Money and Divorce NEWS/BLOGS ARCHIVE


BUSINESS OWNERS AND DIVORCE: Valuing a Business in Divorce

August 1, 2018 by Kathryn Lazar

CONTROLLING COST AND CONTENTION AROUND EXPERT APPRAISALS

When your divorce involves a business owned by you or your spouse, or you and your spouse, the value of the business will most likely figure in the divorce. If you and your spouse disagree on the value of the business (which is often the case when one of you is buying the other out or when one spouse is to be paid a portion of the business’s value), the disputed value may be resolved by engaging a third party expert to calculate what the business is worth. This is called appraisal. Appraisal methods are several; these alternatives are themselves the subjects of many articles (Google “different ways to value a business”). This post focuses not on appraisal methodologies, but on ways divorcing parties can commission a fair appraisal in a way that is economical.

A scenario to be avoided is “expert opinion versus expert opinion,” where each of the parties in a litigated divorce hires an appraiser, the resulting appraisals are materially discrepant, and each appraiser must testify to explain his/her calculation. This can be avoided by hiring one appraiser who meets with both spouses to understand the perspective of each. Critical in this approach is to oblige the appraiser to be neutral, not favoring either party. This reduces conflict, stress and expense.

Another way divorcing parties can control expense is by choosing the type of report they want from the appraiser. Oral reports typically cost less than written reports.

Before starting work, the appraiser should be available to sit down with the parties and their lawyers to discuss any concerns they may have. Such concerns might include the valuation method to be used — one method might be more appropriate than another for a particular business — and any special considerations that might affect value.

The above approach can be implemented in a litigated divorce but is more common in a collaborative or mediated divorce, where the parties’ objective is to find a mutually acceptable result. What is more, appraisers generally charge less for their work in a collaborative or mediated divorce because they know that they will not be called upon to testify in court, which is very time consuming.

 

Spousal Maintenance & Child Support Calculator

May 1, 2018 by Kathryn Lazar

New York has developed formulas for both child support and spousal support.  Although these formulas are “presumptive” — meaning that the Court is supposed to order these amounts in most cases, the law also provides that the Court can make exceptions to the general rule if persuaded that it would be appropriate to do so.

You can easily figure out what the presumptive support is in your situation, if you have the most recently filed tax returns.  Two good websites for getting this information are:

https://www.nycourts.gov/divorce/MaintenanceChildSupportTools.shtml

and http://www.joyrosenthal.com/new-york-maintenance-child-support-calculator/

By inserting you and your partner’s income and the number of children you have, you can find out how much child support and how much spousal support (called maintenance) the Court would presumptively award to you.

For more information about how the child support and spousal support laws might affect you, make an appointment for a consultation with one of our lawyers by calling 845-896-9651.

 

Tax Treatment of Spousal Maintenance – How Will the New Tax Laws Impact on my Divorce?

April 1, 2018 by Brett Jones

DEDUCTIBLE FOR THE PAYOR, TAXABLE FOR THE PAYEE — FOR HOW LONG?

 

Alimony, now known in New York as maintenance, has as its premise in the idea that the so-called “monied spouse” in a divorce should make payments to the non-monied spouse in order to allow the non-monied spouse time to become self-supporting. Back in the day, maintenance awards were often forever. Now that is much less frequent, the concept being not only to give the non-monied spouse a “soft landing” in terms of lifestyle, but also to get on her/his feet economically, perhaps completing an academic degree or other job-qualifying training. For federal tax purposes, maintenance payments have been deductible for the spouse who pays and taxable as income for the spouse who receives the payments.  But not for long.

The sweeping tax overhaul passed in 2018  stands this on its head. Starting with cases that are resolved after December 31, 2018, maintenance (also called alimony or spousal support) will be paid with after-tax dollars, not deducted from taxable income, and would be tax-free to the recipient. For the spouse receiving maintenance, this makes sense, because the legislative rationale is economic rehabilitation. But for the spouse who pays, it’s more like an incentive to stay married. Maybe this is a good thing, socially speaking; after all, the divorce rate is approaching 50%. But where’s the social benefit from staying in a bad marriage? Does that help anyone? The spouses? The children?

Most seasoned family law attorneys I know are of the view that eliminating a tax deduction for high-income earners who make alimony payments will have unintended consequences not contemplated when the NYS legislature enacted the most recent legislation governing the calculation and payment of maintenance effective in 2016.  One of the reasons is because the current tax deduction for alimony payers creates an incentive for high-earning spouses to pay larger alimony payments than they would under the new law.  This means that if you do not reach an agreement or get divorced in 2018, the new law will change the negotiations of any divorce where spousal support is an issue.

Why did Congress  make this change?  The real reason is most likely that they needed to make it look like the tax law changes would not reduce revenue to the federal government, and eliminating the ability to switch who pays taxes on spousal support means that the monies are taxed at a higher rate, generating more federal tax dollars.  This change in the law will increase taxes paid to the US government by $8.3 billion over ten years!   But it also makes things easier for the IRS, which previously had to  determine the deductibility of maintenance payments by checking  to confirm they meet the following requirements, among others: the payment must be made pursuant to a written divorce or separation agreement; must be made to or on behalf of the ex-spouse; the obligation to make the payment must cease if the ex-spouse dies (failure to meet this requirement is probably the most common cause of lost alimony deductions); the payment must be in cash or cash equivalent; the payment cannot be considered child support, plus a couple of other requirements. With a 50% divorce rate, checking compliance is a big job!

Interestingly, the legal headstand  returns federal law on this point to what it was in 1917, when the US Supreme Court ruled that alimony was not taxable to the spouse receiving it. That was the rule until 1942, when Congress overruled the 1917 case, passing the Revenue Tax Act of 1942. Except for gender-neutralizing language, federal law on the point hasn’t much changed since then. An interesting short article about this history is available here.

Given that this tax legislation passed, it is effective for agreements executed after December 31, 2018.  This and potentially other changes in the tax code will need to be closely considered going forward in divorce negotiations.

If you are divorcing or contemplating divorce, please speak with your accountant and your attorney to help you navigate through it.

 

Tax Treatment of Spousal Maintenance II

January 23, 2018 by Brett Jones

Will the new federal tax law alter application of New York’s spousal maintenance formula?

 

Last month when we posted about the tax treatment of alimony (called “maintenance” in New York), the new federal tax bill had not yet passed in both houses of Congress. Now it is signed into law. Good news and bad news.

 

Good news first. When we wrote December’s post, any change in tax treatment of maintenance would have been effective January 1, 2018. However, that is not what happened. This month, the law is passed and its provisions on this subject are not effective until January of 2019. So we have a year during which at least this can be expected to happen: those who are helped by the new tax treatment will  be trying to delay their divorces and those who are hurt y the new tax treatment will be trying to accelerate their divorces.  

 

The bad news is the same as the good news. 2018 will be a year of struggle to speed up and slow down divorce negotiations: spouses who are served by the new law will want to delay their divorces and those who are served by the present law will want to finalize them. So which of these parties are you, a delayer or an accelerator?

 

Let’s look at how this works. A writer named Ethan Wolff-Mann wrote an article (which you can read here) identifying some of the variables that will be in play during 2018. He gives an example of  a soon-to-be ex spouse who will be paying $100,000 a year in maintenance under the old law. This “monied spouse” will get a deduction off the top so that, in the highest tax bracket of 40%, he or she is only out $60,000. On the other hand, the person receiving that $100,000 pays tax on it, so assuming a 15% tax rate, nets about $85,000.  

 

Now take the same example in 2019. If the paying spouse has the same out-of-pocket cost of $60,000, that would mean the receiving spouse gets the $60,000. Period. On that basis who loses and who wins? It is certainly possible to argue both spouses lose. Because of the non-deductibility and the decreased income, can it be argued the government wins? As we discussed last month, maybe the IRS.

Wolff-Mann goes farther, pointing out that states like New York that use formulas to calculate alimony may or may not change them to comport with the new federal law. New York’s formula is relatively new, having come into effect only two years ago. This leaves any adjustments to the courts for the time being. New York courts can deviate from the formula if its application produces results that are “unjust and inappropriate.” This invites courts to deviate from the formula and set payments that take into account the increases in cost to the paying  party and the net income to the receiver.

 

Will New York courts respond to that invitation? Wolff-Mann quotes a New York lawyer who says  that some will and some won’t. If this happens, two couples could be divorcing in the same court under different judges and get different results, even if, hypothetically, they agree to the very same settlement terms. This does nothing for consistency in the law (but it does make 2018 a year in which the self-determination available to parties who choose divorce mediation or collaborative divorce is even more attractive than usual, but that’s another point).  

 

Time will tell the impact of the new federal law on New York divorces. While the dust settles, advice of counsel will be even more important than usual  because, at the very least, this aspect of divorce is less predictable than previously.

 

How is Your Mortgage Affected During Divorce?

May 31, 2017 by Brett Jones

DEALING WITH THE MARITAL HOME MAY BE A CHALLENGE IN DIVORCE

 

The website Credit Marvel published an article titled “How is Our Mortgage Affected During Divorce?” that we comment upon here. The article’s text is in regular type; our comments are in italics. Here it is:

 

With all of the changes in the mortgage industry since 2008, divorce affects mortgage lending more than ever before. One divorce statistic that hasn’t changed since then is that about half of all marriages end in divorce. The United States has the 6th highest rate of divorce in the world. About 41% of first time marriages will end in divorce. The rate is slightly higher at 60% for second-time marriages. Couples that enter the altar for the third time are the most likely to divorce at a rate of 73%.

There is a growing trend in “gray divorce.” Couples age 50 and older are twice as likely to divorce now as they were in 1990. The rate is even higher for couples over the age of 65.

The good news is that if you are married for the first time and your marriage lasts longer than eight years, the odds are finally in your favor of staying together. Age at the time of the marriage is also a factor. Couples that wait until they are over the age of 25 have a better chance of staying married than younger couples. Wilkinson & Finkbeiner Family Attorneys have compiled a comprehensive list of divorce statistics that include a breakdown of statistics by religion, occupation, age, and other data.

The costs of divorce have an impact on making a decision to split. The average legal cost of getting divorced is $15,000. Many couples simply can’t afford to get divorced.  In our experience, the cost of divorce varies depending upon the divorce process utilized; it could cost much less for mediation, but could cost much more for litigation.  Please see our other blog posts which compare the difference divorce process options.

The Impact of the Financial Crisis on Divorce and Mortgages

The financial crisis of 2008 changed the economic climate for mortgage lending. Couples that got married before 2008, found it fairly easy to get a mortgage. Those were the days when lenders were happy to lend up to 125% of the value of a home.

Couples that look to get divorced after 2008 will find that it’s not so easy to get a mortgage as it was at the time they got married. The high rate of foreclosures and short sales have caused mortgage lenders to tighten up the criteria for mortgage qualification. This makes it more difficult for one spouse to buy out the other during a divorce.

Prior to 2008 most lenders considered owning a home to be a couple’s largest asset. It still is, but mortgage lenders are also keenly aware that a mortgage is a divorcing couple’s biggest liability. The responsibility for the family home and the mortgage payments that go with it are the responsibility of both spouses until the house is sold or refinanced.  This is true from the bank’s standpoint assuming that both spouses are names on the Note and Mortgage; however, this is not necessarily true from a divorce attorney’s standpoint or from the divorce court standpoint.  

Options for Managing the Mortgage During Divorce

It’s less likely that one spouse or the other will get the house in the divorce settlement. Regardless of what a judge decides, it’s more likely that a divorcing couple will make a decision about the house based upon which of them can actually qualify for a new mortgage.   We often see couples making decisions about the house based upon a number of  factors in additional to ability to qualify to refinance.

The easiest option to manage a mortgage during a divorce is for one spouse to refinance the house under his or her own name.  At the start of a divorce action, statutory automatic orders go into effect which prohibit a refinance during the divorce action unless both spouses consent in writing.   How the mortgage is managed during the a divorce is an issue that may need to be addressed at the outset of the divorce action, either by agreement of the spouses through their attorneys or if unable,then by application to the Court and subsequent court order.  The attorneys will consider the value of the home when settling the rest of the marital assets. The spouse seeking the refinancing needs to have good credit and adequate income to be in a good position to have a new mortgage approved. This works provided the couple is not past due on any mortgage payments for the last 12 months and the other spouse agrees to let go of the house.   In our experience, banks are generally reluctant to release either spouse from a joint mortgage obligation until one or the other spouse formally refinances the loan in which process one spouse’s name will be removed from the Note and Mortgage .

When neither spouse is able to purchase the other spouse’s share of the home and the real estate market won’t support the full debt that is owed on the home, it may be possible to sell the home on a short sale. A short sale is where the bank agrees to take less than is owed on the mortgage to avoid a foreclosure. This would leave both spouses without a mortgage to worry over. The downside is that pursuing a short sale will negatively affect the credit of both parties.  

Another means of dividing the house is for one partner to sign a quit claim deed. This transfers the interest from one spouse to the other. It’s important to consider that it doesn’t relieve either spouse from the responsibility for the mortgage. If the responsible spouse defaults on a mortgage payment, the other spouse will still be liable for it.   Any properly prepared Settlement Agreement would address this scenario as well as all of the other scenarios regarding the disposition of the marital residence, including detailing the obligations of both parties and the ramifications if one spouse or the other defaults on their respective obligation(s).

Depending upon the rental market for the area, spouses may agree to rent the home to a third party. This means that they will need to work together on the financial aspect of renting the home.

The final option is for divorcing spouses to continue living in the home together until  the other is in a better financial position to secure a mortgage to buy the home.  This living arrangement is not often sustainable.

Making an Equitable Financial Plan for Divorce

What seems like a reasonable divorce settlement on the surface can have negative long-term impact on spouses. A Certified Divorce Financial Analyst (CDFA) can be of valuable assistance to divorcing parties and their attorneys. CDFA’s are experts at identifying marital assets, developing a post-divorce budget and analyzing the financial impact of the proposed division of assets.  CDFA’s take a long-term approach to analyzing after-tax cash flow and net worth for the future five years and longer.

The Institute for Divorce Financial Analysts (IDFA) gives a simple example of how CDFA’s can help. A married couple with a $165,000 home has equity of $77,500. Other financial assets total $165,000. The husband nets about $68,000 per year. The wife has not worked during the marriage and hopes to get a job for slightly over minimum wage. The assets are divided equally, including deeding the home to the wife. The husband agrees to pay child support, alimony, and child support (sic).  The CDFA performed a long-term analysis and determined that the husband’s assets would grow dramatically while the wife’s assets would be completed depleted within seven years. The CDFA made suggestions to the attorneys that would put the couple on equal financial footing now and in the future.

Considerations for Getting a New Mortgage During Divorce

Mortgage lenders will consider all assets and debts when deciding to approve a mortgage. The spouse that applies for a mortgage will need to provide the lender with all pages and schedules of the divorce decree. The lender will consider all payments for alimony and child support payments as a debt when making a decision to approve a mortgage.

Attorney, Katie Connell, cautions divorcing spouses against buying a house before the divorce is final. She cites a case where someone put $10,000 earnest money down on a home and then was not able to secure a mortgage and lost the earnest money. The other spouse sought to be compensated for half of the $10,000, since it was a marital asset before the divorce was final.

Final Thoughts About Mortgages and Divorce

Divorce lawyers do more than help divide assets and manage the legal paperwork. They know that divorcing couples are running high on emotion, especially those that have children. Divorce lawyers will help their clients identify all current financial marital assets and work with the other spouse’s attorney to divide the assets as equally as possible. Nearly every couple has emotional ties to their homes and communities. The best divorce attorneys will help their clients make decisions based upon logic, rather than emotion. They do this by helping their clients paint a picture of what their lives after the divorce will look like. Often that includes showing them how letting go of owning the family home puts them in a better financial position overall.  

 

 

How to save money in your divorce

June 16, 2016 by Melissa Rutkoske

IF YOU LITIGATE, HERE ARE SOME MONEY-SAVING TIPS
Let’s be honest: divorce costs money, and litigation is the most expensive way to do it. Here are my top 10 ways to economize in a litigated divorce:

1)  Gather as much financial information by yourself as you can. Ideally this includes information for you and your spouse, separately and together.  If later it’s necessary to supplement this with information from your spouse, the work you’ve done on your own can serve as a cross-check and highlight areas of inconsistency.

2)  Organize information before giving it to your attorney. Organize it the way s/he suggests. If your attorney doesn’t tell you how to organize it, ask.

3)  Agree with your attorney when you will deliver information to him/her. Deliver it on or before the agreed date; your attorney may have made commitments to your spouse’s attorney about when financial information can be exchanged. Failure to honor these commitments may occasion motion practice in court, adding unnecessary costs.

4)  Disclose all facts to your attorney, whether or not you believe they’re important.  Your attorney can separate legally relevant facts from irrelevant ones, and surprises can be embarrassing and costly.

5)  Listen to and seriously consider your attorney’s advice. After all, it is what you’re paying for, and a seasoned divorce lawyer — provided s/he has all the all the facts — can bring a wealth of experience to a client’s decision-making process.

6) If you have the opportunity to negotiate a settlement rather than continue litigating, respond promptly to your attorney when s/he asks questions. Delays can sabotage a deal.

7) Understand yourself. Know and experience your feelings. It is normal that emotion plays a part in divorce. However, while emotion is a very real part of your experience as a client, it is not how a court looks at issues in your case.

8) Be reasonable. Judges don’t appreciate it you’re not, so being unreasonable can be costly. Stand back, take an objective look and ask yourself whether you’re being reasonable or not.

9)  Don’t make decisions on your own and implement them without discussing them with your attorney. They can trigger a motion from the other side that you will have to respond to in court, which of course costs money.

10)  Understand that your attorney is skilled in legal matters and is not trained as a therapist.  Using your attorney as a therapist, however good a listener s/he may be, is not economical.

 

 

Splitting annuities in divorce

June 15, 2016 by Melissa Rutkoske

Is an annuity account in your divorce picture? An annuity can seem harder to split than a marriage, according to an article in the May 2016 issue of Research Magazine.

An annuity account gives the account holder the  right to receive periodic payments, usually fixed in amount, for life or a term of years. Unlike pensions, which can usually be split by court order, annuities are split only by a handful of the companies that offer them.

Strategies for handling annuities in divorce include leaving the annuity with one spouse, giving the other spouse an asset of equal value. Annuity values are not always obvious. For example, if the annuity features a death benefit, it is likely to be worth more than the account value.

Other variables in valuing annuities include the annuity holder’s cost basis, the value of annuity benefits (which can be living and/or death benefits), any cost to surrender the annuity (which can be in double digits, expressed as a percentage of the account value — for example, a $300,000 annuity account may decline to $220,000-$250,000 in value if surrendered) and whether the annuity pays guaranteed interest.

Bottom line: annuities are not as tractable in divorce as certain other investment products that divide more readily. Except for situations where all annuity benefits can be kept fully intact, divorce and annuities can be a costly combination and divorcing spouses should obtain complete information  before agreeing to split an annuity.

 

NY MAKES RADICAL CHANGE IN SPOUSAL SUPPORT/DIVORCE LAW

July 15, 2015 by Kathryn Lazar

DON’T RELY ON YOUR FRIEND’S EXPERIENCE:  THERE HAVE BEEN BIG CHANGES IN NY SUPPORT LAWS IN THE LAST FEW YEARS

After years of argument and debate, over the course of the last few years, the NY Legislature changed the divorce law regarding spousal support (also called maintenance or alimony).

Since the winter of 2016, a formula has been in effect that establishes a formula for both temporary and long term support, including recommendations as to how long it should last after the divorce is finalized. The new law also establishes a cap for maintenance — it essentially states that, where one party’s income is significantly greater than the other party’s income, maintenance will be automatically awarded on income up to $178,000 (subject to an annual COLA) pursuant to the formula. It does give the court permission to award maintenance on a higher amount of income if the court determines it would be unfair not to do so. This is a very big change from the old law in two regards — the cap used to be $500,000, and it only applied to support during the negotiation or litigation of the case, it did not apply after the divorce was granted. After the divorce was granted, there was no formula, just a long list of considerations the Court should weigh in fixing the amount and the duration.

The Formula for spousal support changes where the payor is also the custodial parent: Under the old law, there was no distinction in the calculation of spousal support based upon whether the payor was the custodial parent or not. The law has changed, now, and there are two different formulas, depending on whether the higher income spouse is the custodial parent or not.

The Formula for child support changes where maintenance is also payable: Under the old law, maintenance was subtracted from a payor’s income when establishing child support, but there were disagreements between Courts as to whether that should happen in the first year of support, or whether it should only apply after one year had passed so maintenance had been payable for at least one year. The new law makes it clear that maintenance should be subtracted from the payor’s income and added to the payee’s income right away for child support calculation purposes.

The Formula for child support add-on’s affected by change in the law: Under the old law, the proportionate shares due by each parent for health insurance, uncovered health expenses, child care and other specified items was fixed based upon each parties’ income prior to the payment of child support or maintenance. Under the new law, the proportions are established after the transfer — so child support and maintenance will be subtracted from the payor’s income and added to the payee’s income if the payor is the non-custodial parent. This could make a significant difference in the amount each party is obligated to pay towards the “ancillary” or “add-on” expenses that are not covered by direct child support.

In addition, the law no longer provides that a degree earned during the marriage results necessarily in a monetary award to the other party.  New York had been the only state in the union that considered a degree and/or a license acquired during the course of the marriage as an asset that could be valued and then distributed. This law eliminates degrees and licenses as an asset, but does permit the court to take their acquisition into consideration in making equitable distribution awards.

How might the current law affect you?  See our separate blog on computation of child support and spousal support, or  make an appointment to talk with one of the lawyers in our office and we will review it with you.

See:  Spousal Maintenance and Child Support Calculator – Lazar and Schwartz, elsewhere in our blog section.