Non-working spouses income in a divorce

Guideline Economics

www.guidelineeconomics.com/files/Advanced Degree.pdf

The Personal Sacrifice Approach:
First, determine the additional earnings to date from the degree and deduct what the degree holder would have made without the degree. Next, subtract that portion of additional income devoted to the personal consumption of the degree holder and income taxes. This approach is much like the present value approach but in reverse and provides for the possibility for a buyout to occur.

Conclusion

....The authors believe that more attention needs to be devoted to the actual contributions and sacrifices made by the non-degree holding spouse.

The "Personal Sacrifice Approach" presented here for calculating an advanced. degree is not complicated. It has the advantage of providing a method for revealing the true cost of a degree that is fair to both parties in the divorce. The most apparent advantage is that it allows the degree holder to systematically payoff the cost of the degree.

===========
Concern:

Is the same considered for the supporting spouse (the non-degree-holder)? Consider this:

He was a biology under-grad. She was a Junior when they married. She quit college & supported him through medical school. Had she not done this, she would have graduated (with an English/Tibetan-Art degree) & he would have gone into sales. After he finally finished his neurosurgery residency, she stopped working outside the home & started working at home -- bearing and raising 3 kids. Now, 30 years after the marriage, the kids are gone, she hangs out at the Club, and he's fooling around with a nurse barely older than his daughter.

Following King, we must take neurosurgery income less sales income, less the Lothario's personal consumption & income taxes. [...determine the additional earnings to date from the degree and deduct what the degree holder would have made without the degree.
Next, subtract that portion of additional income devoted to the personal consumption of the degree holder and income taxes.]

But what of Mom? Where would she have been had she completed her degree & stayed hitched to Dad who was in sales rather than finishing med school? Given the 3 kids, she probably wouldn't have worked outside the home continually after graduation. Her job & earnings might have been different assuming college graduation, but she was destined to spend some time as a stay-at-home mom. As things worked out, when the 3rd kid, Buddy, finally entered 1st grad, she didn't have to go back to gainful employment because her husband was a rich doc.

Is there any part in the King mechanism (or in Court in these matters) for saying: "For the non-degree-holder, determine the potential earnings to date from the time of the marriage and deduct what the non-degree-holder would have earned without supporting the ultimate degree holder. [This is her loss of own earnings.] Next, subtract that portion of additional household income devoted to the personal consumption of the non-degree-holder."

The last sentence is the nub. Sure, she sacrificed in those early years. But she's lead a life of luxury in the last two decades so that the actual contributions and sacrifices made by the non-degree holding spouse have been paid back manifold. King seems to invite this argument.

Divorcing the self-employed spouse: Getting what you are entitled to

Determining how much the damages are in cases involving self employed professionals is difficult. In a lot of situations, the difficulty arises because the self employed individual's actual tax reported income does not reflect how much he or she is bringing into the household. In divorce cases the problem can be amplified because the analyst is not only trying to figure out how much the individual makes or could make, but the value of a income stream into the (post-divorce) future.

Below is an example of the problem and a number of suggested solutions. The problem is based on posting to a popular forensic economics bulletin board.

The setting
Beavis Matfry (age 50) owns a highly successful local chain of hair salons, Beavis Matfry Styles. He has won national and international styling awards, has his own line of hair care products, and his is THE salon in town for anybody important. He still cuts hair personally, and his operators are trained by him and sign non-compete contracts.

Now comes the divorce and the non-working spouse wants half the business.

The Problem
A "standard" business valuation, that uses generally accepted valuation methods such as the Discounted Cash Flow Method, places the value of his business at $1.2 - $1.5 million. However, his personal tax returns show that his personal income from the salons is about $600,000 per year.

In the real world, it is hard for anyone to believe that anyone would give up $600,000 a year for a one-time upfront payment of $1.2 - $1.5 million.

The solutions

1. The analyst may want to value the service business as the capitalized value of the stream of income above that portion that is compensation to the owner/manager in his role as manager. To do this you may want to use a methodology based such as "Sellers Discretionary Earnings" methodology instead of approaches such as the 'Excess Earning method' that in part value on parts of a company that are not really applicable to a service business.

The SDE method incorporates personal earnings and adds back the non-cash stuff like deprecation and interest expense. The Business Reference Guide -2004 edition by Tom West does a good job of explaining this method and also states that it is becoming the most popular method for business valuation (page 294).

2. It may be ok to use the standard approaches such as the 'Excess Earnings' approach but the analyst may need to 'add back' certain expenses to get a more accurate picture of the company's worth. For example, adding back all non operating expenses (cell phone, personal vehicle, professional fees not specific to the business, non working relatives on payroll, etc.), as well as any other expenses an arm's length buyer would not expect to incur as a normal operating expense may produce a more realistic assessment.

Blog 702

Blog 702
Incredible website and blog. It has information on the web site for daubert challenges.

Employment attoney blog

Employment Attorney in Austin Texas.

Just the facts, Jack

The value of using checklists to gather information can not be underestimated. Most forensic economists will, or should, use some type of case specific checklist to gather all the relevant information about the case. Even if the attorney and the attorney's client does not have the information, this will let the economist know that they have at least not forgotten to address the issue.

Using a checklist can also help minimize the number of surprises at trial.

The following story, which was relayed on a forensic economics board, illustrates what can happen when a forensic economist is not provided all the information.

"...I've seen this happen on the other side in divorce cases- the other spouse tries to hide assets to protect them from being declared community property. But sometimes it can happen honestly....

Last Thursday I testified to the present value and marital portions of the husband's defined benefits and the wife's two retirement plans. Information about the husband's plan came from the plan's administrator and information about the wife's plan was provided by her employer.

The information, as always, was provided to me by my lawyer, with appropriate telephone numbers for corroboration.

On the witness stand, opposing counsel handed me a sheet of paper and asked me if I had seen it before. I hadn't. It was a document identifying my client, the husband, as a participant in a 401(k) through his employee union.

I had not considered this info because I didn't possess it. The judge asked me if I could leave the witness stand, confirm the current value of this plan, and determine if it were (as the client claimed) his present pension plan. I knew it wasn't.

Out of the courtroom, the client swore to me he had only one retirement plan, and that the old one had been rolled over into this new one [(401)k]. I said, in that case, the new one will have a positive balance on the date of inception. We called, it didn't.

He argued that they had to be the same because the date his old defined benefit plan was rolled over was almost the exact date that he began this (401)k. Moreover, the current value of the (401)k was almost the exact same amount as the present value of his defined benefit plan. Unfortunately, those were coincidences.

...."

Could the UK method of calculating economic damages work here?

In the UK, the use of an economist is very rare to determine economic damages. The courts just plug in last years earnings and use multipliers from actuarial tables to determine the economic damages. The tables are know as the The Ogden actuarial tables. The multipliers are actuarially determined and controlled for age, gender, etc. The real discount rate is now 2.5% universally. You basically plug in last years earnings. Actuaries may be used for pension plans, etc..

Could that method work here? Most think not.

Here are some cites:


Penn Paper

Torts in the
Eurpoe

Ogden Tables

Comparable work and mitigating damages

Classic example of comparable work:

An actor is given a leading role. Later, the role is taken away from the actor and she is given a leading role in a different movie. The pay is identical for both movie roles. She sues, saying the two acting jobs are not comparable work. The court agrees.

Parker v. Twentieth Century-Fox Film Corp., 3 Cal. 3d 176, 474 P.2d 689, 89 Cal. Rptr. 737 (Cal. 09/30/1970)

[1] SUPREME COURT OF CALIFORNIA
[2] No. 29705
[3] 1970.CA.40287 ; 474 P.2d 689; 89 Cal. Rptr. 737; 3 Cal. 3d 176
[4] September 30, 1970
[5] SHIRLEY MACLAINE PARKER, PLAINTIFF AND RESPONDENT,
v.
TWENTIETH CENTURY-FOX FILM CORPORATION, DEFENDANT AND APPELLANT

Damages or no damages? A response

(Scenario 1)
Male, age 20, Hispanic, high school or GED, average student, spent one
year in prison for car theft, on parole, worked 6 months on concrete pouring
crew, was injured and will not be able to work construction due to lifting
limitations, cognitive ability in tact.

One Vocational Expert's Response

"...The vocational issues for a conviction start with the type of conviction
and the length of time removed from the labor market. In the above case one year for car theft would most likely remove him from all driving occupations.

Given that past work appears to be construction I would not consider the conviction that significant as a preexisting issue that would have limited employment or earning capacity. Now if he had been a child care provider and severed 1 year for a crime against children the
preexisting issues would be very significant...."

(Scenario 2)
Female, age 40, white, college graduate (BBA), spent 20 years in federal
prison for bank and wire fraud, released, no parole, out 90 days,
interviewing for receptionist position, injured in MVA, can continue in
sedentary work, some shoulder and neck limitations, and slight lifting
limits.

One Vocational Expert's Response

"...This case creates more of a vocational challenge. While past work is old and certainly you could not consider occupations involving handling any
type of finance issues you do have a person with advance education. The 20
year absence from the labor market would be similar to the wife and mother who
is now returning to work.

So we have a college educated woman with no work history. I would be temped to return her to school for a short brush up. This would help with showing recent new skill acquisition.

Then begin to look at placement in jobs that require a minimum of a 4 year degree in anything, the type of jobs that those with a degree in psychology would seek. I think given that she has demonstrated the ability to get through college that there would have been higher earning potential than reception work.

Now given a work restriction to sedentary I would think that therewould only be a closed period of losses...."

Damages or no damages?

(Scenario 1)
Male, age 20, Hispanic, high school or GED, average student, spent one
year in prison for car theft, on parole, worked 6 months on concrete pouring
crew, was injured and will not be able to work construction due to lifting
limitations, cognitive ability in tact.

(Scenario 2)
Female, age 40, white, college graduate (BBA), spent 20 years in federal
prison for bank and wire fraud, released, no parole, out 90 days,
interviewing for receptionist position, injured in MVA, can continue in
sedentary work, some shoulder and neck limitations, and slight lifting
limits.

How would you address these. Thanks

Calculating wages for the incarcerated in practice

Mitigate damages?, some say yes:

>>Relayed by a practicing forensic economist:

....in my case, the plaintiff did no market work to
mitigate her losses, but that would have looked "bad" to the jury.

So I was asked to create mitigation for her by reducing her claimed WT damages
by the amount of a minimum wage job. We never lied and said she was
working at Burger King, but an explicit mitigation was introduced where
there was none.

....If I were I faced with this situation today, I would either refuse to create the
mitigation, or would insist on making it clear that the mitigation was
manufactured.

Here are some links that may help to better understand mitigation after prison:

http://www.thescoop.org/archives/2003/04/09/jobs-for-parolees/
http://www.karisable.com/crpunrpar.htm
http://www.bonds4jobs.com/bondingneed.html
http://www.pap.state.ga.us/criminal.nsf/0/
CFD33DBDB7F5C4A685256B4B0079A4FB?OpenDocument.

Unemployment stats for parolees in GA:
Unemployment Rate Averages - 2001

The data shown (The unemployment rate for parolees is over twice as high in every city):

Geographical
Area, General Public 2001, average Rate of Change from 2000, Parolee
2001, average Rate of Change from 2000

Georgia 3.85% +0.47 15.16% -1.17
Albany 5.25%* -2.21 23.58% +2.16
Athens 3.63%* +1.21 14.25% -5.75
Atlanta 3.33%* +0.34 13.33% -1.59
Augusta 4.56%* -0.02 17.25% -5.25
Columbus 4.61%* -0.10 20.58% +0.75
Macon 3.60%* -0.70 15.91% -4.50
Savannah 3.22%* -0.39 12.50% +0.25

Note: * General Public Average for each municipal area is for January - November 2001, and represents the counties served by the district parole office in that area
Information on Georgia's current parole population indicates that only one-half reported being employed full-time at the time of arrest for the offense that sent them to prison. Considering the average hourly wage that most parolees receive, it would be extremely difficult to support even one person on part-time employment.

Here's one from California:
http://www.sacbee.com/content/news/story/7730460p-8669937c.html

What is a person's day worth? Part 2

From Dollar Value of Day website

>>>In this report, we calculate a replacement cost estimate of the economic dollar values attained with the usage of every minute in one day. Relying on time-diary data provided by the U.S. Environmental Protection Agency (EPA) as a part of their National Human Activity Pattern Survey (NHAPS), we calculate the value created in a day as measured by the market price of hiring persons whose work relates to that produced or spent by one person.

Time-diary surveys record activities by time. Depending upon the day, persons might be working 8 hours outside the home at a job and also working 4 hours at home doing cooking, cleaning, or other household chores for the benefit of themselves and family members. It makes good sense that all the hours of work in the day have an economic dollar value. Taking the hourly wage in employment times 8 hours and the hourly wage of perhaps a maid times 4 hours, we can arrive at the dollar value of the 12 hours of work performed by the person in that day. For the remaining 12 hours in the day, dollars may or might not be relevant to an individual's decisions regarding time allocation or time usage; if dollars are relevant, they might not ever require valuation, replacement, or supplementation.>>>>>>>>

What is a person's day worth?

One way:

Value of a day

The Dollar Value of a Day (DVD) by Expectancy Data(1999) is a private analysis of government time diary statistics. The DVD analysis is fairly well respected. It does,
however, provide a value for everything done during the day on a
replacement value basis. When DVD is used for the value of household
labor it is fairly good -- some believe that it is a tad optimistic concerning males.

When used for other daily activities -- caregiving, personal care and
leisure -- some do not believe the results are not consistent with forensic analysis.

Criminal activity and lost earnings capacity calculations

The questions

Situation 1

When you are completing a vocational analysis and determining the next best vocational avenue for a person, what impact does a prior conviction have? By this I mean, what impact does the fact the time served was 10 years ago or just 6 months ago (and lets assume the person served more than 6 months)? Does the severity of the crime (possession of drugs or aggravated robbery) play a part? And what about the age of the former convict and at what age the time was served?

Situation 2

What would you vocational rehabilation experts do if the plaintiff committed a felony after the incident in which he was injured and is now serving, say, a 10 year sentence? In other words, the incident had nothing to do with the commission of the felony, but being in prison eliminates his ability to mitigate. Do you ignore the fact that he is in prison? Do you make an assumption as to what he could have mitigated absent the incarceration? Do you look at any earnings in prison, not that $0.30 per hour makes much of a difference. I am talking about a person who by now could have completed retraining and been placed in a job that would mitigate nearly all of his losses because his injuries weren't all that bad.

Working longer and longer? Some defy the odds

US agency files lawsuit against SJ in job claim
San Jose Mercury News (subscription), CA - 4 hours ago

The federal Equal Employment Opportunity Commission on Tuesday sued San Jose on behalf of a 72-year-old city mechanic who claims he was a victim of age ...

The Economic Cost of a Life Care Plans

Calculating the economic cost of a life care plan typically involves two steps by economists. First, after figuring out (from the life care plan) what products and services have been prescribed for the injured person, the economist will project the future cost of providing those goods and services at the perscribed times. For example, what will Prozac cost in 2014? Making this calculation usually means projecting future medical cost using historical medical inflation cost indexes for the services and products in the injured person's life care plan.

Second, in some instances the life care plan may call for the economist to make seperate cost projections on the cost of individual items. For instance, there may a service that is not neccessarily medical that the life care planner may ask the economist to value.

Follow-up to Collateral Income Source

An example may help bring the economist and the attorney together on how to think about collateral source income.

Think of a person who is 40 years old who works at the local petro plant and earns about $43,000 a year. The indiviudal has worked at the plant for about 17 years. On a Monday the person buys a ticket for Wednesday's lottery drawing. On Tuesday, the person is catatrophically injuried and can no longer work in any capacity. On Wendesday the person wins the lottery and will recieve $1 million a year for the next 20 years.

In this situation, it is pretty clear that the person's lost earnings capacity is the $43,000 a year. The lottery income, which was the result of an arrangement with a third party, recieved by the individual had nothing to do with the person's earnings capacity. The income was simply the result of making an investment in a lottery ticket that paid off. The individual is still out of the earnings that he would have made had he not been injuried.

Collateral Income Source Rule

One area that seems, at least on the surface, to run counter to economic thinking is in the area of independent or third party income sources. Workers compensation payments that an injured worker may receive is an example of collateral source income. To an economist at first glance, it may appear that any income received from workers compensation or the like should be subtracted from the plaintiff's lost earnings calculation.

In contrast many courts, citing the collateral source rule, do not subtract this income from any damage award. The justification for this rule appears to be that the wrongdoer should not benefit from the expenditures made by the injured party and relationships that may have existed between the injured party and third persons before the incident.

The collateral rule suggest that the economist should view the income from a workers compensation policy like income earned from an investment, for example a annuity or stock dividend, made prior to the incident. Furthermore, if the issue is damage to the individual's labor market earnings capacity then workers compensation and similar types of income are by definition not labor market earnings.


Hoey & Farina, P.C, a Chicago Illinois law firm, had a very clear discussion of this point:


'Under the collateral source rule, benefits received by the injured party from a source wholly independent of, and collateral to, the tortfeasor will not diminish damages otherwise recoverable from the tortfeasor.

" 'A situation in which the collateral source rule is frequently applied is one in which the injured plaintiff has been partly or wholly indemnify for the loss by proceeds from his accident insurance. In such a situation, the damages recovered by the plaintiff from the tortfeasor are not decreased by the amounts received from insurance proceeds. The justification for this rule is that the wrongdoer should not benefit from the expenditures made by the injured party or take advantage of contracts or other relations that may exist between the injured party and third persons.'

See the following for a good example of a case that uses and discusses the collateral source rule:

http://www.felahfd.com/HFDLaw/notebook/377.htm

'But for' economic damages in discrimination cases

As economic expert witness, we are asked to provide opinons on the value of lost retirement benefits in discrimination cases. Most times the damage calculations involve the loss of retirement benefits for an indiviudal who is alleging wrongful employment terminated.

The case below (FRANCIS v. RODMAN LOCAL UNION 201 PENSION FUND) is interesting because it deals with damages that arise from a person who believes that they were denied the opportunity to work. As a consequence, the plaintiff in the case believes that the lost hours should be reflected in the calculation of his pension.

Summary and link below:


FRANCIS v. RODMAN LOCAL UNION 201 PENSION FUND (05/14/04 - No. 03-7063) Plaintiff is not entitled to recover ERISA pension benefits for the hours that he arguably would have worked but for the discrimination charged in prior litigation; the settlement amount that he received in that prior litigation was labeled "damages" and was not intended to generate additional pension benefits.

Information needed to calculate damages for children

Information that you should always get in cases involving injury to a child or young adult

• Parent’s highest education level
• Parent’s complete work history including all jobs since graduation from high school
• School transcripts and related school conduct records for injured child or young adult
• Number of siblings (for the injured)
• Age of mother at birth
• Results of standardized test taken by injured (e.g. SAT, military admission tests, state testing)
• Marital status of parents
• Description of any criminal history or run ins with law enforcement by the injured party

Age discrimination cases down but expected to be up

More age discrimination cases have to be on the way (see below). The age of the plaintiff in a age discrimination case is around 45 years old, so there may be more on the way. The average jury award in these types of cases also seems to be higher than either race or gender cases.


May 16, 2004, 6:24PM

Age discrimination hard to prove, but suits likely to grow
By DAVE CARPENTER
Associated Press

CHICAGO — The youngest baby boomers turn 40 this year, leaving an entire generation not only in the throes of middle age but also protected by federal law from age discrimination in the workplace.

Despite the big demographic shift, there's been no explosion of age discrimination charges so far. The U.S. Equal Employment Opportunity Commission received an annual average of 19,500 age claims over the past two years, down slightly from 1992-93, and claims actually declined 4 percent in 2003 from a year earlier.

Using school records to calculate economic damages for a child

For young persons who face life altering injuries, the pre-injury school records, extra-curricular activities and family background information are important factors to consider when projecting future labor market activity.

For instance, studies have shown that holding other factors constant; children who are involved in organized activities outside of school tend to have greater earning capability as an adult. Other studies have shown that better performance on standardized tests such as the SAT are strongly correlated with higher future earnings capacity as adults.

See the National Longitudual Youth Survey website for studies that have looked at these issues.

Valuing Pensions in Divorce Cases

In California and other states, the idea is to reckon the economic value of the pension at the time of divorce. In theory this is done so that the individuals post-divorce work efforts are not incorrectly awarded to the marital period.

There appear to be several ways to handle the valuation of a pension in an divorce case. The ease at which it can be done really depend on if it is a defined benefit or defined contribution plan. Overall here are the approachs:

1. One approach is to value the defined benefit plan at the date of divorce. In otherwords, just look at what is in the pension at the time of the divorce.

2. Another is to value it at the projected retirement and then to do a time rule analysis, apportioning the pension by the fraction of marital years to total years.

3. A third approach is called here a a QUILDRO qualified Illinois domestic relations order. This approach assigns the pension in proportions in the future. The proportions are based on when the retirement would be paid out.

4. A fourth approach simply values the contributions and their interest as they have been paid in - more appropriate for defined contribution plans. This is somewhat problematic for defined benefit programs.

Daily Yield Curve Information

This is a site for working getting yield curve information.

 

http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.html

 

MDEX Website

What they do….

 

Loss of wage is a significant component of any claim for economic damages and will ultimately require the engagement of a vocational expert to substantiate or refute. Such an engagement needs to be made cautiously:

•         cases that involve serious functional loss may not necessarily involve significant wage impact; and cases in which the diagnoses seem less serious may, in fact, have serious implications for the individual’s future capacity to produce income.

•         there are wide disparities in the training and methodologies of vocational experts and the bases of their opinions may or may not be sound.

MDEX Online has developed a wage impact estimate program to give attorneys reliable and cost-effective input on which to make a decision to proceed or not to proceed with the retention of a vocational expert. While it is not meant to supplant the need for a vocational expert or to be used as evidence in court, it is a credible tool for making decisions about the management of the wage impact aspect of the case.

 

The wage impact estimate program is administered by Cynthia Grimley. Ms. Grimley is a seasoned testifying vocational expert who has appeared on behalf of both plaintiff and defense attorneys involving workers’ compensation, matrimonial law, personal injury and labor and employment. The methodology on which she relies has been demonstrated to be both reliable and valid.

 

Here’s how the wage impact estimate program works:

 

            Step One            

The attorney completes and submits the Wage Impact Estimate Intake Form that collects the diagnostic, functional and demographic information necessary to prepare the estimate.

            Step Two             

Once the form is completed, the attorney will be taken to the login/ registration page to login as an existing customer or register as a new customer.

            Step Three          

Upon login or registration, the attorney will be taken to our secure credit card processing area for payment pre-authorization.

            Step Four            

Once payment pre-authorization has been approved, the assignment will be transmitted to a highly trained vocational expert who will examine the information submitted and follow up with the attorney by phone or email if there are points of clarification.

            Step Five             

A written report estimating the anticipated losses, if any, along with recommendations for future action will be sent to you as an email attachment within one week.

            Step Six              

The attorney's credit card will be charged $275.00.

                                               

 

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