WHEN GOOD DIVORCES GO BAD: Three Things You Can’t Afford NOT To Do Before You Divorce

The clouds literally parted and cast sunlight unto the Detroit skyline. I can’t believe I’m divorced – that was easier than I thought it would be he said as we walked out of the courthouse together, newly signed divorce decrees in hand, humming the first few bars of Sunshiny Day.

You might not be signing songs. You might not be planning your first trip as ex-husband and ex-spouse,  complete with new spouses and matching Hawaiian shirts. Heck, you might be counting the days before you can move out of your house, without your attorney yelling at you, with your stuff in tow and your ex left in the dust. But, your divorce was not the tragedy your buddies scared you into believing it would be, your ex and your ex’s attorney did not drain every dime from you like friends threatened would, and you’re divorcing with some money in your pocket and a decent size retirement account to boot. Overall, your divorce is good.

Good for you. But not so fast. If you’re like most newly divorcing folks, there are three things you’ve probably forgotten to do that will make your good divorce go bad.   

You Forgot the Tax Professional

Spend a little extra cash now and have your tax professional review your decree before you sign it.        Tax law, like divorce law, is a specialized area of practice. It is also an evolving area of law, and you will want the most accurate, current information available. You will not offend your attorney, and, if you have a good attorney, your attorney will consult a tax professional with you. We want to make sure our clients take advantage of tax benefit and avoid tax consequences whenever possible.

If you do not, the consequences could be costly. Consider this. Transfers of property between spouses or former spouses incident to their divorce are generally tax free. See IRC 1041. This means the transferor spouse does not have to report a discharge of indebtedness, nor the transferee spouse income, for the transfer when filing the tax return for the year of the transfer. This does not mean, however, that there are no tax consequences. Under IRC 1041, the transferee spouse takes the transferor spouse’s basis and holding period in the property. When the transferee spouse disposes of the property, the transferee spouse pays taxes on the entire disposition. This is, in a sense, a delayed tax. For example, if during the divorce each spouse agreed to be responsible for 50% of their stock’s $50,000 appreciation, if this language is not included in the divorce decree, after divorce the burden is 100% the transferee spouse’s.

The most important thing for you to do is plan ahead. Have you tax professional review the final draft of your decree before you sign it, and ask for a thorough assessment from a tax perspective. It is better to pay for these services now than to find out, ten years from now, that you have to report $50,000 of gain. The court will not listen to you complain that you did not anticipate the tax consequences. As the Michigan Court of Appeals said of an ex-husband making that argument, “His claim regarding unexpected income taxes is, of course, without merit. He either knew, or should have known, of the income tax consequences of his actions. . . .” Couzens v Couzens, 140 Mich App 423; 364 NW2d 340 (1985). [1]

You Forgot the Appraiser

Appraise your home and personal property – the couple bucks and a few hours’ intrusion in your home could mean a couple thousand extra dollars in your pocket. Do not assume that a bad economy means your home has no equity – we’ve received appraisals indicating homes with equity of $60,000 and more. Moreover, every item of personal property has a value. Yes, in isolation the value may be small ($5 for all of the plants, $20 for the yard tools), but, combined, they add up! A fully furnished, three bedroom, two bathroom home with a family computer, a washer and dryer set and a tool shed would have, even at garage sale prices, between $5,000 and $10,000 worth of personal property. Half is presumably yours, possibly thousand of dollars you would have otherwise left with your ex. You may retain                           a local auctioneer or estate salesman to appraise that property in one afternoon for a few hundred.

You Forgot the Plan Administrator

Pension division is one of the most heated areas of contention in a divorce, right behind child custody. Invest in a good pension valuation now, and contact your plan administrator for sample orders and required language to divide that pension, so that you know how much and what you are working with. Ideally, your judge will sign the order to divide your pension right along with your divorce decree – otherwise, trying to prepare that tedious order after your divorce will have your divorce lingering on and on and on like a bad movie that never ends.  

If you are entitled to a share of your spouse’s retirement account and the account is ERISA-covered, do not rely on your decree to effectively divide it. ERISA applies to private tax-qualified pension, profit sharing, and stock bonus plans, including defined benefit pension plans, 401(k) plans, money purchase pension plans, and employee stock ownership (ESOP) plans, but not government and church plans unless those plans elect ERISA coverage. If ERISA applies to the plan, then the plan administrator cannot alienate and divide the account unless and only as provided in a Qualified Domestic Relations Order, which you have probably heard referred to as a “QDRO.” A QDRO is a court order that creates or recognizes the existence of an alternate payee (your ex-spouse)’s rights to receive all or a portion of the plan benefits. The QDRO must also include, at a minimum, the name and the last known address for the payee and the alternate payee, the amount or percentage to pay the alternate payee, the manner of payment, the number or duration of payments and each plan to which the order applies.

This may seem simple, but the key is the phrase “at a minimum.” Under ERISA, plan administrators may reject a proposed QDRO even after the court has signed it if it does not comply with ERISA or the administrator’s requirements. As a matter of federal preemption, the plan administrator holds this power over your judge.

It is common for attorneys and plan administrators to go back-and-forth, for months, revising the QDRO to the administrator’s liking. To avoid the time lost and fees incurred, be sure your attorney has contacted the administrator early in your case. Request sample QDROs from the administrator. Investigate all of the plan benefits. Are there early retirement benefits, for example, and will you be entitled to them? If so, what language do you need to include in your QDRO? Ask your attorney whether a QDRO preparation service will be more efficient and less costly than the attorney’s work to prepare the QDRO. If possible, have the administrator review and pre-approve the QDRO before you submit it to your court for signing as an order. If you do not have an attorney, you will be responsible for these tasks.

In other words, for a few hours one day with your tax professional, an afternoon with your appraiser and   a phone call and letter or two with your pension plan administrator, you could save yourself thousands.

And who wouldn’t be singing Sunshiny Day after that? 

[1] You should contact a tax attorney and/or your tax advisor for a thorough assessment of the tax laws applicable to you. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, be advised that any federal tax advice contained in this article was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Always consult a specialist for thorough tax advice.

What If We Cannot Sell The House?

Blissful, young newlyweds on a let’s-build-a-nest high, you and your spouse purchased a half million dollar house with zero down on a thirty year mortgage with a balloon payment. Ten years later, the bliss has soured and you both want out, but you’ve barely made a dent in the principal. With home foreclosures having been at their highest, many couples face this predicament. Now what?

If you cannot repay your mortgage loan, your lender may begin the foreclosure process. If you face a foreclosure, contact your lender and request a meeting immediately.

At the meeting, discuss what options you have to delay the foreclosure. These may include forbearance, refinancing, a longer redemption period in the event of foreclosure, a new payment schedule, and a short sale. Be proactive. Do not wait for a foreclosure notice to contact your lender or hope that your divorce will shift the debt to your spouse. Usually, it will not. Explain your legal and financial problems to your lender, and ask for reprieve. Most lenders are willing to work with you if you are sincere and in good faith negotiate a repayment plan because lenders would rather have an income stream than an empty house. 

Talk to your lender, your financial advisor and your attorney about a short sale. In a short sale, the lender agrees to accept less than the borrower’s mortgage indebtedness when the borrower sells the property to a third party in an arm’s-length transaction. Lenders usually agree to short sales to avoid the costs of foreclosure and having a large inventory of empty, unsellable homes.

However, short sales come with their own costs.

First, as a matter of contract law, a lender may pursue a deficiency if the short sale approval is not conditioned on the lender waiving the deficiency. Therefore, be sure to condition any short sale plan submitted to your lender for approval on the lender waiving any deficiency.

Second, the short sale approval process is long and tedious; you and your potential buyer must be willing to wait. Large lenders have short sale packets for use. They include forms for, inter alia, comparative market analyses and brokers’ price opinions, hardship letters, financial disclosures, authorizations to release information, listing agreements, and proposed sale terms.

Third, if the lender does approve the short sale and waive any deficiency, the forgiven debt may trigger income tax liability. The lender must send the borrower Form 1099-C, Cancellation of Debt, to indicate the amount of debt forgiven. If the debt was for a principal residence, under the Emergency Economic Stabilization Act of 2008, until 2013 borrowers may exclude the forgiven debt from gross income for federal tax purposes. There is no dollar limit on the exclusion if the principal balance at the time the lender forgave/cancelled the debt was less than $2 million for a couple filing jointly or $1 million for a borrower married but filing separately. Otherwise, the debt may be includable in gross income for tax liability calculations.[1]

If you award the home to one spouse, be sure to state what liabilities follow the house. For example, awarding the home does not, absent more, affect each spouse’s liability on the home mortgage. For example, in Marrow v Marrow, 118 NC App 332; 454 SE2d 853 (1995), the North Carolina Court of Appeals held that a deed to a spouse “assuming the mortgage” did not mean the spouse agreed to relieve the other spouse from liability on their home mortgage because (1) the spouse took no further action (e.g., by making full payments) and (2) the parties’ decree awarded the house to the spouse but required each of them to pay the mortgage until the house sold. Require the taking spouse to refinance the mortgage into the spouse’s name immediately.

If refinancing within the year is impracticable, impose on the spouse a continuing duty to apply for refinancing in good faith until successful and, in the interim, to hold the non-taking spouse harmless for any mortgage default and the costs thereto (e.g., interest). State who is responsible for property taxes, insurance, homeowners’ association fees and any other liabilities until the home is refinanced or sold. State what recourse the non-taking spouse has against the spouse in the event of default, such as liquidated damages, mandatory attorney fees and/or contempt.

[1] Tax liability for short sales is in addition to the tax consequences in IRC 1041 (for sales and other dispositions incident to divorce) and IRC 71 (for includability/deductibility of certain periodic payments in a divorce decree or other written separation agreement). These tax issues go beyond the scope of this article. You should contact a tax attorney and/or your financial advisor for a thorough assessment of the tax laws applicable to you. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, be advised that any federal tax advice contained in this article was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Always consult a specialist for thorough tax advice.

Nuances of Indian Dowry and Gifts

 Indian dowry is prohibited under the Prohibition of Dowry Act of 1961.

            No presumption as to ownership may be indulged in the case of wedding gifts and that not only must the expressed intention of the giver be taken into consideration, but the intention of the wedded             couple as well. In particular, gifts intended to furnish or adorn the marital residence should not be treated as personal gifts to either spouse, and in determining the ownership of such goods, consideration must be given to the origin of the gift and to the relationship of the donor to the husband or wife. Wedding gifts which are to be used and enjoyed jointly should be considered   the same as property purchased by the husband and wife jointly. Darwish v Darwish, 100 Mich App 758, 759; 300 NW2d 399 (1980)

            Indian wedding jewelry of sizable value must be treated as marital property to be divided between the spouses, as gifted to the spouses jointly, rather than the spouse who wore or received the jewelry, if the donor’s intent was to gift to the spouses jointly. Venkataraman v Venkataraman, 1987 Ohio App. LEXIS 9397; 1987 WL 19458 (2009) (over $40,000 of wedding jewelry and other gifts) held “in the Hindu ceremony…gifts, such as this jewelry, are given for the benefit of the family, and, for sake of posterity).

            It is customary in the Hindu religion to give gifts of gold, jewelry and coins to the newly married copy as a sign of prosperity and to benefit the family. Venkataraman v Venkataraman, 1987 Ohio App. LEXIS 9397; 1987    WL 19458 (2009) (over $40,000 of wedding jewelry and other gifts) held “in the Hindu ceremony…gifts, such as this jewelry, are given for the benefit of the family, and, for sake of posterity).

In other words, you'll have to analyze the donor's intent -- not an archaic law -- to determine who gets those gifts.

The KISS Principle Makes YOU Stupid...

            Let’s stay you’re comfortable settling (rather, you think) your case with a clean split – you keep your retirement, your spouse keeps his, and you don’t have to get tied up in those mysterious orders s lawyers call QDROs that take several months to process. KISS, keep it simple, stupid, you think. You find out later – even a day later – that he has twice as much set aside for retirement as you.

            So, if you settled your case without finding out how much of your spouse’s retirement you walked away from, can you get out of it later?

            Probably not.

            Family courts generally approve negotiated property settlement agreements, even when those are not equitable.[1]  The family court is bound by property settlements reached through negotiation absent fraud, duress, or mutual mistake.[2] In Lentz, for example, the court stated, “we will not rewrite or abrogate an unambiguous agreement negotiated and signed by consenting adults by imposing a ‘reasonable’ or ‘equitable’ inquiry on the enforceability of such agreements.”[3] Rather, in reviewing a property settlement agreement, the family court must consider whether the agreement was entered into and signed freely, voluntarily, and understandingly, not whether the settlement is equitable.[4] This standard applies whether the settlement agreement is in writing or placed orally   on the record in open court.[5]

            Settlement agreements that occur while a case is pending are generally enforced, absent fraud, duress, coercion or an agreement contrary to public policy, meaning not one the family court would not accept but one that shocks the conscience.

            Pursuant to Michigan Court Rule 2.507, settlement agreements are binding and enforceable when they are subscribed in writing by the party (or agent) against whom enforcement is sought or recited in open court, on the record. The court rule broadly states, moreover, that we need only produce “evidence of that agreement” the parties reached. The rule provides, in pertinent part:

MCR 2.507  Conduct of Trials . . .(G) Agreements to Be in Writing. An agreement or consent between the parties or their attorneys respecting the proceedings in an action is not binding unless it was made in open court, or unless evidence of the agreement is in writing, subscribed by the party against whom the agreement is offered or by that party’s attorney.[6]

Importantly, as here, if a party alleges that his or her consent was influenced by severe stress, the settlement will nonetheless be upheld unless the circumstances were so severe that he or she actually lacked legal capacity to contract -- that is, he or she had no reasonable perception of the nature or terms of the agreement.[7] Furthermore, whereas here, the party alleges mistake, the mistake must be mutual.[8] When parties enter into settlement agreements, they give up the right to further investigation on those issues to which they settled, and making a mistake in doing so, nor having a change of heart at having done so, is not a basis to set aside the agreement.[9]

            Unless your spouse committed fraud or you both did not know how much retirement he had set aside, you’re stuck with the settlement you struck.

            The KISS principle – keep it simple, stupid – can really make you stupid if you settle your case without knowing all of the details.

[1]               Buzynski v Buzynski, 369 Mich 129; 119 NW2d 591 (1963).

[2]               Lentz v Lentz, 271 Mich App 465; 721 Nw2e861 (2006).

[3]               Id.

[4]               Id.

[5]               Howard v Howard, 134 Mich App 391; 352 NW2d 280 (1984).

[6]               MCR 2.506(G). This rule is applicable to trials,  hearings and settlements.

[7]               VanWagoner v VanWagoner, 131 Mich App 204; 346 NW2d 77 (1983).

[8]               Villadsen v Villadsen, 123 Mich App 472; 333 NW2d 311 (1983).

[9]               Id.

PROPERTY DIVISION BASICS

            The family court’s tasks when dividing marital property are (1) to determine whether the marriage is a short-term marriage, in which case the spouses should, usually, return to their pre-marriage status; (2) for a long-term marriage or a short-term marriage in which the spouses obtained a significant property or debt, to identify marital property, value the property and equitably divide that property; (3) to determine whether   any needs-based or significant contribution-based exceptions justify an invasion ofone’s separate property for the other; and, finally, (4) to determine whether any exception to equitable distribution, including fault, discovery sanctions, litigation sanctions, and unclean hands, counsel an unequal division or forfeiture.[1] The spouse seeking to include property in the marital estate must prove a reasonably ascertainable value.[2]

A.        EQUITABLE DISTRIBUTION

            For long-term marriages, or in a short-term marriage in which the spouses have acquired together a significant item of property or debt, the family court must, usually, equitably divide the items acquired between the date of marriage and the date of divorce according to the Sparks factors, which include the duration of the marriage,                    the contribution of each party to the marital estate, their age, health and status, their needs and circumstances, their earning abilities, past relations and conduct, and general principles of equity.[3] However, “equitable” does not mean “equal,” and, although the standard is usually to divide marital property congruently, the family court should not divide property if one of the exceptions to equitable distribution applies.[4]

            1.         IDENTIFY

            The first step in the equitable distribution analysis is to identify the property subject to equitable distribution. This includes all property the parties obtained during   the marriage “by reason of the marriage,” which excludes gifts and inheritances unless comingled and passive appreciation of separate property.[5] Separate property                  that appreciated actively due to the owning spouse’s efforts during the marriage             the family court may also divide, but only to the extent of the appreciation proven.[6] 

2.         VALUE

            A common misconception is that the family court must value property as of      the date of divorce, as that is the ending-date used to identify marital property. Not so.       The family court has considerable discretion to value property as of some other, appropriate date, such as the date of separation or the date of filing for divorce.[7] Determining the appropriate date, the family court should consider factors such as when the spouses physically separated, whether and to what extent the spouses continued to commingle their assets and how financially independent or dependent they were.[8]  For example, if spouses have obtained separate residences and paid their own expenses, whether through support orders or otherwise, the date of separation is appropriate.[9]

3.         DIVIDE

            Finally, unless an exception applies, the family court must divide the property and debts. There is no standard formula or rigid rule for property distribution, but         the distribution must be equitable, i.e. “fair and equitable under all the circumstances.”[10]  This standard means that, absent a clear reason for an unequal division, the distribution of marital property must be “roughly congruent.”[11] When making this determination,        the family court must consider the applicable Sparks factors, which are the duration of the marriage, the contribution of each party to the marital estate, their age, health and status, needs and circumstances, their earning abilities, the past, conduct, and equity.[12]

C.        EXCEPTIONS

            Even if the family court finds property to divide, equitable distribution should not apply if the court finds one of the following exceptions, in addition to equity.

            1.         SEPARATE PROPERTY INVASION

            There is a strong presumption that each spouse should at divorce retain his or her separate property.[13] The spouse seeking to invade separate property bears the burden of proving the spouse needs the property, and the other is financially able to give it, and/or that the spouse significantly contributed to the property’s increase in value.[14] It bears repeating that the spouse must significantly assist in the acquisition or growth of the other’s separate property; even then, the spouse is only entitled to “compensation” that should be no more than necessary to compensate the spouse for that contribution.[15]

            2.         DISCOVERY SANCTIONS

            A family court may order sanctions for failure to comply with discovery. [16]Sanctions range from prohibiting a party form introducing a witness to outright dismissal of the entire action.[17] Severe sanctions, such as dismissal, “should be employed when there has been a flagrant and wanton refusal to facilitate discovery and not when failure to comply with a discovery request is accidental or involuntary.”[18]

            We usethe following factors to determine the sanction: (1) whether the violation was willful or accidental; (2) the party’s history of refusing to comply with discovery;     (3) the prejudice to the other party; (4) the time before trial; (5) whether there is a history of engaging in deliberate delay; (6) the degree of compliance with other orders;  (7) an attempt to timely cure the defect; and (8) what sanction serves justice.[19]

            3.         LITIGATION SANCTIONS & DISSIPATION

            A family court may also deny a spouse a share of marital property if that spouse has committed wrongs during the course of litigation, whether discovery or otherwise. For example, in Olmstead v Olmstead,[20] the family court properly sanctioned a wife for committing perjury about the nature and extent of her assets during trial.

            Similarly, and as a final exception example, the family court should sanction a spouse for dissipating assets during the marriage. When one spouse dissipates marital assets without the other’s fault, the value of the dissipate asset may be included in the marital estate.[21] For example, in Zamfir v Zamfir,[22] the family court treated over $200,000 of marital funds as if they were still available, and ordered the spouse who spent it without the other’s consent, one-half the value, a $10,000 payment. In other words, a spouse who dissipates marital assets in an effort to avoid dividing them will shoulder the burden, because the family court will still consider the value of those gone assets.[23]

[1]           See, e.g., Reeves v Reeves, 226 Mich App 490; 575 NW2d 1 (1997).

[2]           Wiand v Wiand, 178 Mich App 137; 443 NW2d 464 (1989).

[3]           Sparks v Sparks, 440 Mich 141; 485 NW2d 893 (1992).

[4]           Id.

[5]           Reeves v Reeves, 226 Mich App 490; 575 NW2d 1 (1997).

[6]           Korth v Korth, 256 Mich App 286; 662 NW2d 111 (2003).

[7]           See, e.g., Booth v Booth, 194 Mich App 284; 486 NW2d 116 (1992).

[8]           See, e.g., Kurz v Kurz, 178 Mich App 284; 443 NW2d 782 (1989).

[9]           Id.

[10]          See, e.g. Sparks v Sparks, 440 Mich 141; 485 NW2d 893 (1992).

[11]          Jansen v Jansen, 205 Mich App 169; 517 NW2d 275 (1994).

[12]          Sparks, 440 Mich 141; 485 NW2d 893(1992).

[13]          McNamara v Horner, 255 Mich App 667; 662 NW2d 436 (2003).

[14]          Reeves v Reeves, 226 Mich App 490; 575 NW2d 1 (1997).

[15]          Id.

[16]          MCR 2.313 and related caselaw.

[17]          MCR 2.313(B)(2)(b), (c).

[18]          Traxler v Ford Motor Co., 227 Mich App 276; 576 NW2d 398 (1998).

[19]          Dean v Tucker, 182 Mich App 27; 451 NW2d 571 (1990) (citations omitted).

[20]          340 Mich 156; 65 NW2d 313 (1954).

[21]          Everett v Everett, 195 Mich App 50; 489 NW2d 111 (1992).

[22]          92 Mich App 170; 284 NW2 517 (1979).

[23]          Thames v Thames, 191 Mich App 299; 477 NW2d 496 (1991).

SLOPPY DRAFTING LEADS TO LIFETIME ELECTIONS - THE HUDSON CASE

Generally, retirement benefits that accrued during the marriage are divided equally between ex-spouses. This includes defined benefit plans, such as pensions, defined contribution plans, such as 401(k)s, and many military non-disability plans.  There are exceptions for short-term marriages and marriages with particularly, and financially-connected, serious circumstances of fault (think: your spouse gambled his life savings away and now wants half of yours).

By Michigan statute, all benefits, cost of living adjustments, survivor benefits, early retirement adjustments and other “bells and whistles” (what we call ancillary and component benefits) are divided in the same portion as the basic benefit awarded. This basic benefit is usually a percentage determined by the years of the marriage against the years of employment, divided by two (or, the coverture facture).  For this reason, many judgments of divorce will simply read that the benefits are divided “including all benefits as set forth in MCL 552.505” (the retirement statute).

BUT this statute does not address how the benefits are divided, only which. If the judgment is silent, each ex-spouse alternate payee in the plan (the non-worker spouse) may make whatever election he or she wants. This is particularly problematic for lifetime elections that limit the participant spouse (or worker-spouse)’s ability to designate beneficiaries or make her own payment elections.

In Hudson v Hudson, _____ Mich App _____, Published Opinion of the Court of Appeals, Docket No. 322257 (Jan 7, 2006), the Court of Appeals held that because the judgment of divorce did not preclude election of a lifetime benefit, the ex-spouse was allowed to elect it.

“The parties were bound by the language of the judgment of divorce, and that the judgment of divorce did not preclude defendant’s election.” The fact that “they may have neglected or chosen not to address” the issue of their rights relative to each other’s pension plans “at the time of the judgment of divorce does not afford a basis for subsequently contesting whether the selection of an option afforded by the EDRO is contrary to the terms of the judgment of divorce. It is not. Nor does it afford a basis for finding on grounds of ‘equity’—as plaintiff argued—‘an implied term of th[e] settlement agreement’ (and therefore of the resulting judgment of divorce).”

For these reasons, it is imperative to be clear in your judgment not only what benefits are to be divided, but how. An attorney well versed in family law is essential here. Find someone who dabbles in family law and uses form judgments, and you will very likely find yourself like the unhappy ex in Hudson.

MAJOR CHANGE for Spousal Social Security Benefits -- and it ain't good for the non-worker spouse

The biggest Social Security changes in 30 years are in effect immediately and directly impact all divorcing people in the U.S. Social Security rules for claiming benefits, especially spousal benefits, have been dramatically changed by the Bipartisan Budget Act of 2015, which was signed November 2, 2015. These changes became effective immediately, and everyone is scrambling to understand them. -

In the past, ex-spouses were able to anticipate making independent decisions regarding when they would file for Social Security benefits. Being divorced, they each had their own individual qualifications to meet for filing a claim: age, marital status, benefit entitlements, etc. If an ex-spouse wanted to file a claim based on a worker’s benefit, the ex-spouse could do so without consideration of the worker’s filing status. That has changed. Under the new rules, a worker must be actively collecting benefits in order for an ex-spouse to be able to collect a spousal benefit based on the worker’s benefit.

This is a significant change. Perhaps it is in the worker’s best interest to delay benefits until age 70 so as to maximize their own benefit. That means the ex-spouse must also wait until the worker collects benefits. However, there is no monetary benefit to the spouse to wait, since their benefit will not increase beyond the worker’s Full Retirement Age (FRA) benefit, which may have been at the worker’s age 66. The spousal (or ex-spousal) benefit is equal to 50% of the worker’s FRA benefit, adjusted for reductions if the ex-spouse is under their own FRA.

Another aspect of the new rules are that an ex-spouse is completely at the mercy of the worker spouse regarding the availability of benefits. The worker spouse can actually block the ex-spouse from receiving much needed benefits by simply not collecting benefits themselves. This is not a favorable situation, given the continued animosities that occur between some ex-spouses

Thus, when negotiating your settlement, always discuss social security benefits, at what age the worker spouse intends to collect, and financial consequences if that worker spouses opts not to or blocks the other, now ex, spouse altogether.

Mortgage Traps for the Unwary

Blissful, young newlyweds on a let’s-build-a-nest high, you and your spouse purchased a half million dollar house with zero down on a thirty year mortgage with a balloon payment. Ten years later, the bliss has soured and you both want out, but the house is worth $300,000 and you’ve barely made a dent in the principal. So, your house is “underwater.” Now what?

If you are facing foreclosure. If you cannot repay your mortgage loan, your lender (or, more likely, the lender’s assignee) may begin the foreclosure process pursuant to the terms of your mortgage and federal and state law. If you face a foreclosure, contact your lender and request a meeting immediately. At the meeting, discuss what options you have to delay the foreclosure. These may include forbearance, refinancing, a longer redemption period in the event of foreclosure, a new payment schedule, and a short sale. Be proactive. Do not wait for a foreclosure notice to contact your lender or hope that your divorce will shift the debt to your spouse. Usually, it will not. Explain your legal and financial problems to your lender, and ask for reprieve. Bring financial documents, such as bank account statements and paystubs, to substantiate your financial predicament. The lender may or may not be able to sue you to collect any deficiency between the bid at the foreclosure sale and the outstanding balance on your loan. The terms of the loan will specify whether the loan is a recourse loan, rendering you liable for the deficiency, the notice, if any, required before beginning the foreclosure process, and any other rights you have independent of federal and state law to stop the foreclosure. Request a copy of your entire mortgage and note file. Read it thoroughly and make sure your lender is following every duty to a T (Was notice proper? Do you have an opportunity to cure the default? Is the note a recourse note?) Most lenders are willing to work with you if you are sincere and in good faith negotiate a repayment plan because lenders would rather have an income stream than an empty house.  

If you can negotiate a short sale. In a short sale, the lender agrees to accept less than the borrower’s mortgage indebtedness when the borrower sells the property to a third party in an arm’s-length transaction. Lenders usually agree to short sales to avoid the costs of foreclosure and having a large inventory of empty, unsellable homes. However, short sales come with their own costs. First, as a matter of contract law, a lender may pursue a deficiency if the short sale approval is not conditioned on the lender waiving the deficiency. Therefore, be sure to condition any short sale plan submitted to your lender for approval on the lender waiving any deficiency. Second, the short sale approval process is long and tedious; you and your potential buyer must be willing to wait. Large lenders have short sale packets for use. They include forms for, inter alia, comparative market analyses and brokers’ price opinions, hardship letters, financial disclosures, authorizations to release information, listing agreements, and proposed sale terms. If your lender does not, you will have to obtain these materials. A real estate agent and/or a lawyer experienced in real estate law should be able to assist you. Third, if the lender does approve the short sale and waive any deficiency, the forgiven debt may trigger income tax liability. The lender must send the borrower Form 1099-C, Cancellation of Debt, to indicate the amount of debt forgiven.[1]

If you deed the house to one spouse. If your court awards you or your spouse your home, the award does not, absent more, affect each spouse’s liability on the home mortgage. Because the lender is not a party to your divorce, the court cannot adjudicate the lender’s rights to repayment. Careful drafting in the divorce decree and all deed documents is an absolute must to avoid unintended liability. For example, in Marrow v Marrow,118 NC App 332; 454 SE2d 853 (1995), the North Carolina Court of Appeals held that a deed to a spouse “assuming the mortgage,” absent more, did not mean the spouse agreed to relieve the other spouse from liability on their home mortgage because (1) the spouse took no further action (e.g., by making full payments) and (2) the parties’ decree awarded the house to the spouse but required each of them to pay the mortgage until the house sold. To protect the non-taking spouse, the decree should require the taking spouse to refinance the mortgage into the spouse’s name immediately; if that is impracticable, the decree should impose on the spouse a continuing duty to apply for refinancing in good faith until successful and, in the interim, to hold the non-taking spouse harmless for any mortgage default and the costs thereto (e.g., interest or penalties). The decree should specify each spouse’s responsibility for property taxes, insurance, homeowners’ association fees and any other liabilities until the home is refinanced or sold. The decree should specify what recourse the non-taking spouse has against the spouse in the event of default, such as liquidated damages, a default judgment equal to the amount of the mortgage or other liabilities the non-taking spouse has to pay, mandatory attorney fees and/or contempt.

[1] Tax liability for short sales is in addition to the tax consequences in IRC 1041 (for sales and other dispositions incident to divorce) and IRC 71 (for includability/deductibility of certain periodic payments in a divorce decree or other written separation agreement). These tax issues go beyond the scope of this article. You should contact a tax attorney and/or your financial advisor for a thorough assessment of the tax laws applicable to you. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, be advised that any federal tax advice contained in this article was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Always consult a specialist for thorough tax advice.

I BOUGHT THIS HOME BEFORE OUR MARRIAGE, SO IT'S MINE -- RIGHT?!

You owned your home prior to your marriage. You wrote the check for the down payment. You made every mortgage payment, kept the property taxes current, paid the utilities, funded the remodeling, even during your marriage. Only your name is on the title. So, the home is yours, right? After all, your spouse merely moved into it, your spouse’s name is not on the title, not a dime from your spouse went to it.

Not necessarily. “Title” to real estate is not the same as a “marital interest” in real estate. Title is the link between the person who owns property and the property itself – that is, it is the legal right establishing ownership. Marital interest, on the other hand, is a right to a share of the property. This may be a legal interest or an equitable interest depending on the statutes in your state. This marital interest is why, for example, a husband who is the “sole owner” on his home mortgage or deed can end up having to pay his wife half the value of home’s equity at divorce.

What rights you and your spouse have to your home and the property inside depend on the facts of your case. If you are divorced, then your divorce decree should state those rights. If you are separated but not divorced, you are in a precarious position. If you deny your spouse access to the house, you may deprive her or him of other personal property (this is a crime in some states) or paint yourself as the unreasonable spouse bent on doing no good in court. This tarnishes your credibility. But, your spouse may encumber property or sell it and conceal the profits if you let him or her inside.

Even if you owned your home prior to your marriage, your spouse will raise three arguments to take a share of it when you divorce:

1. The property is comingled. Commingled property is assets and debts that were nonmarital but which were traded in to acquire new property during the marriage, repaired or enhanced during the marriage with marital funds, or, in some states, treated as marital property by written agreement or use during the marriage. A good example is a classic car purchased as a bachelor that you remodeled during your marriage with money you earned at work and deposited into a joint bank account. The statutes and case law in your state will dictate the extent, if any, your court will separate the marital from the nonmarital components of the property. Some courts refuse to do any separating, reasoning that the nonmarital property lost its status forever as soon as marital property mixed with it. Other courts will attempt separate valuations if the evidence presented is sufficient. A skilled attorney and expert testimony from an appraiser are essential here. The valuation is more difficult if the period of time of the comingled status is lengthy or the circumstances in which the property became comingled are complex. Do a cost-benefit analysis with your attorney to determine whether the fees you spend to prove the separate, nonmarital valuation are worth the anticipated value you will retain.

2. The property appreciated during the marriage. Appreciation is the property’s increase in value. During the marriage, the appreciation may be passive or active. Passive appreciation is the increase in value due to the surrounding circumstances, not your conduct. Active appreciation, on the other hand, is the increase in value due to your contribution, such as remodeling, reinvesting, and so forth. In most states, passive appreciation is not marital property. However, active appreciation due to one or both spouse’s involvement during the marriage, financial or otherwise, is. For example, in Reeves v Reeves, 226 Mich App 490; 575 NW2d 1 (1997), the Michigan Court of Appeals held that real estate equity that accumulated before the parties’ marriage in a home and several rental properties the husband owned was the husband’s nonmarital property because he had supplied the down payment and the mortgage payments, but the real estate equity that accrued during the marriage was marital property subject to division because it was attributable to the parties’ use, remodeling and management during the marriage. In addition, the entire equity of a rental property the husband purchased prior to the marriage was his nonmarital property because the appreciation was “wholly passive,” due to neither his nor his wife’s activities during the marriage.

3. The property is invadable. Invadable property is one spouse’s property the court nonetheless divides because the facts and circumstances of the case, as applied to the law for invasion, justify division. Each state has a different invasion law, so be sure to research the laws in your state to determine what, if any, invasion will occur in your case. In general, however, the laws allow invasion if the other spouse “needs” a share of the property due to an inequitable division of marital property or other financially dire circumstances and/or the spouse contributed to the property’s acquisition, use or maintenance, such as by helping to remodel it.  

If you are concerned about your rights to pre-marriage property, you should carefully document what property you believe is yours, when you acquired it, what you did with it during your marriage (encumbered it, remodeled it, used it together, etc), and your guesstimated value. This information will be helpful as you negotiate your divorce settlement. Be prepared to address the comingled, appreciated and invadable arguments. Create a timeline for the property. Obtain appraisals to support your arguments. Most of all, do a cost-benefit analysis to determine whether the attorney fees and costs you incur to keep your property yours is worth the value, financial and sentimental value alike.

HE'S FINE, HE HAS A PRENUP -- OR NOT?

US Weekly has reported that Tiger Woods and now ex-wife Elin Nordegren had a prenuptial agreement worth $300 million, which would make their divorce the most expensive in celebrity history, followed by Michal Jordan’s divorce from Juanita Jordan ($150 million) and Greg Norman’s from Laura Andrassy ($128 million).

Easy, right? Everyone knows what they are getting out of the divorce...

But is it true the prenuptial agreement will prevail if the couple does divorce? Not necessarily.

Prenuptial agreements and postnuptial agreements have been authorized in most states for quite some time. Once seen as an inducement to divorce, and thus a detriment to marriage, now most states treat them as a strength for marriage. As the Michigan Supreme Court explained, the agreements “allow couples the opportunity to ensure predictability, plan their future with more security, and, most importantly, decide their own destiny.” They are contractual, but they are not automatically enforced as written as most contracts are.

You should consult a lawyer in your state to learn the rules applicable to your case, but in some states a prenuptial agreement is unenforceable if (a) it was obtained through fraud, duress, mistake or misrepresentation, or though non-disclosure of a material fact; (b) it was unconscionable when the parties executed it; or (c) the facts and circumstances since they executed it have so changed that its enforcement would be unfair and unreasonable. The first two may be obvious, but for even lawyers the third is not. Essentially, the court can give a “second look” at the parties’ current situation and decide not to enforce the prenuptial agreement. This would be likely, for example, if one spouse contracted cancer and has extraordinary medical bills that neither spouse contemplated at the time of executing the agreement.

Nor are postnuptial agreements always enforced. Postnuptial agreements have the same general purposes as prenuptial agreements, but the parties make them after they are married. Those made when the parties intend to settle their divorce are valid and, in fact, are a favored way to resolve disputes. They are subject to general contract principles and are enforced absent fraud, duress or mutual mistake. Those made when the parties intend to stay together, however, may not be enforceable. In Michigan, for example, postnuptial agreements that dictate the terms of a divorce made when the parties are not divorcing are void on their face as against public policy because they “promote divorce.” See, e.g., Wright v Wright, 279 Mich App 291 (2008) (per curiam op).

This may seem inherently at odds with the treatment for prenuptial agreements, and many lawyers agree. Nevertheless, that is the state of the law.

If you have or are considering a prenuptial agreement or a postnuptial agreement, you should consult a lawyer to learn more about the law applicable to your specific circumstances.

RECEIVERSHIPS - IN EXTREME CASES, PAYING SOMEONE TO DO WHAT YOUR EX OUGHT TO HAVE DONE

            A receiver is a court-appointed expert (usually, but not always, a lawyer) responsible for managing assets to (a) preserve them for a later division by the family court or (b) manage them consistently with a judgment.

            In considering a proposed receiver, the court may, but need not, defer to the petitioning party’s selection. Even in a case where the appointment is stipulated to or uncontested, the court has the final say. By law, “the court shall appoint the receiver nominated by the party . . . unless the court finds that a different receiver should be appointed.” After the court makes an “initial determination” that a different receiver should be appointed, it must “state its rationale” for the appointment, taking into account the same criteria that the parties were required to use in their receiver proposal.

            Qualifications - The receiver court rule, MCR 2.622, requires a receiver to have “sufficient competence, qualifications, and experience to administer the receivership estate.” The party seeking appointment of a receiver must describe how the proposed receiver is qualified according to specified factors, including experience in the operation or liquidation of the type of assets to be administered, relevant business, legal and receivership knowledge, and the ability to obtain a bond. The amended rule also lists 10 provisions addressing when a proposed receiver is disqualified from serving

            Compensation- The receiver court rule also contains a provision dealing with the manner in which receivers are to be compensated. The order of appointment must identify “the source and method of compensation of the receiver,” and the order must provide that interim compensation may be paid to the receiver, but that all compensation is “subject to final review and approval of the court.” A receiver must file an application for fees with the court, and if no objection is filed, the application may provide for the fees to be deemed approved after the seven day objection period passes.

            A family court should not appoint a receiver absent a party’s failure to comply with its orders and, even then, in only the most extreme cases. The purpose of appointing a receiver is to preserve property and to dispose of it under the order of the court. A receiver should only be appointed in extreme cases. While a party’s past unimpressive performance may justify the trial court in appointing a receiver, the party’s compliance with orders, should lead the family court to decline a receivership. Reed v Reed, 265 Mich App 131, 161-162; 693 NW2d 825 (2005) (quotation marks and citations omitted); see also Cohen v Cohen, 125 Mich App 206, 214; 335 NW2d 661 (1983) (noting that “[t]he appointment of a receiver may be appropriate when other approaches have failed to bring about compliance with the court’s orders”).

Is "Half of Everything" Really Half of EVERYTHING?

The short answer is, NO!

The longer answer: The most common misconception about property division in divorce is you have to give your spouse half of “everything.” This is so, I think, in part because it is an easy number to remember – half – and also in part because, for most marriages, it is not easy to distinguish a “marital asset” (that you do divide) from a “separate asset” (that you do not divide, absent special circumstances). Over time, separate assets get used, traded-in, refurbished, spent, shared, combined with other assets, etc., etc. They lose their character as “mine” and become “ours.”

And so my new clients often come to my office with lists of property, telling me they’ve “already figured it out” – “it” being how they want their property divided, how they think it is supposed to be divided. Half the plates, half the holiday decorations, half the photos. That is all fine. Those are items created, acquired, bought and/or used during the marriage. But then I see items like “half the pension.” Well, wait a minute – even for the years you were not married?    Or things like “half the money we [really, I] got from Aunt Mae’s will.” Wait –where is that money, and did your spouse have access to it? 

These could be separate assets. I tell them:

Mostly, the divorce court will divide the marital estate. The marital estate includes marital assets you, your spouse, or both of you created, bought, used, etc., during the marriage. The same is true for debt. However, there are always exceptions. For example, inheritances and gifts to one spouse  are generally non-marital even if acquired during the marriage. Spending that did not benefit the marriage partnership (e.g., a trip with a boyfriend) is generally separate debt. As a final example, in “community property states” (a minority), so too are items you and your spouse identify as non-community property, usually in writing. What we are looking for are assets and debts during the marriage that do not fall into one of the exceptions. So, “everything” is really not “everything” at all – it is generally what you acquired between the date of your marriage and the date of your divorce or separation, unless excepted.

But, again, there are exceptions for that time period, too. Sometimes, the property you think is yours has turned into marital property. There are things you can do to keep your property yours:

First, do not comingle it. Commingled property is assets and debts that were non-marital but which were traded in to acquire new property during the marriage, repaired or enhanced during the marriage with marital funds, or, in some states, treated as marital property by written agreement or use during the marriage. A good example is a classic car purchased as a bachelor that you remodeled during your marriage with money you earned at work and deposited into a joint bank account. Well, why not simply separate the pre-marriage value, right? Some courts refuse to do any separating, reasoning that the non-marital property lost its status forever as soon as marital property mixed with it. Other courts will attempt separate valuations if the evidence presented is sufficient. A skilled attorney and expert testimony from an appraiser are essential.

Second, do not invest in it, repair it, rent it or do anything but leave it. Avoid active appreciation. Appreciation is the property’s increase in value. During the marriage, the appreciation may be passive or active. Passive appreciation is the increase in value due to the surrounding circumstances, not your conduct. Active appreciation is the increase in value due to your contribution, such as remodeling, reinvesting, and so forth. In most states, passive appreciation is non-marital property. However, active appreciation due to one or both spouse’s involvement during the marriage is.

Third, give your spouse a hefty share of marital property to keep it. If your spouse has a sizable share of property, it is less likely yours is invadable. Invadable property is one spouse’s property the court nonetheless divides because the facts and circumstances of the case, particularly one spouse’s needs, justify division. Each state has a different invasion law, so be sure to research the laws in your state to determine what, if any, invasion will occur in your case. In general, however, the laws allow invasion if the other spouse “needs” a share of the property due to an inequitable division of marital property or other financially dire circumstances and/or the spouse contributed to the property’s acquisition, use or maintenance.  

Finally, keep records! If you want to prove that “everything” your spouse says is half hers is not much at all, you need to prove it with admissible records of who owned or owed what when. Convincing evidence. Get titles, security agreements, old photos, loan agreements, appraisals, stock certificates, your broker’s account records, and any other record that tends to prove the property is what you say it is, yours. Testimony about what you remember buying and never, ever, ever using during your marriage, when your spouse staunchly says the opposite, is wholly unconvincing.

For example, I have a client who paid over $100,000 for a pool league and tournament business on mostly verbal agreements and handshakes, a few chicken-scratch notes memorializing the deal. This is every lawyer’s nightmare. He purchased the business when it was not turning a profit and intended to baby it with personal promotions in small bars, restaurants and hotels across the state into profitability. He did. The problem is, then he got married. His wife was already pregnant and unemployed. She offered to do the bookkeeping for the business at home – putting flyers together for tournaments, keeping track of who won what tournaments, collecting dues, renting pool tables, etc. She did everything from home. When the economy tanked, just a few months after their marriage and his son’s birth, he took a construction job up state to support the family. He returned home just a few weeks later to check in, with money. To his dismay,    she changed the locks, filed for divorce and obtained an order allowing her exclusive rights to manage “their” business, a business she claims he offered one-half of to her if she managed it. There is not a single document evidencing that offer. There is not a single document evidencing his 100% ownership, either. Moreover, because she contributed “sweat equity,” according to the judge, the business has become inextricably commingled with marital assets (labor) and is now a marital asset subject to division. The division the judge has in mind? 100% ownership to the wife because the business is her sole source of income. We are challenging the ruling, but, as I said, it is every lawyer’s nightmare to prove or disprove an agreement with no documentary evidence.

Add that to the wife’s contributions to the business’s growth, something a business expert must now determine, and this client’s once separate property is tossed into the divorce court as a potential piece of property to divide in an expensive -- no, very expensive -- trial.

But the truth is, this is common in divorces with property disputes. And that is what makes the distinction between a marital asset and a separate asset difficult.

MORTGAGE WARS AND OTHER FIGHTS THAT HURT YOUR CREDIT: HOW TO PROTECT YOUR CREDIT SCORE

As the first of the month approached, the war between Bill and Sue escalated. Their divorce was not amicable by any means, but, usually, their animosity was a dull roar over who would take the pictures, the furniture and the motor boat– until the mortgage came due.  They lived in the same house, Bill in the basement with the dog and Sue everywhere else. Bill could not venture upstairs to Sue’s space, and she could not trudge downstairs to his. But when the mortgage came due, neither wanted to pay for any of it – not their own space, and certainly not the other’s.

So, they stalled. The first day of the month would pass with no payment. Then the second and the third. By the fourth day of the month, Bill would send an e-mail “reminding” Sue to make the payment, and Sue would leave a note on the basement door “reminding” him to do the same, with a sarcastic “DEAR” underlined angrily in black pen. By the sixth day of the month, they unleashed their lawyers. First there were phone calls accusing each other’s client of ill will. Then there were e-mails, letters and faxes. Then the seventh, eighth and ninth days of the month would pass. Still no payment.

On the tenth day of the month, one spouse always caved in: Bill. He would make the payment at lunch, then, after work, mutter past Sue in the kitchen on his way to the basement grumbling an explicative or two and anticipating the day he would no longer be tied to her.  If he ever wanted to move out of that basement, he had to protect his credit.

Joint debt is a large source of contention in divorce, second only, in my experience, to children.   What seemed like a good idea during the marriage --  that mortgage to buy a bigger home or credit card with a secondary cardholder so both of you could buy groceries and pay bills, for example – feels like the biggest mistake ever during divorce. Inevitably, one spouse insists the other pay, or cannot pay, or simply hoards money elsewhere and refuses to pay. If neither pays, well, you know what happens next: a derog on the credit score.

Join that with a hefty legal bill, a mortgage to refinance, car loans and student loans and personal loans to pay, and your credit score will crash and burn, taking your pocketbook and your sanity along with it and making you crazier than you were during your marriage and divorce.

How can you protect your credit score?

Before Your Divorce

Before your divorce begins, gather your records, find out who owes what, and set guidelines for who pays which debts, when and how. This is your first step and the most important you will take, financially, during our divorce. You must have a frank, open discussion with your spouse about your finances – it is easy for the spouse left in the dark to think the other is hiding money, which leads to the inevitable wild accusations, threats from attorneys, subpoenas for bank records, and thousands spent just to prove you really were, in fact, in debt and had no bank account worth millions in Sweden. (If you think this is incredible you either (1) are not divorcing or (2) are one of the luck few who have not faced these accusations.)

If you maintain a filing cabinet or an e-file for your bills, then start there. Make a copy of each bill (they have a way of “getting lost” or snatched for your spouse’s attorney). Create a spreadsheet that details each creditor, outstanding balance, minimum payment and how to make it, due date, and reason for the debt. Decide which debts you can pay off before you divorce (e.g., a clothing store charge card) and which you can do without (e.g., a monthly gym membership) during your divorce. If you and your spouse are one of the few amicable divorcing couples, use the spreadsheet to negotiate who will assume which debts.

If you are like most people, however, your records are not so immaculate and well-kept. You should order a credit report to determine which debts are in your name, and your spouse should order one, too, for comparison. You may obtain a free credit report each year online at www.annualcreditreport.com. You must supply identifying information, like your Social Security Number, and it will be tempting to order your spouse’s at the same time. Do not. It is a federal crime to order someone else’s credit report without the person’s authorization, even your spouse’s, and you face fines and jail time if you do.  See the Fair Credit Reporting Act, 15 U.S.C. 1681n and 15 USC 1681n.  

When you have all of the debts and who pays what listed, consider making your payment plans enforceable. Do not expect your spouse to pay one-half the mortgage or her own car loan willingly.      You are getting a divorce for a reason, after all. Consider memorializing your payment plan in a writing signed by both spouses and their attorneys and submitted to the judge for entry as a temporary order.      An order is a mandatory directive for each spouse to pay particular debts, and it carries with it the threat of contempt. If your spouse refuses to pay her share of the debt, for example, you may ask the judge to hold her in contempt, with all of the fines and punishment and attorney fees contempt entails, to compel her to make the payment and/or to reimburse you if the creditor badgers the payment from you.

However, the same is true for you. Therefore, if your finances are precarious and you will not have the funds to pay your share, you should forgo a temporary order in exchange for (1) a serious consultation with a bankruptcy attorney and/or (2) a prompter property settlement.

When You Divorce

When you divorce, negotiate your property settlement (if you settle your case) or request an order (if you try your case) that reduces the number of joint debts and has serious consequences when one ex fails to pay the joint debts that remain.

If you and your spouse cannot pay off joint debt, transfer as much as possible to the name of the spouse assuming the debt. For joint credit cards, make use of those credit card offers with the zero balance transfers and low introductory interest rates – the junk mail you normally toss out with yesterday’s news – to transfer the debt to individual credit cards. For credit cards with joint debt in just one spouse’s name, award the entire balance to that spouse and credit the spouse, if needed, with an offset of marital property (maybe you keep your entire retirement account, for example, and assume liability for the MasterCard you used to remodel your kitchen). For debt secured by property (e.g., a car loan), award the debt to the spouse taking the property. For other joint debts, require the spouse to seek refinancing ASAP; this might be a conversation you have together with a financial advisor.

If you cannot transfer joint debt to one spouse’s name, be sure your divorce decree specifies,  in  meticulous detail, each spouse’s responsibility toward the debt. The spouse taking the debt should have a continuing obligation to pay the debt and/or seek refinancing diligently and in good faith. The spouse should also have the duty to hold the other spouse harmless (meaning she will reimburse him) for any nonpayment or other liability that spouse incurs for the debt. The relieved spouse should have a right to inspect all records for payments and refinancing. Include incentives for the taking spouse to pay the debt on time. These could include actual attorney fees and costs if the other spouse has to enforce the decree for nonpayment, liens against property awarded to the taking spouse until repayment, an automatic wage assignment in the event of nonpayment and/or a requirement to maintain life insurance sufficient to pay for the debt until repayment.  

After Your Divorce

After your divorce, do not assume you are totally free from the debt your spouse assumed.

A divorce decree that requires one spouse to “assume and hold the other harmless from” a debt does not mean the relieved spouse is never responsible for paying the debt. This is because a court cannot limit the rights of third parties who are not also parties to the divorce. For example, the decree may require your ex to timely make all payments for the boat she or he wrangled from you during settlement negotiations, but if she or he skips a payment the boat company can pursue you. The burden is yours to answer for that debt, because you signed for it. Then, your option is to spend time and money pursuing your ex for reimbursement.

Another option is the credit flag. An ex-spouse whose credit score suffers when the other fails to pay an assumed debt may insert an explanation in his credit report. The explanation should state, at a minimum, that the other is responsible for paying the debt as a result of divorce. See the Fair Credit Reporting Act, 15 USC 1681j. A flag will explain the derog and may mitigate adverse reactions from potential creditors, but it is not a perfect solution. The debt remains unpaid, and you pepper your report with ties to your ex. You must still pursue your ex for your money.

Query: If she cannot pay the boat company, how can she pay you? See, now, why it is important to have that frank discussion over finances first? Otherwise, you may find yourself paying that debt to keep your credit intact, and muttering about like Bill.

CROPS, LAWSUITS, BONUSES AND OTHER ODD PERSONAL PROPERTY

Most of the personal property you accumulated during your marriage is easy to divide when you divorce—well, not easy in the sense that it is pleasant to do, but easy in the sense that, in the eyes of the divorce court, there are well-established rules for valuing and dividing it. You may not find it pleasant at all, for example, that your ex-to-be is entitled to one-half of your retirement for the amount you acquired between your marriage and your divorce, even though only you worked, but this is the rule in almost all states.

But, there is some personal property that is either too difficult to value, without risky assumptions, or too difficult to divide, or both. Here is how to deal with the more common of them--

Crops & Mineral Rights– Crops are usually a property right separate from the land on which they grow.  So too are minerals below the land. If you have already divided these during your marriage, you should receive payment periodically for them (e.g. for annual harvesting), and you should decide whether to include the payment as income to the recipient, for support purposes, or as property to be divided between the two of you. If you have not divided them during your marriage, then be sure to do so during your divorce – particularly if your ex-to-be is retaining property that is potentially rich with crops and/or minerals. You may do this by selling the rights during your divorce and splitting the profits; dividing the profits in the event of a future sale; alternating years in which you each receive payment or property (e.g., odd years, you harvest); or asking for your appraiser to appraise the property with the crops and/or mineral rights included, though this carries with it assumptions about the market that you may not wish to take.

Pending Bonus – Bonuses for work performed during the marriage are almost always marital property, but what should you do if payment is delayed until after divorce? Similarly, how will you know if your then-ex receives a bonus? If you are settling your case, require that you each disclose any bonus received (and, if not, forfeit it entirely) for the year in which you were divorced. This may be by requiring disclosure of the paystub, a letter from HR, a tax return or any number of these. Then, decide upon a percentage to award the other spouse, such as one-half for the prorated amount allocable to the months of your marriage (e.g., if you were married one-half of the year, then one-half of one-half of the bonus goes to each of you).  If your case goes to trial, ask the judge to order these things.

Pending Personal Injury Lawsuit  - Similarly, a personal injury lawsuit that settles or results in judgment after your divorce, for an injury that either of you sustained during the marriage, is also potentially marital property. The injured spouse is going to assume the award is his or hers; after all, that spouse sustained the injury. However, most personal injury lawsuits will include a claim for the other spouse for loss of services (consortium claims), and most awards will include compensation for economic damages (lost pay, reimbursed medical bills, etc.) in addition to pain and suffering. The pain and suffering award belongs to the injured spouse, the loss of services to the non-injured spouse, and the rest potentially to both of you. So, like the bonus payment, require full and complete disclosure, and assign a percentage to be paid to both spouses, likely one-half for economic damages sustained during the marriage.

Pending Workers Comp Claim – By comparison, a workers compensation claim is entirely for loss of wages, not pain and suffering. For some employees, the works compensation benefits will be paid regularly for loss of pay, plus a back-payment for the time between the date of work loss and the date benefits went into effect. Talk with your lawyer to decide whether to treat that back-payment as property to be divided between the two of you or as income to the recipient for support purposes.

Taxes – If you divorce before the end of the tax year, and cohabitated priorto, decide who gets to claim the marital home for tax purposes, including deductions and credits for such things as mortgage interest, property taxes, certain energy-saving repairs, and so forth. For example, mortgage interest is a sizable deduction, one both of you will probably want to take if you cohabitated, and you could trigger an audit if you both deduct all of it. You could simply defer to the tax code (which tends to favor the person residing in the home the longest, or the person with the higher income, and usually both), but the tax code also usually allows divorcing spouses to deviate and come up with their own plan. The best thing to do is meet together with  a CPA to decide whether to delay your divorce until after December 31st; or divide the exemptions/credits/deductions at tax time; have one spouse take them and pay a percentage of the return to the other spouse; or have one spouse take them and include the refund as income for purposes of support.

Whatever you do, do not assume that only the property you each have now should be divided when you divorce - these future payments are valuable, sometimes even more valuable, and  should be addressed in your divorce, too.

INTELLECTUAL PROPERTY ISSUES IN DIVORCE

For self-employed and inventive spouses, the discussion for divorce does not end with deciding what income to use to calculate r support and who is taking the business debt – or should not, rather. An often overlooked but equally, and sometimes more, important topic is IP.

Intellectual property, or IP, refers to the set of legal rights that attach to an expressed idea, that is, the set of “property” rights that result from one’s mental labor. It includes copyrights, which give the creator exclusive rights for a limited period of time to the manner in which an idea is expressed, patents, which give the creator exclusive rights for a limited period of time to the sale, use and import of an invention, trademarks, which distinguish a product by a unique symbol, and trade secrets, which consist of formulas, practices, processes, and so forth, that give a business economic advantage and are, thus and necessarily, not generally known to the public.

IP issues come up in a divorce more often that you might think. For example, if a wife who conducts yoga lessons out of her home has developed a training model for associate teachers, with her husband’s input, and plans to sell that  model, that model has value, and the husband may have contributed directly (his input) or indirectly (by marriage) to it. As another example, if a husband sells food with certain family recipes, to which his wife had intentional or unintentional access during the marriage, what should be done with those recipes after divorce, and how can the then-ex-husband protect them? As a final example, do either the training model or the family recipes, standing alone and independent of the work efforts of the spouse who created and/or used them, have value, and is that value an asset of the marital estate? The answers are yes, and yes.

Issues of IP valuation fall, generally speaking, along the same lines as issues of typical property valuation. You should also defer to your state’s laws, and a family law attorney licensed to practice in your state, for details. It may be trickier to value IP, since it is unique and its “worth” is subject to future market conditions. However, such is generally the case with business valuations, and some forms of real estate appraisals, and a good appraiser will discount the value to account for market volatility. It also may be trickier to pay the non-creating spouse a share of that value, but, again, a good appraiser can recommend lump sum payments or a formula tied to the market, and perhaps royalties for a defined term. If these options sound heady, it is because they are, and you are best to speak to experts in your state and the IP field.

Issues of IP protection, by comparison, are simpler. Just as the divorce court can restrain ex-spouses from disparaging each other and destroying each other’s property, the court can restrain them from using IP, competition with business and selling protected information, and so forth. Even if you do not foresee your soon-to-be-ex selling or competing with you post-divorce, you are best to request such a restraining order to protect yourself, and, more importantly, your IP in the event you wish to sell it (without the threat of near and easy competition) in the future.

At a minimum, you must speak to an attorney early about these issues. You do not have to be a big business owner to have IP, or a business owner at all for that matter. Your expressed ideas, your recipes for foods you sell, your models for the business you run out of your home, etc., may and probably do all vest you with IP rights. Identify, value, divide and protect them now -- or you could find your ex-wife setting up shop next to you and stealing your business away.

IT’S NOT ABOUT THE SHOES: HOW TO HANDLE PERSONAL PROPERTY DIVISION

You’ve probably heard by now that businessman/divorcee Daniel Shak is suing his poker playing ex-wife over the designer shoe collection – all 1,200 pair with an estimated value of over $1 million – that she acquired during their marriage. According to him, she kept the pricey heels hidden in a secret room. No, he does not want one-half of them, nor the 35% of them he says he is entitled to per their divorce settlement. Few people walk well in 6” stilettos, anyway, and patent pumps or glitter platforms probably won’t go well with his suits. What he does want, however, is what everyone wants when personal property is at-issue in divorce: MONEY.

The problem is, once your divorce is final, it is difficult to re-open the proceedings to fight about those shoes, or anything else related to property, for that matter. The property division terms in your divorce decree are intended to be final, binding and non-modifiable – and the judge really does mean final – absent compelling circumstances. Those circumstances must amount to fraud, duress or mutual mistake. Just not taking advantage of investigating, whether it is inside your wife’s shoe closet or otherwise, won’t cut it.

Thus Shak’s accusation that his ex-wife’s room was “secret” and that she concealed her shoe collection from him. If handled correctly, however, you can keep your divorce from turning into a post-divorce investigation into your ex-wife’s belongings, like Shak’s, and a costly one at that. Consider one or more of these steps:

1. Inspect. If you are suspicious of what your wife has hidden in your home, car, office, or otherwise, chances are she has the same suspicions of you. Take advantage of this by agreeing to inspect the home, cars, offices, etc., together to confirm for each other that nothing is hidden. (Just make sure you aren’t hiding anything).

2. Litigate. Rather than hire an appraiser, send an interrogatory (a question) to your wife that asks her to value your home contents. If you have a value in mind, and you suspect hers would be lower, send her a request to admit (another question) that asks her to agree with your value or, if she cannot agree, state with specificity her value and why she chose it. These are legal tools that allow you and your wife to narrow the issues and commit to certain facts (like value) in your case.

3. Negotiate. Take pictures of each room in your home (some things have a funny way of “disappearing” during a divorce), and spend time creating a spreadsheet that itemizes the property and your guesstimated value. You can find comparables online at www.craigslist.com and www.ebay.com. Use your spreadsheet to negotiate which spouse takes what, and be sure to include a sum at the bottom that indicates the value of each spouse’s share (ideally one-half each) to justify your proposed division.

4. Value. Do not shy away from an appraiser. If you and your wife cannot select one, ask the divorce court to appoint one as an expert. Be prepared with names, and do your research, because you may have to pay the costs as the spouse requesting the appraisal.   A good appraiser will spend a day or two during non-intrusive hours going through your home, item of property by item of property, and produce an itemized report of each item and its value. These reports are excellent starting points for negotiating who gets what (like the spreadsheet) and are eye-opening (you will be amazed by how much “stuff” you own and how much it is worth).

5. Assess. All of this being said, there comes a time when spending on attorneys and appraisers is not worth the anticipated benefit – a couple of items of property that you may not want after your divorce, anyway. Before you endeavor down an expensive path of litigating, investigating, etc., consider whether all of the time and money is worth it based on your wife’s habits during your marriage and the likelihood that she actually does have something hidden. Sometimes the pros do not outweigh the cons, and you will have a smoother divorce moving on content that what you have is what you will get and neither of you care to worry about what the other has.

Otherwise, you could find yourself, years later, regretting that you did not pay more attention and did not care to value those items your wife desperately wanted– and she could be, like Shak’s ex-wife, (literally) walking away with lots of money.

WHY DOES MY ATTORNEY CARE SO MUCH ABOUT MY RETIREMENT?

            Ever wonder why your attorney asks so many questions about your retirement account? It’s not because we secretly envy you for one day having the ability to retire (okay, on a tough day of trial, some of us do). It’s not because we want to find the largest account to liquidate to pay our fees (though some of the shady ones might). It’s not even because we know about and can advise you on all of the nuances of your retirement account (retirement is a specialized area of divorce law, and those who do not deal with it daily probably cannot).

            It’s because there are many things hidden in your retirement account that, if not searched for, are likely to go unnoticed – to your detriment, or, if you play your cards right, to your ex’s. Take these five as examples:

1. IT’S MARITAL PROPERTY – SO GET OVER IT

            If you think your retirement account is yours because you (and possibly your employer) contributed to it with your hard earned money from years of work, well, you’re wrong. In most states, it makes no difference whether the money is yours, your spouse’s or your employer’s. So long as the vested value of the account accrued between the date of your marriage and the date of your separation or your divorce, that money is at least one-half your spouse’s, too.  This means all of the dollars you and your employer put in, plus any appreciate in pre-marriage dollars from your active investments, are your spouse’s, too. Some clients are shocked to find this out, believing, naively, that they worked so that they could one day retire and, therefore, should be able to keep the money they earned to retire. The theory in most states, however, is that he or she worked so that the married coupld could retire, so they should share in that money.

This is a bitter admonition for a client whose spouse has filed for divorce, particularly if that spouse does not have a retirement account of his or her own and child support and alimony and half of all of the property (but not the debt!), too. However, the sooner you accept it, the sooner you can prepare to negotiate the things in your divorce that are worth negotiating. If the law in your state says your spouse is entitled to half, then you do yourself a huge disservice (and probably pay your attorney a lot of money) to argue otherwise, absent a really, really good reason. And those are tough to come by.

That being said, if your spouse has a retirement account, no matter how small, don’t be afraid to ask for your share. If nothing else, you can offset it against her large share of yours.

2. ANCILLARY AND COMPONENT BENEFITS

            When most clients think about their retirement payout, they envision a set dollar figure that they will receive every month when they retire. This is true, usually, but there are a lot of things that make up that dollar figure. Most clients know about the basic benefit – the “set” figure they anticipate receiving. In addition to that basic benefit, your retirement plan may also offer adjustments for the cost of living, survivor benefits, early retirement supplements and subsidies, a lump sum “buy out” amount, and a host of other adjustments to your basic benefit and payments in addition to your basic benefit. We call these the ancillary and component benefits, or “the bells and whistles.” In most states, these too are marital property to be divided between you and your ex.

            Interestingly, while the basic benefit division law is clear (see point 1, and get over it), the law applicable to ancillary and component benefits is not. Here, then, is your first opportunity for negotiating. Always consult an attorney for the laws applicable in your case, but you are likely to find that these benefits are not automatically half each spouse’s or, if they are, only when specifically stated. For example, in some states, an ex-spouse is not entitled to a share of survivor benefits (the benefits paid to your named survivors when you pass away) unless your ex’s entitlement is specifically stated in the divorce decree. The same may apply to early retirement benefits. So, a clause stating your ex is entitled to “one-half of retirement account X” may exclude the “bells and whistles” when you actually retire years later. The result is a larger payout to you because your plan does not have to set aside money for your ex.

3. TAX EFFECTING

            A bank account and a retirement account may have the same balance, but that does not mean they have the same value. In the pursuit of a quick settlement with liquid assets, and hoping to avoid an expert’s fees, some clients will swap a bank account for a retirement account. The problem is, $50,000 in the bank now is not the same as $50,000 in a retirement account now. For one thing, to the extent you can access the retirement account, usually you must pay penalties and taxes for making a withdrawal. For another, there may be hidden costs, such as a loan in repay-status, tied to that account. On the other hand, a future stream of income is usually more value, the present day value, than cash.

It’s worth a meeting with a CPA or other specialist to have those accounts valued. At a minimum, you need to know how much a retirement account you or your spouse intend to liquidate is worth after paying taxes and penalties. (You should also figure out who will be hit with the tax bill and account for that in your divorce settlement). This is called “tax effecting,” meaning that we figure out how much the spouse will have to work with after paying taxes. It’s this figure, not the raw account balance, that we compare to the bank account.

4. LOANS

            So you took out a loan to pay credit card bills, to repair the roof or for a vacation, etc.? Then you’re like most clients. The bad news is (yes, it gets worse), for most retirement accounts loans are not dividable – which means you are left paying back the entire loan after your divorce. The good news is (yes, there’s good news), the loan is also a marital debt that should be divided between the two of you.

Even though you cannot physically divide it in your account, you can account for it by dividing the account net of the loan. Read your settlement or divorce decree carefully to make sure that language is there – otherwise, the plan rules may default to you paying the loan and sharing in the account as if the loan had never been taken.  Do not sign either until the language is there. This is language to negotiate before you settle or to request specifically at your trial. Even if the plan does not have such a default rule, it does not hurt to specify your and your ex’s intent to account for the loan – why leave wiggle room for a different result, i.e. more money for your ex, later?

5. NEW SPOUSES

            In the upheaval of divorce, another marriage may be the last thing on your mind. But there may come a time when a new flame in your life becomes your spouse, and one day the two of you really do retire as a married couple. Do you want your ex meddling in your affairs when that happens? Your ex could, unless you protect your future retirement (with your future spouse) now. Again, always consult with an attorney and review your plan specifics, and make sure you ask: Is the account division as of the date of separation or divorce, or is it “the entire account” (which is a bad idea, because you basically divide all of the money you earn after your divorce)? If your ex is named as a survivor, can you name additional survivors, or does your ex receive the entire survivor benefit (leaving your new spouse empty handed)?  If your ex passes away, does your ex leave any outstanding benefits, and do those revert to you (to pass on to your new spouse)?

            What you do not want to happen, but what often does happen, is to retire only to find out that your retirement money does not match your expectations. So, have this conversation with your attorney early in your case and often – we really do care about your retirement, and for at least these five reasons.

CAR TROUBLE? WHAT TO DO WHEN REFINANCING WON’T DO

So your spouse is keeping the family car that is leased or loaned in your name, huh?

Most folks in your position would worry that the now ex will “forget” to make the car payment, or will not pay off the loan in time  or will wait to the last minute to do either and let your credit score take a hit in the meantime (out of spite or sheer enjoyment or otherwise). What’s worse, if your ex is unable to assume liability for the lease or refinance the purchase loan, then even if your divorce judgment says your ex is responsible for the payments, the car creditor will come after you. This is because the creditor is not bound to your divorce judgment and, frankly, does not car what your  now ex- agreed to do with the payments. Instead, the creditor will take the payment from you, or even sue you for it, then force you to pursue your ex for reimbursement.

What can you do to avoid this result if your ex cannot refinance? Consider these options --

Option 1 – Take It. The “soccer mom” van might not be the best of rides, but, if you take it, at least then you know when you make payments, that it has insurance and when, if at all, the time is right to trade it in for another vehicle. More likely than not, the vehicle will not have equity, which means you will not have to pay your ex to take it off your ex’s hands, anyway.

Option 2 – Pay It. If you prefer that your x keep the vehicle but you still want to be sure it is paid for it, then you pay for it. You could make the payments outright, as a monthly property settlement payment that is non-taxable income to your ex (and not deductible for tax purposes to you) or as alimony (that is taxable to your ex and deductible to you). Or, in most state child support schemes, you can treat the monthly payment as child support and deduct it from your child support obligation. Child support, after all, is intended for your child’s daily necessaries, and transportation to and from school, sports and activities is chief among them. However, be sure your child support order provides that you will make the payment directly to the car creditor – otherwise, you will have to rely on your ex to make the payment, and timely, or hope that your ex does.

Option 3 – Repo It.  Finally, if you do not want the vehicle and you are not paying child support or alimony, be sure to give yourself the rights of a repo man if your ex misses or delays payments. In most jurisdictions, spouses’ agreements for dividing property – including what happens when one of them defaults in an obligation – are enforceable as a matter of contract law. This means, the spouses can be creative, give each other rights and obligations, and the court must enforce them absent a public policy reason (e.g., you cannot contract to set the vehicle on fire if your ex misses a payment). So, get creative! Require in your divorce judgment, as you would with a contract, that ex provide you proof of efforts to refinance the debt every month, proof of timely payments, proof every quarter that the vehicle is properly insured, money for every day that the payment is late, attorney fees and costs if you have to sue your ex for payment, and/or an extra set of keys that you are to use only if your ex defaults in the payment obligations  and you decide to take possession of – and responsibility for – the vehicle thereafter.

Otherwise, you could very well find yourself paying for a vehicle that is not yours – while your credit score takes a hit -- and that you cannot regain, while your then ex-wife drives off scot-free.

Dividing Personal Property: When and How to Fight Over the Pots and Pans

It’s a dangerous clause in your divorce decree: “Each party takes the personal property in that party’s possession, free and clear of any claim of the other.” This clause is most often an       after-thought, tucked away in the boilerplate, something to tidy-up the divorce after the big items – the pension, the home – are divided. With it, every last piece of personal property (that is, everything but land and what’s connected to it) is accounted for, from the sleeper sofa in the living room to the sleeping bags in the shed. On the eve of trial or the brink of settlement, it is easy to toss in the towel and add this clause just, in the words of one of my clients, “to move on.” After all, it makes little sense to spend $2,500 in attorney fees fighting for $500 in personal property, and no one wants to look like the wacko bickering over Christmas decorations and the pots and pans.

But, if handled correctly, your personal property does not have to be– and should not be -- an after-thought.

First, most items that you acquire during your marriage, what we call your marital property, are dividable when you divorce. (There are exceptions for inheritances, gifts and, in some states, items you and your spouse agree to treat as one’s property, but most items are marital property). It does not matter whether one spouse purchased the item, whether one repaired it, whether it is titled to one’s name, etc. For example, your power tools are marital property, and your spouse could stake a claim to them, even though you purchased them, you used them, and your spouse cannot distinguish the drill from the nail gun. Marital property does not lose its character as marital property simply because one spouse uses the item during the divorce, either. For example, the home furnishings, television, computers, etc., at home are still partly yours even if you move from your home and your spouse uses them.

Why does this matter? Money. Every item of personal property has a value. Granted, individually they may be small ($5 for the plates, $10 for the books). But, combined, they add up! A fully furnished, three bedroom, two bathroom home with a family computer, a washer and dryer set and a tool shed would have, even at garage sale prices, between $3,000 and $5,000 worth of personal property. An equitable share, around one-half, is yours. Now, let’s say when you divorce your spouse will retain your home, and all of the furnishings, but the divorce court orders you to pay $1,500 toward attorney fees or credit cards so that your now ex can make the first mortgage payment. Well, your ex has already retained your share of the personal property – in an amount that could exceed the $1,500 you owe!  If you pay, you pay twice: once in cash, once in property. And in today’s economy, who could afford to do that?

Second, personal property creates ambience, marks your lifestyle, makes you you. It is OK to be attached to a set of wine glasses or to insist on keeping a particular painting, to ask for a book your mother gave you or the quilt your grandmother made. Garage sale prices will not do because these items mean more to you than an everyday buyer. Therefore, the law gives them sentimental value. Sentimental value is the intrinsic worth of an item, which the divorce court cannot easily value because the value depends on you, not the market. As a consequence, usually the item is not part of the marital property to divide. Instead, the court will award the item to the spouse requesting it if the award is reasonable. So, if you have your eye on a family heirloom, a particular framed picture, a hand-me-down tool set, or anything else the value of which is “priceless,” be sure to identify it as having sentimental value, and be prepared to explain to your spouse and the court why awarding it to you is reasonable.

Finally, with the right resources, personal property is not difficult or tedious to value.

1. Litigate. Rather than hire an appraiser, send an interrogatory (a question) to your spouse that asks to value your home contents. If you have a value in mind, and you suspect your spouse’s would be lower, send a request to admit (another question) that asks for agreement with your value or, if your spouse cannot agree, state with specificity the believed value and why. These are legal tools that allow you and your spouse to narrow the issues and commit to certain facts (like value) in your case.

2. Negotiate. Take pictures of each room in your home (some things have a funny way of “disappearing” during a divorce), and spend time creating a spreadsheet that itemizes the property and your guesstimated value. You can find comparables online at www.craigslist.com and www.ebay.com. Use your spreadsheet to negotiate which spouse takes what, and be sure to include a sum at the bottom that indicates the value of each spouse’s share (ideally one-half each) to justify your proposed division.

3. Valuate. Do not shy away from an appraiser. If you and your spouse cannot select one, ask the divorce court to appoint one as an expert. Be prepared with names, and do your research, because you may have to pay the costs as the spouse requesting the appraisal. A good appraiser will spend a day or two during non-intrusive hours going through your home, item of property by item of property, and produce an itemized report of each item and its value. These reports are excellent starting points for negotiating who gets what (like the spreadsheet) and are eye-opening (you will be amazed by how much “stuff” you own and how much it is worth).

The alternative is to leave your property with your spouse. Maybe the pots and pans mean little, but the pots and pans and televisions and bedroom sets and books, etc., etc., mean an awful lot – and you could walk away from thousands.

Little Shop Of Horrors: Dealing With Your Business In Divorce

If you are a small business owner, dealing with your business in your divorce could send you spinning into a scene from Little Shop of Horrors – except, instead of a carnivorous plant reeking havoc on your business, your attorney and your soon-to-be-ex do, crying “Feed Me!” Cash, that is, and lots of it.

The family business is often the largest marital asset. Worse, family business owners usually pour their savings into their businesses and secure business loans against their own property or guarantee. When divorce looms, one spouse develops SBLS (Sudden Business Losses Syndrome) and the other spouse develops SYTS (Sudden Yvonna Trump Syndrome). That is, one spouse thinks the business is worth nothing and the other a whole lot of something. They reach a stand-off and fight back-and-forth over whose value is “right” until one spouse caves in or their judge picks a value at, what seems to be, random. No one wins, except the attorneys and their pocketbooks.

How can you avoid this scene and deal with your business effectively? Here are some suggestions:

Decide What It Is

First, decide what it is.

The family business is often not only the largest asset in the marriage, it is the family’s main source of income. The family may have loaned the business certain assets (e.g., a vehicle) expecting to receive a return on the investment, just as one would expect with any property investment. But the business may also generate the family’s income stream, such as through a salary in addition to repayment for loans.

Your decision will drive the division method in your divorce. If you call the business “property,” as you might for a business that makes money with tangible assets, like an apartment complex, then it is subject to the “equitable” or “equal” division rules for property division. If you call it “income,”  as you might for a business that makes money with intangible assets, like a lawyer’s practice, then it is subject to the alimony award rules.

Merely semantics this is not. Most states award each spouse one-half of the marital property. However, not all states award each spouse one-half of the other’s income as alimony. Therefore, when a business is both property and income, like a retro ice cream parlor with top-notch appliances and cash to pay salaries to boot, it is important to segregate the property from the income when dividing it to avoid a double dip. That is, without careful segregation, you could divide the entire business as property and then award the non-taking spouse alimony based on the taking spouse’s  income from the already-divided business.  See, e.g., McCallister v McCallister, 517 NW2d 268 (Mich Ct App 1994).

Choose Your Valuation Method

Next, choose your valuation method.

Choose wisely. Choose the wrong method, and you could over-value the business and shell out more cash to your ex than due, or under-value it and lose your credibility, or pay more to your expert business appraiser than the business is worth. At a minimum, the valuation should examine the business’s assets and liabilities (its book value), earnings history and potential, dividend and salary capacity, goodwill and other intangibles, industry, economic environment, stock sales, comparables and performance during the marriage. See Rev Rul 59-60. But, no surprise, divorcing spouses and their attorneys have a remarkable capacity to make the difficult even worse. For business valuations, this means choosing a method that focuses on certain factors at others’ expense to generate the value most favorable to their position.

For the SBLS-afflicted, a favorite method is the fair market value method or the going concern method. This method treats the business as an item of property sellable on the open market. The value is what a willing buyer and a willing seller, neither under a compulsion to act and both adequately apprised of the facts, would use. But where the demand for the unique business (e.g., a stamp shop) or dime-a-dozen one (e.g., a Detroit diner) is low, so is the value. This is true for most family businesses. SBLS-afflicted spouses make it even moreso by purchasing expensive equipment, taking out a hefty loan, making a risky investment, or otherwise incurring debts that put the business’s book value in the red. Therefore, the hypothetical sale might look more like a “going out of business” going concern sale. The hypothetical purchase price is low, and for the SBLS-afflicted that is ideal. After all, there is less value to divide if no one will buy the business – and no one wants to buy a business bad in debt, at least, not for much.

For the SYTS-afflicted, a favorite method is the capitalization of earnings method. This method treats the business as a stream of income valuable to its owners, if not to buyers in the open market. The value is what an investor would be willing to invest in a comparable risk to generate the same income. It is the product of the projected income steam and a capitalization rate (a risk multiplier). The capitalization rate is based on the rate of return for similar investments, the risk and the business’s historical earnings, among other things. SYTS-afflicted spouses make the cap rate as high as possible by comparing the business to lucrative ones (That hardware store is just like The Home Depot!), minimizing risk (Nothing’s as reliable as this business!) and glossing over low earnings years (Nevermind that low profit; look at the business trips, meals and clothes we got that year!) After all, the more the business generates for its owners, the more valuable it is – and the more to divide in divorce.

Get Creative

Finally, get creative.

For most, it is unwise and impractical to divide the business with each spouse retaining a share. If each spouse retains one-half, expect decision-making deadlock. If one spouse retains a minority interest, expect oppression. As the Michigan Supreme Court noted, “It would be a rare divorcing couple who would benefit from a judgment that requires them to maintain an ongoing business relationship.” McDougal v McDougal, 451 Mich 80; 545 NW2d 357 (1996). (This is true even for amicable divorces. Remember, you got divorced for a reason. Disagreements, particularly when business and money are involved, can and will happen.) Usually, one spouse buys the other’s interest.

That can be a sizable sum of cash. And daunting. And impossible to pay at once. (Enter those chants of Feed me! from Little Shop of Horrors again). Try these payment options instead:

Section 71 Payments: Pay the leaving-spouse’s share for the business as “Section 71” payments with IRC 71. IRC 71 treats payments as alimony for tax purposes, which means they are taxable as income to the recipient and deductible to the payor (which most find attractive). This is true even if the payments are not traditional alimony intended for support but actually a buy-out of one spouse’s property rights. The payments must terminate at death or the recipient’s remarriage. Therefore, be sure to tax-effect the payments (i.e., account for the tax treatment in the amount), factor the risk into the payment amount and/or require the payor to maintain life insurance or other security until paid in full.

Fiduciary Agreement: If you will retain a minority share in the business and your spouse the majority shares, before you sign the agreement be sure it contains fiduciary language. Fiduciaries owe duties of fairness, disclosure, and protection to the minority. They have responsibilities that other members do not. If they breach the responsibilities (e.g., by keeping a stock sale secret and reaping the profits), the harmed minority can file a lawsuit to disgorge the profits. In many states, majority business interest holders are fiduciaries by operation of law. If that is your state, be sure your agreement recites the law, at a minimum, and do not be afraid to contract for more responsibilities. If this is not your state, put the language in!

Base Payments, Plus Ceiling:  Perhaps your spouse thinks the business is worth a whole lot more than you – that profits are “just around the corner.” If her suspicion stalls your settlement, consider a payment schedule that will reward her if she is right – with additional payments. For example, the payment schedule might require payments of $500 each month plus 10% of the net profits for the month, after payment for all reasonable business expenses. But protect yourself just in case she is right! Make sure the payment plan has a ceiling. For example, that 10% profits language might read “plus 10% of the net profits for the month, not to exceed an additional $2,000 each month, after payment for all reasonable business expenses.”  

Most of all, accept that you will have to pay to keep the business (or step away from the business and accept your spouse’s cash) early in your divorce case and move on to planning the best way to do it. You must cut your emotional ties to that front desk or cash register and start anew, refreshed post-divorce.

Otherwise, you will fight and fight and fight and spend and spend and spend, and that business, neglected, really could do a Little Shop and crumble around you.