HIDDEN COSTS OF DIVORCE
June 13, 2011 § 4 Comments
John and Marsha have decided that they are tired of living in their own, personal soap opera, and they have agreed to an irreconcilable differences divorce. It looks pretty simple:
Marsha will get the former marital residence. It’s paid for and Marsha intends to stay there. The house sustained some damage in a wind storm a couple of years ago, and the parties got $10,000 for repairs from insurance, but they spent it on a Hawaiian vacation, with a few days in Vegas on the way out, in an unsuccessful attempt at refreshing their marriage. Marsha says she can get the repairs done or not because they don’t affect its habitability. The roof needs replacing, but it’s been patched and doesn’t leak. She says she’ll fix it if and when it leaks or when she sells the house, but she does not have the $6,000 it will cost right now.
The parties own two adjoining commercial lots worth about $15,000 each. Marsha has agreed to take the lot they purchased in John’s name in 1990 for $1,500 before Wal-Mart located down the street. John will get the jointly-titled lot they purchased for $12,500 several years ago. A car lot is expanding and has expressed an interest. Marsha would like to settle the divorce as soon as possible so as to cash in. Marsha owes $14,000 on her credit cards, and she’s behind in her payments, so she needs as much cash as she can get out of sale of the lot.
The parties will split the 1,000 shares of Wal-Mart stock that they accumulated through the years. Marsha really doesn’t know much about stock, so John has generously agreed to divide the shares.
Marsha has enjoyed driving the 2008 Jaguar that John bought her several years ago in an attempt to make up after she caught him in a questionable situation with a waitress from the Waffle House. The car is paid for, and Marsha loves it because she has never had a nice car before. She will get it in the divorce.
John has agreed to pay Marsha $1,000 a month in rehabilitative alimony for 36 months. Even with the alimony, it will be a tight squeeze financially for Marsha, so she doesn’t need any unpleasant financial surprises after the divorce is final.
Marsha is in a hurry. She wants you to do up the papers and she will pick them up to go over with John tomorrow, so she can get them filed right away.
It’ll be a snap to prep the PSA, and you are tempted to just hand the notes over to your secretary so they can be done while you hit the golf course.
Before you jump on this, though, ask yourself whether Marsha will really be getting what she thinks she is bargaining for. Consider:
- The divorce will be a transaction effecting a change of ownership in the former marital residence, triggering a re-rating of the homeowner’s insurance. Because the hurricane repairs have never been done and approved by the insurance company, Marsha’s homeowner’s insurance premium is likely to skyrocket. Not only that, but there are other factors that can adversely affect Marsha’s insurance premium, including her credit rating, which is questionable due to the credit cards. In order to get her homeowner’s insurance premium back with a reasonable range, she will have to spend that $6,000 on the roof and complete the other repairs. How can she find out in advance whether she will have a problem? Marsha can get a free insurance C.L.U.E. (Comprehensive Loss Underwriting Exchange) report by writing CLUE, Inc. Consumer Disclosure Center, P. O. Box 105295, Atlanta, GA, 30348-5295, or by calling 1-866-312-8076. An insurance agent can help her decipher the report. And, as you probably know, she can get a free credit report once a year.
- When the commercial lots are sold, Marsha will be paying capital gains taxes, currenty 15%, on $13,500. John will be paying capital gains on just $2,500. Marsha’s tax bite will be $2,025, leaving her $12,975. John’s taxes will be a mere $375, allowing him to pocket $14,625, or $1,650 more than Marsha.
- Also, has Marsha gotten a title opinion on the commercial lot titled in John’s name? It would be a bitter pill indeed to discover when she goes to sell it that John borrowed money against it without her knowledge.
- The stock has the same pitfall as the commercial lots. Stock purchased for $25 a share years ago will carry a much heftier capital gains burden than will the shares purchased for $65 a few years ago. Moreover, John can allocate himself the shares that have sustained losses in the recent downturn. Yet the parties are treating all the shares the same, and, to make it worse, John will call the shots.
- As for her ride, Marsha needs to look at it as a cash drain. How much is she willing to let it drain her? The insurance alone is more than $1,500 a year, and this year’s tag, which is now due, is $862. Not only that, it uses exclusively premium gas, and has never gotten the 21 miles to the gallon that the dealer promised. Yes, it is paid for, but would she do better selling it and taking the cash to buy something more economical? Can she even afford this car?
- Finally, the alimony is taxable income to Marsha unless the parties agree that it will not be taxable. John will not likely agree due to the fact that he will get to claim it as a deduction. Is Marsha aware of this? Can you negotiate an extra $300 or so a month for Marsha to use to pay her income taxes?
You can do the papers exactly as Marsha dictated, or you can sit her down and bring all these matters to her attention. It’s the difference between acting as Marsha’s clerk-typist and acting as her lawyer. You get to decide.
UPDATED CHECKLIST OF CHECKLISTS
May 27, 2011 § 5 Comments
Proving your case by proving certain factors is a fact of legal life in Mississippi. I’ve referred to it as trial by checklist. If you’re not putting on proof of the factors when they apply in your case, you are wasting your and the court’s time, as well as your client’s money, and you are committing malpractice to boot.
Many lawyers have told me that they print out these checklists and use them at trial. I encourage you to copy these checklists and use them in your trial notebooks. And while you’re at it, you’re free to copy any post for your own personal use, but not for commercial use. Lawyers have told me that they are building notebooks tabbed with various subjects and inserting copies of my posts (along with other useful material, I imagine). Good. If it improves practice and makes your (and my) job easier and more effective, I’m all for it.
Here is an updated list of links to the checklists I’ve posted:
Doing an accounting in a probate matter.
Income tax dependency exemption.
Modification of child support.
AN ALIMONY TAX CONSEQUENCE YOU NEED TO CONSIDER
November 12, 2010 § Leave a comment
Internal Revenue Code § 71(f), provides that when alimony payments last three years or less, they will not likely be treated as tax deductible, even if the divorce judgment specifically states that they are deductible.
You need to talk this over with a CPA to get some guidance before you draft your PSA or have your client testify, for example, that she wants 24 months of rehabilitative alimony. This is one of those “tax consequences” of the award that is one of the Armstrong factors that the court is supposed to consider. If you don’t put evidence in the record about it, you won’t have to worry about it because the trial judge simply won’t give it any thought. Your client may call you later and ask for some financial assistance, though, and it probably won’t be a pleasant conversation.
As with all IRS rules, I am sure that there are ways to draft an agreement to avoid the problem, and, of course, the amount of alimony can be adjusted up or down to accommodate the tax effects.
This IRS rule underlines the importance of including in your property settlement agreements a disclaimer that you have not provided any tax advice, and that the parties have been encouraged to get tax advice from a qualified expert.
PROVING TAX EFFECTS OF ALIMONY
September 2, 2010 § 3 Comments
Armstrong vs. Armstrong, 618 So.2d 1278, 1280 (Miss. 1993), sets out the factors that the trial court is supposed to consider when adjudicating whether to award alimony, and if so, the form, duration and amount.
All of the Armstrong factors are important, and failure to prove even one can doom your claim. One of those factors is “The tax consequences of the spousal support order.”
There are only two ways to establish the tax consequences: (1) Have an expert testify or offer into evidence a learned treatise; or (2) Agree with opposing counsel what they are and present the agreement to the court.
It doesn’t take a legal scholar to appreciate the advantages and disadvantages of these approaches. An expert can offer clarity, but she can be asked about so many extraneous matters on cross until the court is bewildered. A learned treatise can be precise and clear, but you still need to lay a foundation for it with an expert in most cases. In either case, experts are expensive.
By contrast, it doesn’t take much to convince opposing counsel that it is to both parties’ benefit to enter into a stipulation as to the tax consequences. That way, both parties have evdence in the record for the court to consider, and if the case is appealed, the Court of Appeals is not left scratching its collective head about why there is no proof of the tax consequences.
Back when I was practicing, several of us attorneys colluded and came up with a form for a stipulation. I believe it covers every base. It was done several years ago, and may not reflect intervening changes in the tax code, but it will at least provide a template for you to adapt to the current law.
Here is the form:
| MISSISSIPPI CASE LAW | FEDERAL INCOME TAX |
| “Lump-Sum Alimony” | “Lump-Sum Alimony” |
| Represents part of the equitable distribution of the marital estate. Is a fixed sum not subject to modification. Obligation to pay continues after the death of the payee or payer. | Represents a property settlement for income tax purposes and is not taxable by the payer or taxable to the payee. Is not alimony for income tax purposes because payments would continue, by operation of law after the payee’s death. |
| “Periodic Alimony” | “Periodic Alimony” |
| Is based on the payer’s duty to support the payee in the manner to which she or he had become accustomed, is modifiable and terminates on payee’s remarriage, death, or payer’s death. | Is tax deductible by the payer and taxable to the payee; i.e., qualifies as alimony for tax purposes. The reason periodic alimony qualifies as alimony for tax purposes is because under Mississippi law there is no liability to make any payment (in cash or property) after the death of the recipient spouse. |
| “Rehabilitative Alimony” | “Rehabilitative Alimony” |
| Is for a fixed term, but is modifiable. | If the liability to make the payments stops after the death of the recipient spouse, then rehabilitative alimony would qualify as alimony for income tax purposes. |
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The payment is in cash.
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The instrument does not designate the payment as not alimony.
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The spouses are not members of the same household at the time the payments are made. This requirement applies only if the spouses are legally separated under a decree of divorce or separate maintenance.
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There is no liability to make any payment (in cash or property) after the death of the recipient spouse.
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The payment is not treated as child support.
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The obvious advantage of the stipulation is that it establishes the fact without expense and both parties have the information in the record. Unfortunately, this is an element of alimony proof that is almost never addressed by the attorneys in a trial, and it could cost your client dearly.
TRIAL BY CHECKLIST: LUMP SUM ALIMONY
August 31, 2010 § 9 Comments
A practice tip about trial factors is here.
The factors that the trial court must consider in making an award of lump sum alimony are:
- Substantial contribution to accumulation of the marital assets by quitting work or assisting in the business;
- A long marriage;
- Financial disparity;
- Other considerations, including payor’s assets and payor’s stability or instability.
Cheatham v. Cheatham, 537 So.2d 435, 438 (Miss. 1988). NOTE: these factors predated Armstrong (periodic alimony) by five years, and the Armstrong factors essentially overlap these. It may be preferable to cover all of the Armstrong factors coupled with a specific request for lump sum alimony as well as periodic or rehabilitative.
TRIAL BY CHECKLIST: PERIODIC AND REHABILITATIVE ALIMONY
August 27, 2010 § 19 Comments
A practice tip about trial factors is here.
Armstrong vs. Armstrong, 618 So.2d 1278, 1280 (Miss. 1993), sets out the factors that the trial court must consider and address in making a determination about whether to award periodic and/or rehabilitative alimony. They are:
- The income and expenses of the parties.
- The health and earning capacities of the parties.
- The needs of each party.
- The obligations and assets of each party.
- The length of the marriage.
- The presence or absence of minor children in the home, which may require that one or both parties either pay, or personally provide, child care.
- The age of the parties.
- The standard of living of the parties, both during the marriage and at the time of the support determination.
- The tax consequences of the spousal support order.
- Fault or misconduct.
- Wasteful dissipation of assets by either party.
- Any other factor deemed by the Court to be “just and equitable” in connection with the setting of spousal support.
Before the court can reach the issue of alimony, the court must first adjudicate equitable distribution and determine whether any need for alimony can be alleviated by a greater share of equitable distribution. This means that the factors for equitable distribution (Ferguson factors) must be presented in alimony cases. If, after equitable distribution, the court finds that the needs of both parties are met and there is no disparity, the court does not consider alimony.
Professor Deborah Bell in her MISSISSIPPI FAMILY LAW treatise and her annual seminars has done some important research into how length of marriage and relative income affect awards of periodic, rehabilitative and lump-sum alimony. You should become very familiar with her work if you are going to take on an alimony case.
Caveat: This is an area of the law in flux, and the cases are significantly fact-driven. You should do some research for authority supporting your position pro or con before going to trial. There is plenty of case law on both sides of the issue.
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