May 16, 2012

Neff v. Neff BUCKS COUNTY LAW REPORTER 417 (2011)

NEFF V. NEFF BUCKS COUNTY LAW REPORTER 417 (2011)

Husband appeals the entry of an order for equitable distribution alleging this Court erroneously excluded inheritance funds received by Wife from the marital estate.

1. Inheritance funds received by a spouse, even though commingled with a joint account, do not necessarily lose their identity as a non-marital asset when the funds are easily accounted for and the expenditures are easily traceable.

2. The “vanishing credit doctrine,” although not binding law, is a well-established doctrine in Bucks County. It is a means of calculating or evaluating the amount of credit for contribution of separate property to the marital estate for purposes of equitable distribution.

C.P. Bucks County, Family Division, No. A06-09-60321-DQRY-32. Equitable distribution: Mary G. Neff v. Joseph G. Neff.

It is well-established that property acquired by inheritance is not marital property. Under the Divorce Code, “marital property does not include … [p]roperty acquired by gift, except between spouses, bequest, devise or decent ….” 23 Pa.C.S. §3501(a)(3). Husband argues however, that once an inheritance is “co-mingled” in a joint bank account, it thereby becomes “marital property.” See, e.g., Verholek v. Verholek, 741 A.2d 792, 797 (Pa. Super., 1999), (concluding that once non-marital property is combined with martial property, “it loses its identity as non-marital property and takes on the status of marital property”); Rohrer v. Rohrer, 715 A.2d 463, 467-8 (Pa. Super., 1998) (finding that inherited money which moves in and out of marital accounts loses its non-marital characteristics). Nonetheless, the facts and circumstances of the case at hand are clearly distinguishable from Husband’s argument and the abovementioned cases. In Verholek, Rohrer, and supporting cases, the foremost concern is the fact that once non-marital property, such as inheritance, is commingled with marital assets, such as being placed into a joint bank account, the money may become hard to trace. The Rohrer Court cautions, and Verholek agrees, that the difficultly is “when such funds move in and out of marital accounts, it becomes impossible to determine those amounts that become dedicated to the marital use, and those amounts taken from the marital estate to be used for individual purposes.” Rohrer, 715 A.2d 467; see also, Verholek, 741 A.2d 797. Similar to Wife’s inheritance here, both Verholek and Rohrer deal with inherited funds. However, this case is void of the “confusion” present in Verholek and Rohrer. In the instant case, the inheritance fund is easily accounted for, because all of the expenditures were traceable. Additionally, Husband has already received the benefit from these funds. Husband was given the opportunity to live in the marital residence rent-free, the furniture, bedroom treatments, a television, and deposit on the installation of a new pool were purchased with a portion of these funds, and even the remaining mortgage of $28,312.00 on the marital home was satisfied. To qualify this inheritance as marital property, and include it in the equitable distribution, would allow Husband to double-dip into Wife’s inheritance from her father.

  

Another distinguishing factor between the Neff inheritance and other non-marital property deemed marital in cases is the amount of time the funds were in the joint savings account. Unlike other cases where a non-marital inheritance enters a joint account and is dedicated to marital use for over the length of the marriage, Wife’s inheritance was only in the account for less than six months. This is perhaps the reason why the Neff expenditures were so easily identifiable. The Superior Court has recognized the importance in accounting for such length of time distinctions. In a 1992 case, Pavie v. Pavie, the Superior Court held that husband’s inheritance funds, which were placed in a joint account, were never converted to marital property. 606 A.2d 1207 (Pa. Super., 1992). The Superior Court reached this decision because the inheritance was “received close in time to the separation.” Id., at 1208. Furthermore, in Anthony v. Anthony, the Superior Court expressed, albeit in a different context, that it is “the time, rather than the manner, of acquisition that determines whether property is marital property.” 514 A.2d 91, 93 (Pa. Super., 1986).

  

Whether or not “an asset is marital property or separate property for purposes of distribution of the marital estate, is a matter reserved to the sound discretion of the trial court.” Carney v. Carney, 673 A.2d 367, 368 (Pa. Super., 1996). In Carney, the Superior Court noted that, under the Divorce Code, it is the policy of the Commonwealth “to effectuate economic justice between parties who are divorced … and insure a fair and just determination and settlement of their property rights.” Id., at 369; citing, 23 Pa.C.S. §3501(a)(3). Thus, as the Anthony decision suggests, looking at “the time” in the Neff case, this Court used its discretion to determine that a deposit of an inheritance fund into a joint savings account six months prior to separation, can be considered “close in time,” as the Pavie Court observed. 606 A.2d 1208. Receiving an inheritance, which is excluded from marital property under §3501(a)(3), although placed in a joint account, just six months prior to separation, should not be considered as marital property for equitable distribution. Finally, under the Policies of the Bucks County Masters Office regarding the “vanishing credit doctrine,” Wife should receive full credit for her inheritance. The “vanishing credit doctrine” is a means of calculating or evaluating the amount of credit for contribution of separate property to the marital estate. The “vanishing credit doctrine” focuses on the length of time that the contributed property was held jointly, not the overall length of the marriage:

The vanishing credit returns to the contributing spouse more of the contributed property when the contribution occurs immediately before  separation than when the contribution occurs many years before separation. If the contributed property is held jointly for 20 or more years, no credit may be given. If the property is held jointly for only one year, full credit may be given. For periods in between, there would be a pro rata credit so that if a $20,000 contribution is held for 10 years, then 10/20 of $20,000 may be distributed directly to the contributing spouse off the top of the estate.” See “Policies of the Bucks County Masters Office for Equitable Distribution, Alimony and Counsel Fee Cases regarding the Vanishing Credit Doctrine,” p. 34. Emphasis added. In this case, the Master found that if a “vanishing credit” was calculated with Wife’s inheritance of $222,747.19, a total of $217,178.00 would have been returned to Wife and $5,569.00 would be included in the martial estate (.5/20 of $222,747.19). Since Husband received the benefit of Wife having paid off the $28,312.00 mortgage on the marital home, where Husband was living rent-free, Wife should get the remaining inheritance funds.

Although Husband argues that the “vanishing credit doctrine” is not binding Pennsylvania law, it has been a long established policy in Bucks County. The “vanishing credit doctrine” is a fair and reasonable approach to equitable distribution that has been recognized and approved of by the Superior Court on several occasions. In a 1986 Superior Court decision, Sergi v. Sergi, the Court assessed the trial court’s observation concerning equitable distribution of separate, pre-marital bank accounts that were “blended into the joint account” during the course of the marriage. Sergi v. Sergi, 506 A.2d 928, 933 (Pa. Super., 1986). The Superior Court affirmed the use of the “disappearing credit” approach employed by the trial court. Id. When deciding what amount is owed, the Superior Court, in agreement with the trial court, stated that they would look to these credits as “disappearing credit, depending upon the length of the marriage.” Id. The Sergi Court reasoned that a time period as long as a five year marriage still warranted credit for premarital cash. This “disappearing credit” was also recognized in the Pavie Superior Court decision which, as discussed above, involved inheritance funds placed in a joint account. In Pavie, the Court agreed with the Master’s “vanishing credit doctrine” like approach to deduct the base amount of the husband’s inheritance from the account since it “was received close in time to separation.” 606 A.2d 1208. Thus, in this case, as set forth above, the six month prior to separation receipt of Wife’s inheritance, is clearly within the five year period discussed in Sergi, and certainly “received close in time to separation” as the inheritance in Pavie.

  

Furthermore, given the broad discretion of the trial court in making distribution determinations of marital assets, the “vanishing credit doctrine” can be considered when formulating its order based on the Master’s recommendations. See, Smith v. Smith, 653 A.2d 1259, 1270 (Pa. Super., 1995) (noting that it is “within the trial court’s discretion to credit marital expenses to one of the parties and take such credit into account when dividing marital property”), citing, Winters v. Winters, 512 A.2d 1211, 1216 (Pa. Super., 1986). Thus, according to the “vanishing credit doctrine” calculation or the one year timeframe guideline, in agreement with the Master’s fair and equitable Report, this Court correctly ordered that Wife should receive full credit for the contributed property, her inheritance, held jointly for only six months.

  

IV. CONCLUSION

As set forth above, Wife’s inheritance is not marital property. The inheritance fund was only in the joint savings account for six months, the expenditures are identifiable, and moreover, by continuing to live in the marital home rent-free, Husband had already received a benefit from this inheritance, especially having the $28,312.00 mortgage cleared. Additionally, if the “vanishing credit doctrine” is applied, with these benefits to Husband in mind, any money he might receive under this doctrine has already been distributed. By incorporating the Master’s Report on all of the issues raised in this appeal and concluding that the remaining balance of Wife’s inheritance funds, held in Wife’s IOLTA account, are her sole and separate property, this Court’s July 8, 2011 Order fairly and equitably reflects the disposition of marital property. Additionally, for the reasons set forth above, both the award of alimony and the Order’s division of the Philadelphia rental properties were properly entered.

By the Court,
/s/Wallace H. Bateman, Jr., J.