A Spouse’s Bad Conduct and its Impact on Property Division in a Massachusetts Divorce

By Jonathan Fields, Esq.

One of the most frequent questions clients ask divorce attorneys is whether a spouse’s bad conduct will impact the financial settlement in a divorce.  This article explores the Massachusetts law in this area.

The Massachusetts property division statute, G.L. c.208 s.34, requires courts to examine multiple factors in determining the division of the marital estate upon divorce.  The statute articulates mandatory and non-mandatory considerations.  Practically speaking, the length of the marriage may be the most important consideration upon which all further analyses depends.[1]  The relative economic and non-economic contributions of the parties (paradoxically, a non-mandatory consideration under the statute) has been elevated by the case law to be the “touchstone of an equitable division of the marital estate.”  Moriarty v. Stone, 41 Mass. App. Ct. 151, 157 (1996).  The character of an asset (whether it was inherited and/or premarital) is another prominent consideration.  Rice v. Rice, 372 Mass. 398 (1977).

The statute also includes, as a mandatory consideration, “the conduct of the parties during the marriage.”  On the far end of the spectrum of conduct affecting a property division is a case in which the wife solicited the husband’s murder.  The trial court awarded the husband 90% of the marital estate and the Appeals Court upheld the division.  Wolcott v. Wolcott, 78 Mass. App. Ct. 539 (2011).

Obviously, conduct less egregious than that in Wolcott can also form the basis of a disparate division.  Johnson v. Johnson, 22 Mass. App. Ct. 955, 956 (1986) (judge properly considered “husband’s abusive conduct, both physical and mental”); Bacon v. Bacon, 26 Mass. App. Ct. 117, 120 (1988) (judgment affirmed where judge considered fact that “[a]t times, early in the marriage, the husband was abusive to the wife”).

[1] As a leading article describing the theory underlying the enactment of G.L. c.208 s.34 in 1974 puts it, the “length of the marriage is a critical consideration in assignment of property.  The equities of assigning to one party a portion of the other’s estate are clearly diminished where the marriage is only of brief duration …” Inker, Walsh and Perocchi, Alimony and the Assignment of Property, X Suffolk Univ.Law.Rev 1 (1975).

Read full article here.

 

Removal of Children to Another Jurisdiction: What Every Parent Should Know

By Jonathan E. Fields, Esq.

When a parent wants to move with the child outside of Massachusetts, and the other parent does not consent to the removal, a complex legal analysis must be undertaken in order to determine the rights and responsibilities of the parents and the child.  If the parties cannot come to an agreement themselves, a Guardian Ad Litem (GAL), usually an attorney, is often appointed to investigate and report on the matter.  The parties might settle after the GAL report but, if not, each has a right to pursue the case to trial and have a judge decide the matter.

This article seeks to explain the law of removal – and to be of use to both parties and practitioners.

Read article here.

For all relevant Massachusetts cases on removal, go here and scroll down for “Removal.”

Alimony and the TCJA: Common Misconceptions Every Divorcing Parent Should Know

By Jonathan Fields, Esq.

Under the Tax Cuts and Jobs Act of 2017 (TCJA), alimony will no longer be tax deductible to the payor and no longer tax includable to the payee effective January 1, 2019.  The law was a shock to many, particularly divorce lawyers, most of whom had gotten quite used to the way things had been for the last 75 years.  There is a saving grace in the TCJA, however — qualifying agreements and modifications can be grandfathered into the old taxability treatment subject to certain requirements.  Specifically, unless the parties opt-in to the new law, the TCJA applies to “decree[s] of divorce or separate maintenance or written instrument[s] incident to such … decree[s]” executed after January 1, 2019.  To unwind this legislative convolution:  the old taxability provisions can apply to your qualifying pre-2019 agreement unless you both agree that you don’t want them to.  Still a mouthful, but that’s the way Congress wrote it.

The biggest misconception about alimony and the TCJA, frequently repeated in the lay media, and even by legal commentators, is that the qualifying instrument must be a final divorce judgment.  It does not.  You do not necessarily have to have a final divorce judgment by the end of the year to be grandfathered.  Lawyers, who like to be “better safe than sorry” may prefer to have a divorce judgment but, when you are fighting this issue out in December of this year without the luxury of time, it’s worthwhile to take a closer look at what is actually required.

Procrastinators can rejoice. TCJA continued the requirement from IRC s.71 that a payment made to or on behalf of a spouse or ex-spouse pursuant to a “written instrument incident to [a divorce decree]” qualifies for alimony treatment.  TCJA further sets forth that such instruments are “as defined in s.71… as in effect before” TCJA.   Presumably, the case law from the past several decades interpreting the clause remains relevant and binding.

So, basically, in many instances, all a couple may need to qualify for grandfathered alimony treatment is a contract by December 31, 2018 that is a “written instrument incident to [a divorce decree]” pursuant to the statute. The “contract” here is no more prescriptive than a common law “meeting of the minds” contract – except that, unlike in the common law, it must be in writing.  A separation agreement signed by the parties and approved by the court should do – no need to wait for a final judgment of divorce 90 to 120 days later.  A separation agreement not yet approved by the court should also suffice.  But it doesn’t even have to be that formal.  Two Tax Court opinions illustrate the flexibility of the “written instrument incident to a divorce” requirement.

A Tax Court Memorandum Opinion, Leventhal, T.C. Memo. 2000-92, made clear a “meeting of the minds” requirement, particularly that there be a “clear statement in written form memorializing the terms of the support between the parties.”  In this case, one spouse’s written assent to a letter proposal of support by the other spouse was a sufficient writing to bring it within IRC s.71.  Moreover, Leventhal tells us, it was not necessary to articulate a specific amount of support so long as “there is an ascertainable standard with which to calculate support amounts.”

A Tax Court Summary Opinion, Micek, T. C. Summ. Op. 2011-45 (2011), is also instructive for our purposes.  Here, the couple separated in 1997 and entered into an oral agreement in 1999 that the husband pay the wife alimony of $1,250 per week.  Later that year, the husband signed a “spousal support affidavit” agreeing, or reaffirming, the payment of alimony in the same amount.  In 2003, the husband stopped paying because he became disabled and, presumably, was unable to earn income. The wife’s attorney then wrote to the husband, inquiring as to why the alimony has stopped.  Think about this: there is still no divorce pending at this point, the wife hasn’t signed anything yet, and the wife’s lawyer wrote the letter described above four years after the husband started paying alimony.

A few more years go by.  At some point – the opinion does not make clear when – the husband filed for divorce. Presumably satisfied that neither party had the means to support the other, the parties’ agreement incorporated in the divorce judgment mutual waivers of present and future alimony. In 2009, the IRS filed a notice of deficiency disallowing husband’s alimony deductions for the years 2000 to 2003 – the period prior to the divorce during which the husband was paying alimony to the wife.  All of the payments at issue were made prior to the filing of the divorce.

The husband took the matter to Tax Court.  The issue before the court was whether the alimony was paid pursuant to a “written instrument incident to [a divorce decree].”  The Tax Court agreed with the taxpayer, finding that alimony was paid pursuant to such an instrument and, therefore, deductible to him and includible to his ex-wife.  The Tax Court reasoned that (1) the so-called “spousal support affidavit” signed by the husband in combination with (2) the letter from wife’s attorney inquiring as to why he had stopped paying alimony (which evidenced her client’s understanding that alimony was to be paid) was sufficient to qualify under IRC s.71.  That is, a written instrument (the affidavit) signed by one party and the letter from wife’s attorney was together a sufficient “written instrument” that evidenced the meeting of the minds between the parties.

Considering the significant time gap between the instrument and the divorce filing, it is striking that Micek did not focus on the requirement that the “written instrument” be “incident to [a divorce decree].”  We might deduce from Micek that timing is not dispositive to the “incident to” requirement but that it is, rather, a sort of “totality of the circumstances” analysis.  Indeed, the parties had been living separately and the husband had been paying alimony for several years and, eventually, they got around to making de jure what had been de facto. From this, it would appear a logical construction that the alimony payments at issue, though made several years before a complaint for divorce, were “incident to” a divorce.

In any event, to play it safe, the practitioner should endeavor to have the contract executed while a divorce is pending or imminent in order to meet the “incident to divorce” requirement – so, unlike Mr. Micek, nobody is relying on the Tax Court to save the day.  Bottom line: a divorce judgment is not the only way, under the TCJA, to get the preferential tax treatment that alimony judgments today can enjoy.

In the context of Micek and the “incident to” discussion above, consider prenuptial or postnuptial agreements.  Although there is no case law on the issue, these do not appear to be qualifying agreements pursuant to IRC s.71.  They are not, in the same sense as the Micek agreement, “incident to” a divorce decree – even if one of the parties filed for divorce shortly after signing.

Two additional issues merit consideration. (1) Must a 2018 agreement contain a present award of alimony and (2) How should the practitioner handle 2018 temporary orders of alimony followed by a 2019 (or later) divorce judgment?

As for (1), it is unclear whether a 2018 agreement that contains no present award of alimony but preserves the rights of the parties to future alimony would qualify for preferential retroactive treatment.  On the one hand, TCJA’s new alimony rules exempt from its application “any divorce or separation instrument” executed before 2019.  That would suggest that any agreement would suffice – whether or not it includes a present award of alimony.  On the other hand, elsewhere in TCJA, alimony is defined, subject to other conditions, as payments made to or on behalf of a spouse pursuant to a “divorce or separation instrument.”  Arguably, read together, there needs to be a present award of alimony – actual payments must be made (or required).  In light of the uncertainty, the cautious practitioner would do well to include a requirement of a present payment of alimony, if only a nominal amount, and a statement in the agreement to the effect that the parties intend the agreement to qualify for tax preferential treatment per the TCJA.

As for (2), temporary orders pose challenges when dealing with TCJA and retroactivity.  If there is a 2018 temporary order of alimony followed by a 2019 divorce judgment, the temporary order is extinguished.  With that, the link to retroactivity may be severed.  That is not clear, of course, but it is a possibility.  Therefore, the practitioner may want the judgment to incorporate the temporary order so as to preserve best as possible the benefits of a qualifying retroactive instrument.

This position is generally consistent with the IRS regulations for alimony pursuant to the Tax Reform Act of 1984 – which also dealt with the issue of the retroactive application of that law to instruments entered prior to that Act’s effective date of January 1, 1985.  Those regulations (which, by the way, have been “temporary” for 34 years) made clear, for example, that if a 1985 divorce judgment incorporated without change the terms of a 1984 instrument, that 1985 judgment would be grandfathered under the then pre-existing tax law. 26 CFR s1.71-1T (Q-A #26).

The 1984 regulations do have one caveat that the practitioner may wish to consider – the subsequent judgment must incorporate the terms of the prior instrument “without change.”  Clearly, we don’t know if the IRS will interpret the TCJA’s alimony provisions in the same way but it may be worthwhile to at least consider these regulations as we venture into uncharted territory.  If the IRS were to adopt this position with respect to TCJA, it would certainly be problematic in the event a 2018 judgment provides for a nominal alimony payment and a post-2018 judgment calls for a larger payment.

In the months ahead, while many labor to complete agreements by year’s end, we can hope for clarifying guidance from the IRS.  In the meantime, especially in the gray areas, practitioners would do well to let clients know, in writing, where there are uncertainties as to whether their agreements will be grandfathered.

Taxation of Property Division in Divorce: What You Need to Know

By Jonathan Fields, Esq.

I.  General Rules

Under §1041 of the Internal Revenue Code (IRC), the general rule is that neither gain nor loss is recognized on transfers of property between spouses or ex-spouses “incident to a divorce.”   A transfer “incident to a divorce” is one that occurs within one year of the divorce and not more than six years from the divorce.  If it occurs after six years but it is clear from the divorce agreement that the transfer is related to the divorce, §1041 still applies.

Under §1041, the gain or loss is deferred and the transferee former spouse gets a “carryover basis” – that is, the transferee assumes the transferor’s tax basis in the property at the time of transfer and such tax basis is carried over for income tax purposes.

A caveat — the deferral benefits of §1041 do not apply where the transferee spouse is a “non-resident alien.”  A spouse who is not a U.S. citizen and has no permanent resident (“green card”) status may be considered a non-resident alien if they do not meet the “substantial presence” test.  IRS Publication 519 (2018).

Simple enough.  But there are multiple exceptions to §1041’s non-recognition rule – each of which should be carefully scrutinized when dividing assets in a divorce.

II.  Exceptions

       A.   Sale of Marital Home

In dealing with the sale of the principal marital residence in the context of a divorce, §1041 does not apply. Rather, we look to IRC §121 — which provides that a taxpayer can exclude up to $250,000 of capital gain from the sale of the principal residence if filing a separate tax return, or up to $500,000 for a joint return, provided the following requirements are met:

  • During the five-year period ending on the date of the sale or exchange, the residence must have been owned by either spouse and used by both spouses as their principal residence for periods aggregating two years or more.
  • An individual shall be treated as using property as such individual’s principal residence during any period of ownership while such individual’s spouse or former spouse is granted use of the property under a divorce or separation instrument.
  • If a residence is transferred to a taxpayer incident to a dissolution of marriage, the time the taxpayer’s spouse or former spouse owned the residence is added to the taxpayer’s period of ownership.
  • The exclusion can only be applied to one residence every two years.

      B. Retirement Assets

Retirement assets such as a 401-k or 403-b are not covered by §1041 but, rather, by a law called ERISA; as such, they cannot be divided except by a qualified domestic relations order (QDRO) incident to a divorce.  The division, which creates an account for the non-participant spouse (called the “alternate payee”), does not trigger tax consequences so long as no distribution is made.

IRA’s, on the other hand, are not covered by ERISA and, therefore, do not require a QDRO in order to be divided.  In dividing an IRA, be certain not to liquidate the account.  Instead, do a trustee-to-trustee transfer (a direct transfer) of the IRA funds, moving them directly from one spouse’s IRA to the other spouse’s account. That way, the IRA will be split and there will be no tax liability for either spouse.

In most cases, post-division distributions from ERISA and non-ERISA plans will trigger tax consequences to the distributee at ordinary income rates.  For recipients under 59½ years of age, an additional ten percent early distribution penalty will also apply.  The early distribution penalty is an amount equal to ten percent of the early distribution.

Alternate payee spouses who require immediate cash from a retirement plan post-divorce can look to IRC 72(t) for relief.  Under that provision, distributions to a former spouse from an ERISA plan pursuant to a QDRO will be subject to ordinary income tax — but are exempt from the ten percent penalty tax even if the recipient is younger than 59½ years of age.

     C.  Assignment of Income Doctrine

Another exception to the non-recognition rule of §1041 is the assignment of income doctrine.  A bedrock principle of tax law is that the person who earned the income is taxed on it regardless of who receives the proceeds.   The assignment of income doctrine is implicated when the right to receive the income has already accrued, and the parties assign that right to the spouse who did not earn the income.

           1.   Income Producing Property

Consider a divorce where the husband owns income-producing rental property and he assigns the rental income to the wife on the assumption that this will shift the income to her and she, then, will pay taxes at her lower tax rate.  Under the assignment of income doctrine, that will not work.  In order to achieve the objective that she pays taxes on the rental income at her tax rate, she would have to own the property.  Another income-shifting strategy, of course, would be to pay alimony which will continue to be deductible to the payor and includable to the payee for agreements through the end of 2018.

            2.   Savings Bonds

An ostensibly simple transfer of savings bonds is anything but simple.  A spouse who transfers U.S. savings bonds to a former spouse incident to a divorce must recognize as income in the year of transfer the deferred, accrued, and unpaid interest attributed to the bonds.

            3.   Other Assets Not Capable of Being Assigned

Particularly with highly compensated employees, a variety of other income-producing assets are typically not permitted to be assigned to others. Examples of these include: non-qualified deferred compensation plans, stock options, and restricted stock units.  With these assets, the owner is liable for taxes based on the realization of income.  And the support is usually paid to the non-owner spouse when the income is realized as well.

     D.  Corporate Redemptions

As noted, §1041’s non-recognition rules apply to transfers of property between spouses in a divorce. Therefore, a transfer of ownership of a closely held business in divorce does not trigger gain or loss if it is directly between the spouses.  Alternatively, a transaction involving a spouse who transfers shares to the corporation in exchange for redemption proceeds triggers rules that are much more complex.

In the event a transfer directly between spouses is not feasible or appropriate and a corporate redemption is necessary, one of the spouses must pay the taxes.  The good news is that the regulations allow divorcing couples to elect the tax treatment they want — to decide how (and to whom) the stock redemptions will be taxed.  For example, depending on certain factors, the couple can either elect to have the transferor or transferee spouse taxed on the redemption proceeds.  26 C.F.R. §§ 1.1041­2(c).

IV.   Conclusion

Tax issues in divorce can be complex and mistakes costly.  Make sure your attorney has a grasp of these laws before you decide to hire them.

 

Attorney Jonathan E. Fields Interviewed on Mix 104.1

Everything you wanted to know about divorce, but were afraid to ask: follow the link to listen to this lively and detailed interview with Jonathan E. Fields and Mix 104.1 host Mike Mullaney. Jon talks Marriage Story, mediation and what it means to be a divorce lawyer in 2020.

Please find a link to the interview here.

Attorney Jonathan E. Fields featured in AAML Newsletter October 2019 Meet This Fellow Questionnaire

AAML October 2019 Meet This Fellow Questionnaire
Jonathan Fields
Wellesley, MA

1. What is your favorite Fall activity?
Hiking with our dogs in the New England woods, breathing in the crisp autumn air. Actually, not really – aside from going to the gym, we are all sort of homebodies. Netflix, Doordash, having people over for drinks and barbecue are more usual activities for us than extended walks in the forest.

2. If you were an animal, which would you be and why?
I would be our well-loved dog Patches, a 14-year-old hound mix.  He spends the day contentedly sleeping, sniffing, eating, and looking out the window. Sounds like a pretty good life for a creature without a human brain.

3. What’s your favorite aspect of being a matrimonial lawyer?
My practice is about half mediation and half traditional representation. In mediation, particularly, I enjoy navigating the psychodynamics of the parties and helping them come to agreement.

4. What would your autobiography be titled and why?
My parents moved us to Florence, Italy in 1969 where we stayed until 1976 – all of us Americans living in this wonderful city for many years. A snappy title for my autobiography eludes me at this point but, these years having been formative to my development, the title would certainly be a riff on my Italian years.

5. What are the first three things you would buy if you won the lottery?
“Give it all to charity” might be the best answer. But I would probably do something more selfish like renovate our house and buy a plane.

6. What actor would star as you in your biopic?
When I was in college and had more of an early eighties curly hairstyle, it might have been Tom Hanks of the same period. Not sure who would play me today – although my wife remarked that a recent DMV photo made me look like a female East German gymnast.

7. If you could have one superpower, what would it be?
The power to make unreasonable people settle their cases would be a nice superpower. Or invisibility – that would be cool too.

8. Do you have any hidden talents?
What are they? I just learned how to make the perfect hard-boiled egg.

Attorney Sheryl Dennis to Chair MCLE Program TURBOCHARGED Estate Planning Practice Upgrade 2019

TURBOCHARGED Estate Planning Practice Upgrade 2019
Leading practitioners and judges analyze advanced next-level issues!

Attorney Sheryl Dennis to Chair MCLE Program on October 25th

Join Attorney Sheryl Dennis for this In-Person Program scheduled for Friday, 10/25/2019, 9:30 am – 4:30 pm,
Courtyard by Marriott, 700 Unicorn Park Drive, Woburn

For more information including registration and agenda. Please visit MCLE. 

Attorney Andrea E. DeLaney Featured on Radio Entrepreneurs

Andrea E. DeLaney is an experienced family law attorney. Prior to joining Fields and Dennis LLP, she had her own practice, DeLaney Parker Law Offices, LLC, where she gained significant experience in the areas of family law and divorce, including child custody, child support, paternity, alimony and asset division. Her experience and compassion make her an ideal choice for dealing with sensitive family law cases. She is a member of the Massachusetts Bar Association Family Law Section, Norfolk Bar Association, North Shore Women Lawyers’ Association, and is on the membership committee of the Massachusetts Collaborative Law Council (MCLC).

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Rikki B. Saksik to be Honored at the upcoming Massachusetts Lawyers Weekly Event, “Excellence in the Law” for her Excellence in Paralegal Work as one of the top paralegals in Massachusetts.

Fields and Dennis LLP is proud to announce that senior paralegal, Rikki B. Saksik, will be honored at the Massachusetts Lawyers Weekly Event, “Excellence in the Law” for Excellence in Paralegal Work.  “I am so pleased that Rikki will be honored at this event.  She deserves an award as an absolutely outstanding paralegal.”  Jonathan E. Fields

“I am thrilled to be recognized for standing out and going above and beyond on a regular basis, not just professionally at the firm and with other colleagues, but also in my daily life as well.” Rikki B.  Saksik

Excellence in the Law celebrates excellence throughout the legal community in all of Massachusetts. Individuals are honored in the following categories: Excellence in Firm Administration/Operations, Alternative Dispute Resolution, Marketing, Paralegal Work, and Pro Bono. We also honor our Up & Coming Lawyers.

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The Boston metro family law, divorce and estate planning attorneys at the law firm of Fields and Dennis LLP are based in the Newton Wellesley area and serve the city of Newton: Auburndale, Chestnut Hill, Newton Centre, Newton Corner, Newton Upper Falls, Newton Lower Falls, Nonantum, Oak Hill, Waban and West Newton and town of Wellesley: Babson Park, Wellesley Hills, Wellesley Square Fields and Dennis also serves many clients in the Greater Boston and Massachusetts region including Ashland, Dover, Holliston, Medfield, Needham, Sherborn, Westwood, and all of Massachusetts.

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