W. BRUCE OVERBAY VS. MARY ELLEN OVERBAY, 376 N.J. Super. 99 (App. Div. 2005) (Decided March 18, 2005):

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Alimony was a central issue in this case. In assessing defendant’s need for alimony, the court considered various monetary gifts and inheritances defendant received during the marriage from family members.

Plaintiff stipulated these assets were not subject to equitable distribution, N.J.S.A. 2A:34-23(h), but the income generated from defendant’s inheritance was a crucial factor in assessing defendant’s need for alimony, N.J.S.A. 2A:34-23(b)(11). See also Aronson v. Aronson, 245 N.J. Super. 354, 363 (App. Div. 1991) (Although inheritance is exempt from equitable distribution, income generated by a dependent spouse’s inheritance “is no different from income generated by any other asset, exempt or otherwise, for an alimony analysis.”).

Each party presented testimony from a certified financial planner regarding defendant’s inheritance assets. This testimony established that approximately eighty-six percent of defendant’s total inheritance was invested in cash or cash equivalents, nine percent was invested in bonds or fixed income securities, and about five percent was invested in stocks or managed equities. Defendant’s inheritance was classified as a “low-risk portfolio,” and the experts agreed that low-risk investments generally translate into a low rate of return, and, conversely, higher risk investments usually provide a higher rate of return. The trial judge found that defendant’s rate of return was “approximately two percent.”

Citing to Miller v. Miller, 160 N.J. 408 (1999), the trial judge imputed an annual income of $80,000 to defendant based upon a 7.4 percent rate of return on her inheritance assets. The trial judge explained his decision to impute additional investment income to defendant as follows:

It is because of the potential for extreme volatility in the stock market that the Court in Miller determined that the fairest and most appropriate measure for imputing income would be to take a five-year average yield for long-term A-rated corporate bonds as determined by Moody’s [Composite Index]. That yield is 7.4%.

The issue in Miller was “whether income should be imputed from a supporting spouse’s investments for the purpose of determining his or her ability to pay alimony pursuant to an agreement.” Miller v. Miller, supra, 160 N.J. at 413. Mr. Miller, “an experienced investor who gained great knowledge of financial matters through his employment at Merill Lynch,” id. at 425, “had $1.5 million invested in Municipal Bonds, yielding a tax-free income of $87,500 per year,” and he “had invested approximately $3,000,000 in various growth stocks, paying interest and dividends of approximately $50,000 per year,” id. at 416. Mrs. Miller argued the “potential, although yet unrealized, income from [her former husband's] investments should be imputed to [him] in much the same way as income earned through employment is imputed to an unemployed or underemployed supporting spouse.” Id. at 421-22 (citations omitted). The Court agreed, but declined to impute the average annual twelve percent growth rate for stocks “because of the inherent risks involved in stock market investments.” Id. at 423-25. Instead, the Court took a more conservative approach imputing only 7.7 percent to Mr. Miller’s investments. Id. at 425. Thus, if Mr. Miller had voluntarily elected to follow the alternative investment practice outlined by the Court, he would have achieved a higher rate of return on his investments without exposing his capital to greater risk simply by investing differently:

[P]laintiff, as the supporting spouse, could invest his substantial capital assets to yield more than the approximately 1.6 percent interest he is currently earning on his growth stock investments. Doing so would not require that [Mr. Miller] deplete his considerable principal; it only means that [he] could invest his principal differently in higher yield investment options available to him, much in the same way that an underemployed spouse could obtain a higher paying job available to him to make a more productive use of his human capital.

[Id. at 423.]

The Court concluded that imputing income to Mr. Miller’s investments based upon the five-year average rate of return for Moody’s Composite Index on A-rated Corporate Bonds was “the fairest solution . . . under the present circumstances.” Id. at 424-25. The Court then limited its holding as follows:

We emphasize that our holding today does not suggest that [Mr. Miller] must actually invest all of his substantial assets in choice long-term corporate bonds. To the contrary, we recognize that [Mr. Miller] is an experienced investor who gained great knowledge of financial matters through his employment at Merrill Lynch. He may choose to diversify his investment portfolio over many different types of investment options. We do not intend to deprive [Mr. Miller] of the opportunity to control his investment options.

[Id. at 425-26.]

The Overbay appellate court held that by rigidly applying the formula used in Miller to the facts of this case, the trial court effectively deprived Mrs. Overbay of the opportunity to control her investment options.

The Overbay appellate court held that what was reasonable for Mr. Miller is not reasonable for Mrs. Overbay. Mr. Miller, an experienced investor with a net worth of $6,561,644 and a high tolerance for risk, pursued an aggressive investment strategy. On the other hand, Mrs. Overbay testified that it was always very important to her “to maintain the principal and not let anything happen to it. So I’ve tried to invest it safely where there would always be a rate of return, but a safe rate of return.” When asked why it was important for her to maintain the principal and not put her inheritance at risk, she testified that her inheritance was “hard earned money,” and she did not know “what my health expenses might be or what the future holds and that’s what that was there for. I inherited bad genes and money.”

The court previously indicated the need to utilize some reasonable foundation or basis when imputing income to an inheritance. Connell v. Connell, 313 N.J. Super. 426, 434 (App. Div. 1998). In addition, the court has cautioned that “[t]he peculiar facts of each case must be carefully weighed to achieve fairness and balance in considering a [spouse's] inheritance.” Ibid.

Because “no two cases are exactly alike,” Bonnano v. Bonnano, 4 N.J. 268, 274 (1950), neither bright-line tests nor hard and fast rules should be imposed when imputing a reasonable rate of return any more than when determining an appropriate award of alimony. See, e.g., N.J.S.A. 2A:34-23(b)(13) (requiring court to consider, in addition to twelve enumerated factors, “[a]ny other factors which the court may deem relevant”); Kingsdorf v. Kingsdorf, 351 N.J. Super. 144, 157 (App. Div. 2002) (“[A] court of equity should not permit a rigid principle of law to smother the factual realities to which it is sought to be applied.” (quoting Graziano v. Grant, 326 N.J. Super. 328, 342 (App. Div. 1999))); Habble v. Habble, 99 N.J. Eq. 53, 56 (Ch. 1926) (A particular method for determining alimony “is only a guide, and not a hard and fast rule. Each case must be separately judged according to the circumstances.”). See also Alston v. Alston, 629 A.2d 70, 75 (Md. 1993) (“[N]o hard and fast rule can be laid down, and . . . each case must depend upon its own circumstances to insure that equity be accomplished.”); Tracey v. Tracey, 614 A.2d 590, 597 (Md. 1992) (“[E]quity requires sensitivity to the merits of each individual case without the imposition of bright-line tests.”).

The lesson to be learned from Miller is that when a spouse with underearning investments has the ability to generate additional earnings——without risk of loss or depletion of principal——but fails to do so, it is fair for a court to impute a more reasonable rate of return to the underearning assets, comparable to a prudent use of investment capital. In Miller, the Court took note of the difference between legitimate investment strategies, specifically, between investing “designed to produce [future] income through appreciation in stock values” and investing for present income. Miller, supra, 160 N.J. at 421. In imputing additional income to Mr. Miller, id. at 423-24, the Court recognized that it would be unfair to allow one spouse to maximize future income through anticipated asset appreciation for his or her own benefit, while limiting present income that would enter into the alimony calculation for the benefit of the other spouse. That distinction between a “growth” strategy and an “income” strategy applies equally to a supporting and a supported spouse in the context of imputing income to either spouse for purposes of calculating alimony.

In this case, the trial judge initially erred when he failed to explain why it was appropriate to impute additional earnings to defendant’s inheritance, and he subsequently erred when he used an unrealistic rate of return to impute additional investment income to defendant.

The appellate court cautioned that Defendant is not required to put her capital at risk, or to jeopardize her inheritance, by pursuing an investment strategy that is neither reasonable nor prudent. See, e.g., Lake v. Lake, 756 A.2d 917, 924 (D.C. 2000) (concluding that “a conservative five percent could reasonably be imputed as annual investment income” without requiring “invasion into principal or increased future earnings”); Brock v. Brock, 690 So.2d 737, 741 (Fla. Dist. Ct. App. 1997) (noting that it is not equitable “to require an investor to reinvest assets in a manner which will result in losses through fees, taxes, cost, and loss of principal due to inflation” because “[s]uch an investment strategy is not . . . ‘prudent’”); Breihan v. Breihan, 73 S.W.3d 771, 778 (Mo. Ct. App. 2002) (Former spouse “should not be required to risk assets in order to generate higher rates of return nor should the court impute a greater amount of income based on more aggressive investments.”).

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W. BRUCE OVERBAY VS. MARY ELLEN OVERBAY, App. Div. (A-5989-05T1; Decided July 21, 2009):

This case returns to the appellate court after remand proceedings. See Overbay v. Overbay, 376 N.J. Super. 99 (App. Div. 2005). [see above]

In the earlier decision, the appellate court noted that Mr. Miller was an experienced investor with a high tolerance for risk. Therefore, he was comfortable with a more aggressive investment strategy than Mrs. Overbay, whose goal was “to maintain the principal and not let anything happen to it.” Overbay v. Overbay, supra, 376 N.J. Super. at 108. Accordingly, the court found that the trial court erred when it attributed additional investment income to defendant based on a 7.4 percent imputed rate of return, and directed the trial court to redetermine the amount of alimony to be paid by plaintiff to defendant. Id. at 113.

Back at the trial court, as that evidence demonstrated, defendant is able to generate additional investment income, “without risk of loss or depletion of principal.” Overbay, supra, 376 N.J. Super. at 111. Consequently, the appellate court did not disturb the trial court’s new revised decision to impute a 4.5 percent yield on defendant’s inheritance.

See related Blog Post, published in the New Jersey Family Law blog.

NOTE: My legal services include family law, divorce, litigation, arbitration, mediation, alimony, equitable distribution, and property settlement agreements.