PLANNING FOR DIVORCE IN THE NEW YEAR – NOW – PART I

During the holidays, divorce may be lingering in the back of your mind - but, if you are like most folks, it is probably not at the top of your “to do” list.

This is not to say that filing for divorce during the holidays is a bad thing. Actually, it is sometimes a good thing, or a necessary one. For example, you may need a temporary custody order to keep your spouse from leaving to Florida with your children “to visit family,” never intending to return. Or, you may need a restraining order to keep your spouse from racking up an astronomical credit card bill for “gifts” he or she will end up keeping when you do divorce.

But these are, despite the rumors, relatively rare scenarios. Some folks will file for divorce and wait to serve, if local rules allow, until after the New Year. But most, having lived with a broken marriage for a long time anyhow, would rather wait for January, in those ripe few weeks between Near Years Day and Valentine’s Day, to file.

The hustle and bustle of the holiday season may even be a wanted diversion with family before this sometimes intense process called divorce begins.

However, even if you do want to wait for the new year to divorce, now is the time to plan. Here are the steps you should take now to make the process easier:

1. Consult a Mental Health Professional and/or Clergy – That’s right; this divorce attorney is recommending you talk to a mental health professional or clergy member, or someone else you trust, about options other than divorce. Divorce can be, and often is, a difficult process, and if reasonable alternatives exist that can make you and your wife a happily married couple again, you should consider them. This may include couples’ therapy, individual therapy, family therapy, religious education, or something as simple as planning a weekly date night. For marriages that feel irretrievably broken, hopeless, we often discover mental health issues, substance abuse issues, or both, are the culprits. Medical treatment may be necessary, and, certainly, the support of a spouse can make recovery easier. Even if it is just to prepare mentally for the divorce process, consulting with a professional earlier is a must.

2. Gather Financial Documents – All of your bank accounts, credit card accounts, retirement accounts, investments, etc., will be valued during the divorce process. Depending on when you acquired them and what you did with them, they may remain yours. But, even if they do, you must still identify them. So start now. These records have a funny way of “disappearing” when one spouse files for divorce, so extra copies are a good idea. Copy, at a minimum: your last five years’ tax returns; your last year’s worth of bank and credit card accounts, investment statements, retirement statements, and so forth. If you can save these to a flash drive for your attorney to download, all the better.

3. Make Your Budget – Whether you have children to support or just yourself, you should plan for emergency and extra expenses now. These include filing fees, attorney fees, housing expenses (more on that next), health insurance you may have to purchase, etc. Build in an emergency fund, if possible, for vehicle repairs, last-minute health expenses, and so forth, but do not make it too large – the larger the reserve, the more you have available to pay as alimony. You, and your attorney, will want to know how much you have to work with so that you select the most appropriate long-term option.

more to follow...

TOP THINGS TO DO IMMEDIATELY AFTER DIVORCE

Change Beneficiaries & Review Estate Plan

            Be sure to change the beneficiary and alternate payee designations on   any life insurance policies, disability policies, bank and credit union accounts, and  any other policy or account, except as required in your Judgment. The Judgment does not automatically change these designations, even for ex-spouses. You should also consider preparing or revising your estate plan. The Judgment does automatically terminate your ex-wife’s right to a share of your estate if you predecease her, and vice-versa, but you will want to update your plan to provide for your daughters and any other children, family members or friends, or other individuals or charities. Your estate plan will dispose of your property at your death, and it may also appoint a guardian for any minor children you have in the event the mother predeceases you or is unable or unwilling to serve as a fit parent. You can designate funds for college savings, and you can transfer assets to minimize tax consequences for beneficiaries, as examples.

FOC Services

            Please take some time to review the Friend of the Court services available to you should you need them in the future. These services are available until each child is age eighteen (or up to nineteen and a half while in high school), you and your ex-spouse opt out of the services, orthe Court orders otherwise. They include parenting time enforcement, family counseling,  child support recommendations applying the Michigan Child Support Formula, which either parent may request once every three years and sooner upon establishing   an appropriate basis to modify the current order, and a robust set of forms to help you enforce or modify orders. You may also obtain these online at www.courts.michigan.gov.

Personal Property

            Make arrangements with your ex-spouse to transfer ownership of property specifically awarded to each of you, and be sure to sign over any titles or    other ownership documents. This includes vehicles -transfer title ownership to the vehicles awarded to each of you. You can transfer title by signing the front of the title and filing with the Secretary of State within fifteen days of singing. The two of you may also go to the Secretary of State together. There are local branches that stay open late on Wednesday and on Saturday. You can locate branches online at www.michigan.gov/sos.

Monitor Credit

            Monitor your credit report to ensure your ex-spouse removes your name and/or pays debts that are in your name but assigned to her.

Tax & Financial Advice

            See a tax professional and a financial advisor to determine the best post-divorce investments and tax filing strategies for you. Most people take a financial hit in divorce, but appropriate planning will help you recover faster.

HOW TO PROTECT YOUR CREDIT, AND GET PAID, WHEN YOU CANNOT TRUST YOUR EX TO PAY THAT JOINT DEBT

            Parties should order their credit reports to verify what debts are reported under whose names. Under federal law, parties are entitled to obtain free credit reports. These can be ordered online from https://www.annualcreditreport.com. Note that it is illegal to order someone else’s credit report without authorization. The Fair Credit Reporting Act has serious penalties for the ordering of a report without proper authority. 15 USC 1681b, 1681n. If joint credit cards cannot be paid off and closed, parties should explore the possibility of transferring joint debt to separate credit cards to allocate the liability in accordance with their settlement.

            Of course, economic factors may outweigh the legal risks to a party’s credit rating: the parties need to think about which debts have the best interest rates or payment schedules or which are least likely to be enforced. Often parties simply do not have the funds to establish new households and also to pay off debts.

            Short of paying off a debt, there is no sure way to protect one spouse from exposure if the other spouse fails to pay a joint debt. When possible, attorneys should avoid the problem altogether by assigning responsibility for debts to the person whose name appears on the debt or to the person who has the most to lose if the debt is not paid.

            When one spouse assumes a debt bearing the other spouse’s name, a judgment should require the assuming spouse to attempt to remove the other spouse’s name from the debt. If the assuming spouse has a good credit rating and sufficient income, a third-party creditor will sometimes agree to release the nonassuming spouse from liability or will refinance the debt in the assuming party’s sole name. However, creditors are often reluctant to give up a potential pocket to collect from, and refinancing is often expensive.

            Judgments may include various security devices to ensure that a party actually pays the debts he or she has assumed. These devices include liens on other property awarded to the assuming spouse, life insurance to provide funds in case the assuming party dies, an award of attorney fees for enforcement, or the right to offset other obligations between the spouses. A party with adequate bargaining power can sometimes demand a conditional wage assignment or power of attorney to sell assets belonging to the debtor spouse, with the wage assignment or power of attorney only to take effect on the other’s default in payment. However, not all of these security devices will survive a bankruptcy proceeding.

            Under federal law, a spouse whose credit rating is affected by the other spouse’s nonpayment of debts may insert an explanation in his or her own credit reports explaining that the debt in question should have been paid by the other spouse. 15 USC 1681i. This might mitigate credit problems, but it does not make the innocent spouse whole.

NINE MAJOR MONEY MISTAKES TOO OFTEN MADE IN DIVORCE - Part 3

6. BUT WE GAVE HER THE HOUSE (SECURITY)

            You wife might want the house, and she might be able to afford it, by awarding it to her in your divorce decree does not release your liability to the mortgage company. You and your wife can make any agreement you want; the mortgage company does not care and, if she misses a payment, will pursue you for it. That means calls, collections letters and, possibly, a lawsuit. What are you to do if you have to make the payment for her? Most guys, while fearful that this will happen, do nothing in their decree to protect themselves if it does. Get creative – so long as the decree is not against public policy, the judge will sign it. For example, if she misses                a payment, you withhold alimony (more on that in the next mistake), or you get to assume        the payments and possession of the home, or you can demand the home be listed for sale and    the profits, after repaying you, divided, or you keep them. Better yet, require her to refinance     the mortgage and provide you with proof of her attempts on a regular basis until she does so.     The worse thing to do – and also what many guys do – is require her to “refinance.” This means nothing if you don’t have the enforcement language to back it up.

7. I REFUSE TO PAY ALIMONY

            Alimony is not all that bad – really. Many guys refuse to pay alimony because, they think, writing a check every month for years to an ex (who is an ex for a reason, after all) is tantamount to relieving the divorce every month for year. However, alimony is tax deductible from income to you and taxable as income to your ex-wife. You should think of it as a tax planning measure. If you have a choice of paying $5,000 a year as a “property settlement,” which is not deductible to you, and $5,000 a year as spousal support, which is, go for it. Just be sure the support amount is not modifiable upward; otherwise, your ex could reap the benefit of your pay raises post-divorce.

8. SHE NEEDS SUPPORT NOW, SO I’LL PAY IT

            If you pay child support, you will get the sob story: I haven’t received the check, I need extra money for clothes, etc. It’s tempting to make a direct payment, lest you leave a kid without food to eat and a bed to sleep on. But this is a trap. Make a direct payment, and, in most jurisdictions, you will not receive a credit toward the child support you should have paid unless the paying parent keeps a copy of the payment (no cash, please!) and a receipt and both parents agree the payment was intended to replace that support. In many states, the direct payment is        a gift – no ifs, ands or ors about it. That means, you must pay the same support twice.

9. I DON’T NEED A CPA

            Too many men would rather save costs by figuring our tax consequences on their own, maybe with one of those programs you can buy at the grocery store, or, worse yet, ignoring them altogether. However, a divorce is not just about dividing property, venting over who cheated or lied or whatever else went wrong, and making provisions for child welfare. It is a complex transaction that is rampant with tax consequences. What can I deduct? How can I avoid an assessment for property awarded to me? What happens to investments? What filing status do we use? Who claims the children as dependents? What if we owe taxes? You can make agreements in your divorce decree to answer all of these questions. Spend some time with a CPA, in addition to your attorney, to strategize.

But cheap out, and you will make a major money mistake.

NINE MAJOR MONEY MISTAKES TOO OFTEN MADE IN DIVORCE - Part 1

The “simple and cheap divorce” is a myth.

Even simple divorces require work, such as divorce decrees that tie-up all lose ends (effective enforcement language, any one?) and post-divorce property transfer documents (deeds, notifications for COBRA, promissory notes, to name a few) to make those decrees work.        And cheap divorces should include money spent wisely.

I write should because the “cheap divorce” really refers to two divorces -- the cost-effective divorce and the avoided-costs divorce. Unfortunately, in pursuit of the cost-effective divorce, and under the mistaken belief that their wives are paying less and have, therefore, somehow “won the case,” too many men make major mistakes when it comes to their money – the very thing they are trying to avoid.

Make these mistakes, and your “simple and cheap divorce” will cost you a fortune:

1. SHE HAS TO PAY HALF THE DEBT, RIGHT?

            Most jurisdictions apply a rule called “equitable distribution” or “equitable division” to divide assets and debt. The rule sounds an awful lot like “equal” division, and, sometimes, it is. For example, retirement accounts (usually, the husband’s) that accrued during the marriage are divided equally between ex-spouses. However, the same is not true for debt. “Equitable” really means, do what is fair, and, for debt, that usually means the spouse who earns more pays more. Do not go racking up a credit card bill with the assumption that your wife will be responsible for one-half the balance. If she earns less than you, she won’t.

2. THE INHERITANCE IS TO ME, NOT US

            If you received an inheritance, you might think all of it is yours – after all, your name appears in your generous great-aunt-somebody’s will, not your wife’s. Not necessarily.              In general, any property  you acquire between the date of your marriage and the date of your divorce is considered marital property eligible for division (for those of you living in community property jurisdictions, the same rule usually applies). An inheritance might be your separate property, but only if you did not commingle it with marital property or treat it as marital property during your marriage. And that is tough to do. Imagine receiving an inheritance of $20,000 and just leaving it in an account, in your name only, sitting there, and not touching it at any time during your marriage. Most spouses don’t, especially in our economy. If you used that inheritance during the marriage, if you added it to a joint bank account, or even if the divorce court believes your wife needs a share of it, that inheritance is not yours – it’s your wife’s, too. The best thing to do, if you receive an inheritance, is title the property in your name only, deposit the money into an account bearing your name only, and do nothing but leave it alone – until you are safely divorced.

TO BE CONTINUED...

Just When You Thought You Were Through: Post-Divorce Mistakes and How to Avoid Them - Part 5

Mistake #8: You Never Got Your Share Of The Retirement Account

If you are entitled to a share of your spouse’s retirement account and the account is ERISA-covered, do not rely on your settlement agreement or 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 account, then the plan administrator cannot alienate and divide the account unless and only as provided in a qualified domestic relations order (QDRO). A QDRO is a court order that creates or recognizes the existence of an alternate payee (the other spouse)’s rights to receive all or a portion of the account 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 as an order 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 state court 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. Ideally, you will have an approved QDRO ready contemporaneously with your divorce decree to avoid second trips to the courthouse.

Mistake #9: Your Awards Are Unsecured

You negotiated a solid payment schedule, and your soon-to-be-ex has paid child support regularly throughout your case. As soon as you divorce, poof, finances turn for the worst, and your ex files for bankruptcy. What used to be reliable income has vanished. The problem is, you did not secure your awards. What can you do? If you are already divorced and your ex-spouse is bankrupt, be sure to protect your rights as a creditor in the bankruptcy case. Under the latest version of the federal Bankruptcy Code, child support, spousal support and property settlement obligations are non-dischargeable in bankruptcy. See 11 USC 523. Furthermore, there is usually no need to file a motion in the bankruptcy court to protect your rights to payment. However, the new laws will not stop a sneaky spouse from trying to discharge other debt (e.g. a joint credit card), which may have a financial impact on you. Be sure to speak to a bankruptcy attorney as soon as you learn of your ex-spouse’s filing to determine what, if anything, you should do. If you are not yet divorced, negotiate other payment security options. These may include purchasing a life insurance policy on your ex-spouse as adequate security for child or spousal support in the event your spouse dies prematurely, a perfected security interest in personal property, a mortgage on real property or a lien, which, as a secured creditor, you can pursue when your ex-spouse defaults in a payment. If you choose one of these options, be sure to describe the security (including legal descriptions and model numbers, if appropriate) and default terms (including any opportunities to cure and liability for deficiencies, if appropriate) in detail in your settlement agreement and your decree.  

Mistake #10: Your Decree Is Ambiguous

A mindless flick of the pinky finger so “party” reads “parties.” An extra click with cut/copy/paste. Mislabeled parties (“plaintiff” for “defendant”). Or just poor wording. These are all excuses for an ambiguous divorce decree. You and your ex-spouse might understand what “you really meant,” but do not rely on your agreement now to resolve any disputes in the future. Third parties might disagree with you, and years from now so might your ex. If your decree has a typo or is in any way ambiguous, fix it immediately, while the case is still fresh in your and your judge’s minds. If your ex-spouse agrees with you, then you should submit a stipulated amendment to your decree, properly worded and with both of your signatures, for your judge’s review and signature. If your spouse does not, then you will have to prepare a written motion (with a brief of the law, if appropriate) to explain to the judge why you think the decree has a typo or is ambiguous and what you think the decree should really provide.  The burden of presenting evidence to support the revision is on the party seeking the revision, so be sure to have ample evidence to support your position. Copies of your settlement agreement and any writings from your ex-spouse confirming or acting on the agreement are helpful. See, e.g. ER Brenner Co v Brooker Eng Co, 301 Mich 719; 4 NW2d 71 (1942).

I know of an attorney who recommends clients trust their attorneys and take time to rest and relax during the divorce process. Plan a trip, he says. You should trust your attorney, but you should also trust that Murphy’s Law is true. Mistakes can happen. A trip to the Bahamas is tempting but a BIG MISTAKE. Thorough planning and repeated review of your settlement agreement, your decree, and all of the related documents until the ink from your signature dries blue are essential to avoiding these common mistakes.

Once made, they are difficult to undo –Instead of having money for your trip to the Bahamas, you could end up like Frank, indebted to your ex and embarrassed in court for trying to wiggle out of a bad deal.

Just When You Thought You Were Through: Post-Divorce Mistakes and How to Avoid Them - Part 4

Mistake #5: You Thought The Economy Would Be Great

In today’s economy, this may be a less common mistake. However, be sure a glimmer of hope (a pay raise, a new job) that the economy is on the up does not give you a false sense of security. This was Frank’s problem in the adaptation from Marshall v Marshall. Do not count on maintaining your current income, or earning more, when you negotiate a support or property settlement payment schedule. To the extent the laws in your jurisdiction allow, build in automatic support review periods and/or make your payments conditional on another event, with a floor and a ceiling to the payments (e.g., you pay one-third of the money you receive for the sale of X, to a maximum of $Y and a minimum of $Z). Do not agree to non-modifiable, fixed support unless you are absolutely certain (and that is rare) you will have the income to pay it. Do not waive support, even if you gawk now at the thought of your spouse paying it. If your payments include interest, consider whether a variable interest rate tied to some external indicator is better than a fixed rate. If your settlement contains conditional payments (e.g., you pay your spouse one-half your home’s equity only if you sell the home in ten years), clarify whether the payee is entitled to an alternate award if the condition fails. Prepare a budget for your first post-divorce year to determine whether you will have an income sufficient to meet all of your personal and court-ordered expenses. If not, what can you trim? Most of all, have a financial advisor review your settlement before you finalize it and apprise you of any beneficial planning techniques.

Mistake #6: Your Spouse Is Still Your Beneficiary

State law treatment of beneficiaries for life insurance, annuities and endowments vary. In Michigan, unless the parties’ judgment of divorce provides otherwise, the judgment terminates each spouse’s interest as a beneficiary in the other’s life insurance policies, endowments and annuities. See MCL 552.101. This is true, in Michigan, even if the federal Employee Retirement Income Security Act of 1974 (ERISA) preempts state law with respect to determining beneficiaries because it does not preempt a nonparticipant interest waiver. See, e.g., Sweebe v Sweebe, 474 Mich 151; 712 NW2d 708 (2006). This is not true in all states, and you should not rely upon it even if it is true in your state because the laws in this area change. The best way to ensure your ex-spouse is no longer a beneficiary for your life insurance, endowment or annuity is to contact your insurance, endowment or annuity administrator and execute new beneficiary designations. A certified copy of your decree is helpful but not necessary unless you have limited rights to modify your beneficiary designations. Be sure to contact the administrator before you finalize your settlement agreement and your decree to learn whether the administrator will require any special language in either or documents from your spouse to effectuate the change.

Mistake #7: Your Estate Plan Is Old, Or You Do Not Have One

Divorce is also the time to review your estate plan. Who do you want to administer your affairs when you pass away? Who will receive the property you leave? Who should oversee your funeral and burial services and any expenses thereto? Who do you want to make your important medical decisions in the event you are unable? Discuss these issues with your attorney to learn what effect divorce has on your estate plan. Some attorneys are even willing to redraft or prepare your estate plan at a reduced rate as part of your divorce file.

Just When You Thought You Were Through: Post-Divorce Mistakes and How to Avoid Them - Part 3

Mistake #3: Your Spouse Has Not Refinanced

If one spouse retains the home, the agreement does not mean, absent more, the non-taking spouse is no longer liable to pay the home mortgage. The lender is not a party to your divorce, so the court cannot adjudicate the lender’s rights to repayment. Careful drafting in the settlement agreement, the decree and all related documents is an absolute must. These should, at a minimum, require the taking spouse to refinance the mortgage into the spouse’s name immediately; if that is impracticable, the spouse should have a continuing duty to apply for refinancing in good faith until successful and, in the interim, hold the non-taking spouse harmless for any mortgage default and the costs thereto (e.g., interest or penalties). They should specify each spouse’s responsibility for property taxes, insurance, homeowners’ association fees and any other liabilities until the home is refinanced or sold. They 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, mandatory attorney fees and/or contempt.

Mistake #4: Your Spouse Is Still A Named Titleholder

Imagine the dismay (horror?) of discovering, on the eve of your home sale, that your ex-spouse from fifteen years ago is still a named titleholder on your deed records. To complete the sale, you need your ex to execute a quitclaim deed to you. But your ex absconded to Vegas a year after your divorce, and no one has heard from her since. Sound unbelievable? This happened to one of my clients, who was (understandably) disappointed to learn that we had to track down her ex-husband. She incurred attorney fees and deed recording costs for something that could, and should, have been resolved concurrently with her divorce. Whenever you award property to one spouse or to both spouses in a different format (e.g., as tenants in common rather than as joint tenants), be sure to execute deeds to effectuate the transfer in addition to the settlement agreement and the divorce decree. You need to have clear title. Ideally, these will all be prepared and ready for execution at the same time. If not, then your settlement agreement and your decree must require each spouse to cooperate to execute all reasonably necessary documents as soon as practicable and specify consequences for the uncooperative spouse. You should also inquire of your register of deeds or county clerk whether you can make your decree “in recordable form.” In Michigan, a judgment of divorce is recordable and, once recorded, serves the same purpose as a deed if it complies with certain format requirements, such as containing all of the property’s legal description. That way, parties can simply record their judgments in lieu of deeds when their ex-spouses abscond or refuse to cooperate.

Just When You Thought You Were Through: Post-Divorce Mistakes and How to Avoid Them - Part 1

Frank and Betty were married for twenty years, two of which they spent divorcing.

Frank owned part of a profitable trucking company. As news spread that Frank and his business partners planned to sell the company, Betty eagerly pushed her attorney to retrieve a share of the cash. After protracted litigation and settlement negotiations, Frank, Betty and their attorneys arrived at a nineteen page settlement agreement. In exchange for Betty’s release of her marital rights in the business, Frank would pay her $25,000 within 30 days of receipt of the buyer’s first purchase price payment, then $202,000 in semiannual payments of at least $10,000 until the balance was paid in full. Frank thought the deal was solid. He negotiated the semiannual payments to coincide with the dates he anticipated receiving purchase price payments from the buyer. He even negotiated his payments to be conditional on the buyer’s, so that if the buyer failed to pay, he would not have to pay Betty. To Frank, Betty was a fool for accepting this deal – if Frank did not get his money, Betty would not get hers.

The problem? Frank did get his money, but not the $10,000 he hoped. Turns out, the buyer’s purchase agreement with Frank’s business included a loophole through which the purchase price would fall as the market price fell. The market tanked. Frank went back to his judge and complained that Betty should receive less because they either intended her payments to rise and fall as his from the buyer did (Betty guffawed) or, alternatively, a reduced price was only fair. judge thought the reduced price was fair, with sympathy for penniless Frank.

But Betty brought that written settlement agreement to the appellate court and pointed out exactly what they agreed – not a price reduction loophole to be found. The appellate court reversed the judge’s decision and rebuked Frank: “[Frank] wants the trial court to make a property settlement for him that he did not make for himself . . . . The only mistake of the parties was with respect to the final purchase price of the stock. . . . It must be assumed that the parties considered the risks of the property settlement agreement that they made . . . .” See Marshall v Marshall, 135 Mich App 702; 355 NW2d 661 (1984).

Frank would have no out from under that settlement agreement He owed Betty all $227,000, with interest, even though his business deal soured and he got a trifling of it.

In most states, once parties have negotiated and entered into a settlement agreement that the divorce court then incorporates into a decree, the court cannot modify the agreement absent fraud, duress or mutual mistake. So, what can you do to avoid Frank’s mistake and others like it? Here are some suggestions.

Mistake #1: You Forgot The IRS[1]

You know the saying, “There are two certain things in life: death and taxes.” Yet, when it comes to negotiating a divorce settlement (which sometimes feels like death), too many spouses fail to consider the tax consequences of their settlement. They focus on what appears to be a big win (keeping the house, getting the boat) without focusing on the tax costs. It may be obvious to you that a checking account with a $50,000 deposit and immediate accessibility is not the same as a $50,000 deferred compensation retirement account, but there are subtler tax issues to consider as you settle, too:

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. The transferor spouse must provide the transferee spouse with sufficient documentation to determine the basis and the holding period. Treas Reg 1.1041-1T, Q7. 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 marriage each spouse would have bore 50% of their stock’s $50,000 appreciation, after divorce the burden is 100% the transferee spouse’s. Therefore, be mindful of the basis and the holding period transferred to you whenever you accept property in your settlement.  

The most important thing for you to do is plan ahead. Consider all tax consequences early in your settlement discussions. A simple chart listing all of your property, with a column for fair market value, a column for outstanding debt, a column for pre-tax value and a column for estimated tax costs will help you and your attorney. So too will a tax adviser. Have you tax adviser review the final draft of your settlement 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. . . . [W]e decline to permit plaintiff to use his income taxes as a basis for a [modification].” Couzens v Couzens, 140 Mich App 423; 364 NW2d 340 (1985).

MORE TO COME…

[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.

HELP YOUR LAWYER OUT: GATHERING DOCUMENTS

To properly prepare for your case, we need to identify all assets and liabilities and ascertain their values or balances. In an effort to work with you to prepare for your case cost-effectively, your attorney will rely on you in part to retrieve as many of the following items as possible.  If you do not have an item, please note “n/a” next to it. If you have an item but cannot locate it, please note where you believe we can locate it. Bring this list and all of the documents you do have to your next meeting with your attorney.

___Income tax returns, including state and federal personal, corporate, partnership, joint venture or other income tax returns, with related W-2, 1099 and K-1 forms, from the start of the marriage to the present.

___Income information, including payroll stubs and all other evidence of income since the filing of the last income tax return.

___Personal property tax returns filed in this state or anywhere else from the start of the marriage to the present.

___Banking information, such as monthly bank statements, passbooks, check registers, deposit slips, cancelled checks, and bank charge notices on personal and business accounts; certificates of deposit, money market accounts and retirement accounts from banks, savings and loan institutions, credit unions or other institutions in which either spouse has an interest.

___Financial statements submitted to banks, lending institutions or any other persons or entities, prepared by either spouse during the last five years.

___Loan applications made by either spouse within the last five years.

___Brokerage statements from all accounts of securities, commodities or mutual funds held by either spouse during the marriage individually, jointly or as a trustee or guardian.

___Certificates of stocks, bonds and mutual funds accounts owned by either spouse during the marriage or pre-owned.

___Stock options records pertaining to options held in any corporation or other entity by either spouse, individually or jointly, from the start of the marriage or pre-owned, whether or not exercised.

___Pension, profit sharing, deferred compensation agreement and retirement plans records and statements pertaining to any financial plan owned by either spouse, or by any corporation in which either spouse has been a participant from anytime to the present.

___Wills and trust agreements executed by either spouse or in which either spouse has a present or contingent interest or in which either spouse is a beneficiary, trustee, executor or guardian and from which benefits have been received or will be received and which are or were in existence during the past five years; all records of declarations of trust and minute books for all trusts to which either spouse is a party.

___Life insurance or certificate of life insurance policies now in existence insuring the life of either spouse, and statements of the cash value, if available.

___General insurance policies, including annuities, health, accident, casualty, motor vehicles of any kind, property liability including contents, owned by either spouse during the past five years.

___Outstanding debt documents reflecting all debts owed by either spouse, secured or unsecured, including personal loans, credit card statements, and lawsuits pending or previously filed in any court from the start of the marriage to the present.

___Records of ledgers, both personal and business, together with all accounts and journals.

___Sale and option agreements on any real estate owed by either spouse individually, jointly or through another person or entity, or as trustee or guardian.

___Personal property documents, including invoices, contracts, insurance policies, and appraisals on all personal property, such as furniture, fixtures, furnishings, equipment, antiques, and any type of collections, owned by either spouse individually, jointly, as trustee or guardian, or through any other person or entity during the marriage.

___Firearm registrations issued of pending receipt of governmental registration documents, owned, possessed or controlled by either spouse during the past five years.

___Vehicle financing agreements and titles, including those related to airplanes, boats, and other types, as well as automobiles, owed by either spouse, individually or jointly, during the marriage.

___Corporate interest records showing any kind of personal interest for either spouse in any corporation (foreign or domestic) or any other entities not evidenced by certificate or other instrument.

___Partnership and joint venture agreements to which either spouse has been a party during the marriage.

___Employment records showing evidence of wages, salaries, bonuses, commissions, raises, promotions, expense accounts and other benefits or deductions of any kind, fringe benefits records showing any benefits available to either spouse from any business entity, including without limitation auto, travel, entertainment, educational and living expenses.

___Employment contracts under which either spouse has performed services during the past five years, including a description of any oral contracts.

___Charge account statements for the past five years.

___Membership cards or documents identifying participation rights in any country clubs, key clubs, private clubs, associations, or fraternal group organizations during the past five years of the marriage, together with all monthly statements.

___Judgments and pleadings in which either spouse has been a party, either as plaintiff or defendant, during the marriage (except this case).

___Medical bills, prescriptions, evaluation reports or diagnoses for psychiatric treatment receiving during the last five years.

___Photographs or videos of real estate and contents owned by either spouse during the marriage.

___List of sale deposit box contents, as well as each box’s location and the names of the people authorized to enter it.