For families with some wealth, a big concern about gifting assets to children is whether a divorcing spouse might end up with some of the gift. Avoiding the most obvious pitfall is easy – don’t allow the child to title the gifted assets jointly with the spouse. And under the laws of most, if not all, states inherited and gifted property is not marital property.
Trouble arises when the gifted, nonmarital asset appreciates. Under Florida Statute Section 61.075(6)(a)1.b., a nonmarital asset can be converted into a marital asset as a result of efforts of the spouse:
The enhancement in value and appreciation of nonmarital assets resulting from the efforts of either party during the marriage or from the contribution to or expenditure thereon of marital funds or other forms of marital assets, or both.
In Naranjo v. Ochoa, 4D21-3084 (4th DCA 2023), the former wife received what was termed inheritance advances from her mother on two occasions, one for $665,000, and the other for $170,000. Former wife invested those funds into 4 mutual funds, with no other actions leading to the appreciation. By the time of the divorce, the invested funds had appreciated $892,787. The appeal concerned whether the appreciation in the value of the mutual funds should be considered as the result of the efforts of the former spouses.
The trial court held that the appreciation was a marital asset, reasoning:
The Court finds that the gifts were made to [the former] [w]ife as part of an early inheritance for the purpose of enhancing the investments and that the evidence shows that the investments were done as a joint marital venture and that both parties contributed to the enhancement of the $830,000 [which the former] [w]ife received from [her mother].
The appellate court right away saw that something was off.
However, applying de novo review, we hold the circuit court erred in its concluding from those facts that the $892,687.94 appreciation was a marital asset to be divided equally between the parties. As stated above, the circuit court’s final judgment did not address our and other district courts’ precedent-some of which the former wife’s counsel cited during closing arguments interpreting what “efforts” are required for an enhancement in value and appreciation of a nonmarital asset to be deemed as a marital asset under section 61.075(6)(a)1.b., Florida Statutes (2020). Consideration of those cases guides our conclusion of why the $892,687.94 appreciation was, as a matter of law, a nonmarital asset.
Two of the cases cited by the appellate court are instructional here, for stock market investing situations.
In Steele v. Steele, 945 So.2d 601 (Fla. 4th DCA 2006), the circuit court was asked to determine whether the accumulated value of the former husband’s pre-marriage 401(k) contributions was a nonmarital asset and therefore not subject to equitable distribution. Id. at 602. During the marriage, the former husband’s employer modified the 401(k) plan to provide its employees with the ability to monitor and control their investments. Id. The new plan also allowed employees to move assets among nineteen different mutual funds. Id. The former husband utilized this feature and, during the almost six-year marriage, made three such transfers, without withdrawing any funds.
Applying a prior version of section 61.075(6)(a)1.b., we affirmed, reasoning, “the husband in this case did not actively trade stocks or bonds. He only made three transfers during the six-year marriage, and these transfers had only a minimal impact on the value of his 401(k).” Id. at 603.
In contrast to the active stock trader situation:
In contrast, in Chapman v. Chapman, 866 So.2d 118 (Fla. 4th DCA 2004), a circuit court held that an increase in value of a husband’s premarital securities resulted from the husband’s efforts during the marriage, thereby making the increased value a marital asset under a prior version of section 61.075(6)(a)1.b. Id. at 118. On appeal, the husband claimed his efforts regarding the securities were limited to replacing investment grade bonds, as they became due, with similar bonds. Id. The husband therefore contended the enhancement in value was passive and should not be considered a marital asset under the statute. Id.
We affirmed, observing that the husband’s claim had been contradicted by his brokerage account records, which revealed he had been actively trading stocks and bonds, enabling him to achieve a greater annual return than the benchmark for stocks. Id. We concluded, “[t]he evidence that the husband was actively trading stocks and bonds was sufficient to support the trial court’s finding that enhancement resulted from his efforts during the marriage.” Id. at 119.
In reversing the trial court, the appellate reasoned as follows:
Unlike Chapman, where the husband’s brokerage account records revealed he had been “actively trading” stocks and bonds, enabling him to achieve a greater annual return than the benchmark for stocks and resulting in that enhancement being deemed marital, here it is undisputed that the $830,000 advanced inheritance was invested in the four mutual funds using a “buy-and-hold” strategy which the former husband typically had utilized and the former wife testified she had utilized, without active trading by either party during the marriage.
Even though the former wife prevailed, she still lost, because she had to litigate the issue at trial, lost at trial, and had to litigate the appeal. In addition to the time and money involved, litigation is stressful and most people would prefer to avoid it. What could the former wife and her mother done differently to avoid this situation?
The opinion describes the gift as an inheritance advance. Yet most inheritance advances are for a child in need. The former wife left the money in the brokerage account for many years. Why was this inheritance advance necessary? If there were some reasons for making the gift, the gift could have been structured as a joint account with right of survivorship, or the account could have had the former wife added to the account as a pay-on-death beneficiary. Both of those structures would have kept the account away from the divorce proceedings, at least until the mother died. The mother could also have funded an irrevocable trust, which would have made it more difficult to argue that the account should even be considered a subject to the divorce proceedings.
