in divorce cases. These disputes can be further complicated by the nature of the payments — passive earnings or earned income, payments accrued and paid prior to a divorce filing, or payments partially accrued and paid after a divorce filing. The outcome and determination of these questions affect the composition and value of marital estates, and ultimately the division of marital property.

Starting with the fundamentals, in a divorce case trial courts are required by Ind. Code 31-15-7-4(b) to divide marital property in a “just and reasonable” manner. Ind. Code 31-9-2-98(b) defines “property” and does not reference future earnings. The presumptive “just and reasonable” division of marital property is an equal division of a marital estate with non-exclusive factors listed in consideration of a potential deviation from that presumption. Ind. Code 31-15-7-5. These statutory dictates form the basics of marital property division in Indiana.

But what of income? It has long been the law in Indiana that future earnings are not considered marital property to be divided in the division of marital estates. Beckley v. Beckley, 822 N.E.2d 158, 160 (Ind. 2005). In Beckley, compensation for future lost wages under the Federal Employers’ Liability Act was not considered marital property as opposed to compensation for past lost wages, which was considered marital property. Id. at 162; see also Leisure v. Leisure, 605 N.E.2d 755 (Ind. 1993) (holding that workers’ compensation payments are not marital property to the extent they replace lost future wages after divorce). These holdings build upon Wilcox v. Wilcox, 365 N.E.2d 792, 794-95 (Ind. Ct. App. 1977), which held that since a husband did not have a present vested interest in future earnings, those future earnings did not constitute marital property and division of those earnings as marital property would be an impermissible award of spousal maintenance (synonymous for alimony). See also In re Marriage of McManama, 399 N.E.2d 371 (Ind. 1980) (reversing a lump-sum award to a wife in an amount that helped a husband obtain an advanced degree as an impermissible award of spousal maintenance); Prenatt v. Stevens, 598 N.E.2d 616 (Ind. Ct. App 1992) (holding that a degree acquired during marriage is not marital property). Roberts v. Roberts, 670 N.E.2d 72, 76 (Ind. Ct. App. 1996), succinctly summarized that Indiana does not permit a degree to be included as marital property and does not allow an award of future earnings unless a spouse qualifies for spousal maintenance.

The battleground over inclusion of income in marital estates is expanded by the fact that Indiana does not have classic alimony as do many states and does not provide for spousal maintenance except in very limited circumstances that are not based on length of marriage and income. Ind. Code 31-15-7-2 provides for three types of spousal maintenance: (1) physical or mental incapacity maintenance if the ability of a spouse to support himself or herself is materially affected, (2) caretaker maintenance for an incapacitated child, and (3) rehabilitative maintenance up to a maximum of three years. These limited categories of spousal maintenance cannot be used to pull future income into marital estates.

With this background, what is the conundrum? There are several obvious examples. Take for instance the small business owner who signs a contract prior to a divorce filing but must perform work and services after filing in order to fulfill contractual obligations, with payment made after the filing. Is this future income in whole or in part? How do you segregate the pre-filing work effort contributions from the post-filing work effort contributions and allocate in a way that does not capture future income or create an impermissible award of spousal maintenance? Or what about a lawyer who has a contingent fee practice with cases on file at the date of divorce filing but must work post-filing to bring those cases to judgment and collection? Same issue. Likewise, the physician who meets with patients and has surgeries scheduled prior to a divorce filing but does not perform the surgeries or collect payment until after filing? Again, how are these competing interests in light of Indiana authorities reconciled? And this complexity does not even take into account that there may be strategic behaviors such as deferring receipt of income, categorizing payments a certain way (such as a covenant not to compete v. net sales proceeds) or taking other steps to try to reduce the value of marital estates. See, e.g., Reese v. Reese, 671 N.E.2d 187, 192 (Ind. Ct. App. 1996) (rejecting a husband’s contention that the proceeds attributable to a noncompete agreement represented future income and holding that the restrictive covenant signed in conjunction with the sale of a business represents the goodwill of that business absent evidence to the contrary). As a corollary, there also is the conceptual distinction between passive post-filing future income (e.g., interest, silent investor distributions and dividend income) versus active future income (e.g., W-2 wages, K-1 earned income, active investor distributions). The income earner may also contend that he or she is earning “compensation,” whatever the source of payments, in order to shoehorn the payments into the nonmarital future income category. Some parties try to label payments in a certain perceived favorable way to try to avoid inclusion in marital estates. Even with comprehensive discovery and analysis, the facts revealed may be left with little Indiana statutory and common law guidance to resolve the dispute.

So how can the conundrum be resolved? One possible solution is to amend the Indiana Code to speak directly to “income” and what categories, if any, fall under the statutory definition of “property.” That legislative effort also could address passive and active income differentials and income generated by both pre-divorce filing and post-divorce filing work efforts. Although dependent on cases seeking appeal, the Indiana Court of Appeals and Indiana Supreme Court could publish additional opinions that amplify on the general principles espoused in a fairly small number of authorities. More provocatively, the Indiana General Assembly could revisit the Indiana Dissolution of Marriage Act and how and when spousal maintenance applies. Regardless of the approach or approaches taken, clarification as to what “income” constitutes marital property and what “income” does not would bring needed and welcome guidance to an under-analyzed and sometimes highly contentious area of Indiana divorce law.•

Andrew Z. Soshnick is a partner in the Indianapolis office of Faegre Drinker Biddle & Reath LLP, a fellow of the American Academy of Matrimonial Lawyers and International Academy of Family Lawyers, and past chair of the Indiana State Bar Association and Indianapolis Bar Association family law sections. Opinions expressed are those of the author.

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