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 1/1/19. 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 under certain conditions.
The biggest misconception, frequently repeated in the media, or ignored 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 always prefer 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 rejoice! The TCJA retained the provision from IRC s.71 regarding a “written instrument incident to [a divorce decree]” and, presumably, all the case law from the past several decades interpreting that provision.
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, Micek and Leventhal below, illustrate the flexibility of the “written instrument incident to a divorce” requirement — but a detailed discussion of them is beyond the scope here.
Preferably, you would want to execute the contract while a divorce is pending or imminent so that it can meet the “incident to divorce” requirement. (The “incident to divorce” requirement, by the way, is why prenuptial or postnuptial agreements likely would not be qualifying agreements.)
In any event, a divorce judgment is not the only way to get the preferential treatment. Word of caution to do-it-yourselfers: don’t do this without lawyers! And for more guidance, these Tax Court cases should be a good start, Micek, T.C. Summ. Op. 2011-45, Leventhal, T.C. Memo. 2000-92.
Another fascinating report from the UK firm Penningtons Manches gives a global perspective on the alimony laws of different countries. UK (England and Wales), UK (Scotland), Ireland, Singapore, Nigeria, Germany, New Zealand, Finland, France, Russian Federation, Japan, Israel, United Arab Emirates. Also briefly discussed: the divorce laws of Texas and California.
A brief excerpt follows:
There are many common threads in family law across jurisdictions but also some very significant differences – particularly the wide variation in approach to spousal maintenance (or alimony). In Scotland, Sweden, Finland and New Zealand, financial independence for both spouses is at the heart of the court’s approach and the obligation to maintain a spouse is not imposed, save for a short period or in exceptional circumstances. But there are jurisdictions at the other end of the spectrum which provide ex-spouses with generous and long lasting income.
Read the report here.
Female breadwinners are ponying up for their exes more than ever.
A recent American Academy of Matrimonial Lawyers (AAML) survey found that more than four in 10 lawyers (45%) had seen an increase over the past three years in women being on the hook for alimony, aka spousal support or maintenance. Meanwhile, 54% said they’d seen a rise in mothers paying child support…
Is alimony a possibility for clients who divorce after age 65? What are the issues in guardian initiated divorces? How to tackle Medicaid planning? These were some of the topics discussed at MassBar Educates Panel, “Gray Divorce: Representing the Elderly Divorce Client”. Jon fields joined elder law attorneys Steven Cohen and Patricia Keane Martin on the panel to discuss the unique issues in representing elderly clients in divorce. With life expectancies on the rise and older people the biggest demographic for divorces, gray divorce is no longer a niche subject. Please click on the link to find out more about the event and MassBar Educates program.
How do you know if mediation or litigation is right for you? What are some of the ways the needs of affluent families affect the cost and planning process of divorce? What is a Certified Divorce Financial Analyst?
Jon Fields joins Kelli Adams, Financial Counselor, CFP®, EA to answer some of these questions in GW & Wade’s “ask the experts” interview, focusing on the hidden costs of divorce.
“If your balance sheet contains more than a few basic assets—your bank accounts, your home, your car—the cost of your divorce will probably be affected. Stock options, restricted stock, trusts, executive compensation packages, business interests: assets like these require more nuanced negotiations. You’ll want to make sure your lawyer has experience dealing in complex financial instruments.” -Jon Fields
Please click on the link to read the full interview.
The Massachusetts Supreme Judicial Court in Curt Pfannenstiehl v. Diane Pfannenstiehl recently came to an important decision regarding how Massachusetts treats spendthrift trusts in divorce. By doing so, the court overthrew the controversial decisions of the lower courts, which would have radically adjusted the way trusts are viewed in Massachusetts. The function of these trusts is to protect beneficiaries from outside creditors and overspending, so it may be a relief to many that the Massachusetts Supreme Judicial Court has chosen to interpret the trust as the settlor intended it, rather than, as the lower courts did, viewing it as “property” that can be divided as a marital asset in divorce.
The case concerned a husband and wife who had an arrangement during the marriage to fund their daily living expenses from the husband’s trust. The husband’s income wasn’t sufficient to cover these expenses, and the wife had given up her career in order to look after the couple’s children. The couple used the trust to fund their lives year to year.
The Appeals Court relied upon the trusts “ascertainable standard” to determine that the trustees were “required” to make distributions to the husband Curt Pfannenstiehl. The reasoning behind this was that the trust was to provide for the welfare of the beneficiaries, and during the marriage, it was used to provide for the family’s living expenses. However the court’s interpretation seemed extreme, given that trustees generally have discretion in their distributions rather than being compelled to pay out. In addition, the Massachusetts Supreme Judicial Court disagreed with the lower courts’ opinion that the trust was a certain interest for Curt, instead viewing it as too speculative to be considered “property”. The Supreme Court also disagreed that Curt was entitled to a quantifiable fraction of the trust (the lower courts valued his interest as a simple 1/11th piece because it was shared with 11 other people) because of the history of how the trustees used their discretion to make unequal payments or no payments at all, and of course, the spendthrift clause, which means the trust isn’t supposed to benefit creditors or ex-spouses in the first place.
It was a good thing for Curt Pfannenstiehl that the courts ruled the way they did. When after trial, he was ordered to pay his ex-wife Diane approx. $1.4 million that he didn’t have and couldn’t earn, he was prosecuted for contempt after he couldn’t pay the judgement, and put in shackles. The Appeals Court reversed based on inability to pay, and the Supreme Court eventually decided not to treat the trust as marital property, but there was a brief moment when the protection the trust had seemed to offer Curt evaporated. Pfannenstiehl v. Pfannenstiehl shows that divorce has the potential to derail even the most painstaking plans parents have made for future generations. Thankfully, even in such a fraught situation, the courts have chosen to acknowledge that the original purpose of such a trust is to provide for future generations, and that this should be safeguarded.
Sheryl Dennis is an expert in matters of trusts and estates. With over 24 years of experience in family law helping families resolve complex issues, Sheryl is the right choice for people looking to navigate sensitive family law issues related to estates, inheritances. Please contact Fields and Dennis today to see how we can help.
The AICPA/AAML National Conference on Divorce is an annual event that offers unparalleled opportunities to gain comprehensive insights on the financial aspects of divorce in the company of some of the Country’s top Divorce Attorneys and Chartered Public Accountants. As well as offering the advantages of a forum to network and learn from peers, expert speakers have previously presented on topics as diverse as Intellectual Property, healthcare and issues specifically encountered by women and LGBT couples. Jon Fields will be attending this year’s conference in New Orleans, May 2016. Fields and Dennis LLP looks forward to the insights this event will doubtless bring, as we anticipate returning to our practice with new perspectives and deeper professional insights on some of the most pressing and complex issues that our clients face.
Alimony is an explosive topic. Some people totally agree with it, while others are firmly against it. Either way, alimony can be a large part of divorce, and the financial aspect can be lengthy and costly for the party that will be paying the alimony. The decision of granting alimony by the court depends on several different factors that many people don’t even realize. For instance, a major factor is marital fault. The reason for the breakup of a marriage could affect the amount and duration of alimony in the eyes of certain judges. If one spouse has evidence of cheating, that could affect the alimony outcome, for example.
Another factor is the length of the marriage. Think about this: How long have you been married? Five years v. 25 years makes a huge difference, and with the latter, age plays into the equation. If you are a young person who is divorcing, the courts may look at you as someone who can easily obtain work. However, if you’re an older person, the courts may see you as unable to pay any type of support for a long period of time. Then there is the lifestyle during the marriage. Did you both live extravagantly? If so, this luxurious way of living may be over for the both of you. However, if you are a non-working spouse and are accustomed to a certain lifestyle, alimony may play into your favor. Then there is Social Security to consider. Did you know that if a non-working spouse, who had been married over 10 years to the former spouse and has not remarried, is entitled to her/his ex’s Social Security benefits? This becomes an element of alimony.
Health comes into decision-making as well. If a spouse isn’t in good health and is unable to sustain a job, this will affect how much and for how long s/he will receive alimony. For instance, if Spouse A has been out of work for two years and can’t return, then Spouse B may have to pay a larger portion toward alimony than originally expected. Besides health, kids are a major concern too. Who are the children going to live with? If they live with you, you may be entitled to more money, since the workday is shortened due to childcare. If they live with your spouse, s/he may be entitled to a larger sum.
Other monetary sources can pose an issue. Say, for instance, you have another source of income or a trust—this monetary source may affect how much alimony you receive or pay. A buildup of assets is important to note. For instance, if your husband built up his law practice while you were married, he now has to pay you half its value. The receipt of this lump sum could possibly reduce alimony payments down the line.
At Fields and Dennis LLP, attorney Jonathan E. Fields has almost 25 years of experience in Family Law, including alimony proceedings. He has been listed in The Best Lawyers in America ® 2015 edition in the field of Family Law. He is also an Executive Board Member of the Massachusetts Council on Family Mediation and a Panel Member of the Children and Family Law Trial Committee for Public Counsel Services. Please contact him today if you are looking for a trusted and experienced Boston divorce lawyer.
Based on this article: http://life.familyeducation.com/divorce/alimony/45556.html
Divorce is a highly emotional time and when you are going through such a trying life event, practical matters may be far from your mind. But despite the emotional toll, it is important that you consider financial matters – if not for yourself, for the well-being of your loved ones. You will get through this difficult period, and once you are on the other side, you will surely want to enjoy your new life.
Asset division can make an already emotionally heightened experience even more overwhelming, but if you take it one step at a time, you will get through it and be glad that you didn’t let your finances fall by the wayside in the midst of turmoil.
Here are 3 financial tips to help you through a complex divorce. Read more.