Here are five tax tips that should be considered before entering into a divorce settlement

1.While two assets may have the same “value” they may not be equal. 

Two assets, though equal in value, may be treated differently for tax purposes.  Capital gains taxes for instance are calculated based on the profit reaped from the sale of the asset.   The profit is the difference between the sale price and the asset’s cost basis.   Though the assets may, at thee time of divorce, be equally valued, the asset which cost less may have a bigger capital gain, resulting in a higher tax bill

 In a common scenario, a couple possesses a stock portfolio and a home equally valued- which one should you choose?  A homeowner, under certain conditions, is permitted to exempt $250,000 ($500,000 for a couple) from capital gains from the sale of the marital residence.  The stock portfolio will be taxed on each stock’s capital gain or loss. 

2.  You may spend time with your children, but they may not your dependants.

The right to the dependency exemption for the children goes to the custodial parent. In the case of joint custody arrangements, the exemption goes to the parent whose home the child spent the most number of nights. If custody is truly equal, the parent with the highest adjusted gross income gets the deduction

The parents can agree to alternate or transfer the dependency exemption by filing the IRS form 8332.    Where there are multiple children, the parties can even agree to split the children so that each parent can benefit from the dependency exemption. 

3. Maintenance/alimony is deductible.

Periodic support payments to your spouse made pursuant to a written agreement or judgment that are not child support may be income to the recipient and deductible by the payor. 

4.  You may be able to time the entry of the divorce to your tax advantage.

Your income tax filling status is determined by your marital status on the last day for your filing period, for most people, December 31.    If, for instance, you would benefit from filing a joint return- for example, if there was a capital gain of $500,000 from the sale of the marital home which could be exempted by filing a joint return, it may be prudent to delay finalizing the divorce if the sale and the divorce were to occur at the end of the tax year.   

5.  Child support is tax neutral.

Unlike maintenance, child support is tax neutral

So why do couples, who are aware of the risks, fail to even consider entering into a pre-nuptial agreement?   Diana Mercer in This is Not Your Parents' Prenup: Debunking Prenup Myths offers several explanations, with my comments added:

•  Prenuptial agreements are only for wealthy people; my fiancé and I are just starting out or have nothing. 

Things change.  As you become older and more accomplished in your career your income will increase.  Your assets, particularly your  home, your savings and your retirement accounts will become more valuable.  You may inherit money or property from your family.  The pre-nuptial agreement can protect the accumulated wealth and provide for how it will be dealt with if a marriage ends in divorce or death.

•  Prenuptial agreements only protect the wealthier spouse and leave the other spouse with little or nothing.

Pre nuptial agreements must be fair.  If the agreement is found to be unconscionable, it will be set aside.  Particularly where there is disparate wealth, the pre-nup can  provide for maintenance for the non-moneyed spouse in the event of divorce.    

• Premarital Agreements must cover everything, soup to nuts.

The agreement can be tailored to your specific desires.   I have written agreements that were limited to how one asset how- a prospective inheritance -would be handled in the event of divorce.   On the flip side, I have prepared agreements that micro-manage how funds will be budgeted and expenses paid throughout the marriage. 

•  Premarital Agreements Aren't ROMANTIC

 The words “pre nuptial agreement” may be the most unromantic words I know.  However, those words are generally uttered between two people who love each other and plan to invest their lives together so that there is incentive to work together and be reasonable in planning for a possible future without each other.   Contrast the pain of saying the word “pre-nup” with the bitterness of a divorce, where greed and irrationality dominate- there is no question which is more painful.   

Alimony paid in accordance with a properly drafted divorce agreement or Court Order is deductible to the person paying it and reportable as income to the recipient. Thus, if you are receiving alimony, you must set aside a sufficient portion to pay federal and state income taxes in order not to be unpleasantly surprised come tax time.

Child support is "tax neutral"; non-deductible to the payer or income to the payee.

A capital gain exclusion of $250,000 (single) and $500,000 (married) exists for the sale of a principal residence, defined as where you lived for any two of the past five years.  If after a separation, this rule tells us that the home must be sold within three years of departure for the exclusion to apply to the departing spouse.

Marital status for tax filing purposes is set on the last day of the year--December 31. If you are divorced before December 31, you must file as a single taxpayer or head of household if you qualify. If you are still married on December 31, you can file jointly or separately, although the latter is not recommended since the total combined tax liability is greater than in the case of joint filing.

If filing separately, the first to file's election of standard or itemized deductions requires the other filer to do the same. Ouch!

Joint tax return = joint liability despite what your divorce agreement or Judgment says. The IRS "innocent spouse" exceptions are very limited.

The custodial parent is entitled to claim the children as dependency exemptions unless otherwise agreed in writing.

Attorneys fees related to a divorce are not generally deductible, whether your own or paid to your spouse's lawyer. Tax advice related to the divorce is deductible, as are fees paid to determine or collect alimony.

If a person is obligated to pay child support and alimony but pays less than the monthly amount due, payments are first applied to satisfy the child support obligation (tax neutral) before alimony.

A tenth tip -  Two assets with same value at the time of the settlement may have very different values when tax impacted.  You have to be very conscious of the basis of assets and the appropriate tax rules.   For example because of the capital gain exclusion on the martial residence, the house sold for a profit of $250,000 may be worth more than a stock portfolio sold for an equal gain. 

In the end, you should discuss the tax impact of your divorce with your attorney and accountant. 

Disagreements can arise over a multitude of issues, including the selection of a broker, setting and negotiating the sale price, apportioning responsibility and the costs of preparing the property for sale and, of course, distributing the sale proceeds.     Any one of these issues can erupt aborting the sale.        

Well crafted settlement agreements address these issues, in detail, in an attempt to pre-empt disputes. But, in reality, if a dispute arises, by the time a court rules on one party’s breach of contract, the buyer will have walked away from the deal.    

Sara Lerner of NPR  reports that there is a new breed of real estate agent, specializing in sale of homes owned by divorcing couples.   "Really it's a simple, singular goal, and that's to, as efficiently as possible, get to the end of the road, which is the sale of their home."

One broker reports his strategy is:

I never try to force them to communicate together, which means a lot of separate and duplicate communication, so that neither ever has the impression that I'm trying to force the agenda of one on the other..

My role at that point, when someone needs to get something off their chest, is simply to let that happen. Because if people aren't able to express themselves, then it causes frustration," he says. "And the last thing that I need is for a husband or a wife to be frustrated with me because they are perceiving that I'm not ... that I don't get it.

Even though both parties’ interests should be aligned in selling the marital home so that they could “cash out” and move on, selfish desires or just the need to assert control over the other, often prevent the parties from acting in concert.    Any real estate broker who is willing to enter fray and bring the adversarial parties together to facilitate a sale deserves his commission.  

At that time, I opined (and the trial court agreed) that divorce settlement should not be opened.   I wrote:

Had the wife participated with Madoff in the fraud or had knowledge of the wrong-doing, the husband might have a case. But, the husband simply made an unfortunate choice and, through no fault of the wife, lost his investment.

Had the account value gone up, it is doubtful that husband would have shared the profits with his ex-wife. Alternatively, had the wife poorly invested the cash she received from the husband, she would have no claim against the ex-husband for her loss. And what about all the people who bargained for the marital home, which is now worth substantially less than it was one year ago-should they look to have their former spouses share in the loss?

There is a practical reason why the husband cannot win this case-if the mere fact that some former marital asset lost value could subject a settlement agreement to attack, there would be no finality to divorce. Every agreement would be at risk for a post divorce attack. In order for there to be finality, in absence of fraud, duress or coercion etc, agreements must be enforced, without the benefit of hindsight.

Recently, the Appellate Division, in a 3-2 opinion reversed the trial court.   As pointed out in David Lat’s analysis in Above the Law, the point of contention seems to be not if there was a mistake, but defining what was the mistake.

If there was a mere mistake as to the valuation of the Madoff account, then [the Husband] would be out of luck — a point the majority and the dissenters appear to agree on. But according to the majority, there was a mutual mistake as to something more fundamental than mere valuation, namely, the existence of the account:

The majority of the Court felt that the mistake was the belief that the Madoff account existed. The majority opined that the husband “never had an account in his name with Madoff; on Madoff's own admission there were no accounts within which trades were made on behalf of investors.”

The sharply worded dissent, on the other hand, noted that:

Because Steven received significant value in exchange for the payment of $6.25 million to Laura, his retention of the Madoff account and subsequent losses render this case no different than the legion of cases denying a spouse's request to open up a divorce settlement where the final value of an asset was not what the parties believed at the time of the divorce.

The dissent predicted that the majority's decision would lead to "chaos, not only for the court system, but for the litigants as well, who deserve finality and to move on."

The case is headed to the Court of Appeals. 

 As reported by the American Academy of Matrimonial  Lawyers, increasing numbers of women are asking for  pre-nuptial agreements.  

More women are working now than in precious decades and they are earning higher salaries. Women comprised 46.8 percent of U.S. workers in 2009, according to the U.S. Department of Labor and that number is expected to rise to 46.9 percent in 2018.

"In our historically male-dominated culture women didn't control money and now they need to plan as much as the men. More women have more assets these days and have more control over funds," said Moses, a family lawyer with 30 years of experience.

While marriage is supposed to be forever, the sad reality is that one half of all marriages will end in divorce. A pre-nuptial agreement can limit the acrimony at the time of a bitter break-up as assets and liabilities can be distributed in a pre-determined manner.  In most cases, New York courts will enforce a properly executed pre-nuptial agreement so long as it was not procured as a result of fraud, coercion or duress.    

Perhaps the principle reason couples remain legally wed is to maintain or continue health care coverage.    When a couple divorces, the ex-spouse is no longer to eligible to be covered through the other’s medical coverage.   The former spouse either may maintain the existing policy under COBRA or purchase a policy on his/her own. 

 As pointed out:

 If one person has an existing condition, obtaining affordable health care coverage is often difficulty or impossible. The recession, with its real estate lows and health care expense highs, adds incentives to separate indefinitely.

A second reason to separate instead of  divorce is to obtain lock-in social security benefits.

According to federal law, an ex qualifies for a share of a spouse’s Social Security payment if the marriage lasts a decade. In the case of more amicable divorces, financial advisers and lawyers may urge a couple who have been married eight years to wait until the dependent spouse qualifies.

However, a separation without an agreement memorializing the parties understanding of their rights and liabilities leaves the parties at risk.  

Property acquired or debts incurred by the other are technically marital and subject to equitable distribution.  

Absent a maintenance waiver, if one spouse becomes disabled, unemployed or unemployable, the other may become responsible for paying spousal maintenance.

Finally, if you pre-decease your spouse, your spouse can make a claim against your estate; by virtue of marriage, your spouse has a right of election which prevents you from disinheriting hi/her.    The right of election could be waived in a separation agreement. 

By entering into a separation agreement, you could get all of the benefits of a separation and limit your exposure to risk.

In the article, I was quoted for having noticed a trend in my practice. In conversations with many of my younger clients, I observed that often they did not want a pre-nuptial agreement to protect assets they had already acquired-often they had yet to acquire anything of value, but instead, to protect their prospective inheritance. In many cases they were being dictated to by their parents and told that they had to obtain a pre-nuptial agreement.

In its most basic form, a pre-nuptial agreements identifies what is marital property, which would be subject to equitable distribution if the parties later divorce, and what is separate property, which would be immune from their spouse’s claims.

Property inherited or acquired by gift is separate property. However, money is fungible and memories of the source of the funds are conveniently fleeting.

As pointed out in the Divorce Analysis Blog:

A prenuptial agreement is useful in establishing the parties individual pre-marital wealth levels. While this may seem mundane ( I mean, who doesn’t know their net worth when they say “I do”?), you would be how surprised how time colors the memory of wealth. Like the old “fishing story” beliefs about net worth can change dramatically with time.

One of the most useful aspects of the prenuptial agreement is that it clearly defines what is separate property, where appropriate, values the separate property and delineates the circumstances where separate property can be converted to marital property.

Parents leaving sizeable estates to their children may require the children to obtain pre-nups to ensure that however their children use their estates, the funds will for all purposes remain a separate asset and otherwise immune from a spouse’s claim in the event the marriage ends in divorce.
 

At the end of marriage, whether by divorce or death, disputes over money and the disposition of marital assets may be inevitable. However, a pre-nuptial agreement can help lessen the potential for conflict by clearing identifying the parties separate property and defining the parties’ rights to the marital property.

A recent article illustrated why a Pre-Nup may be a smart money move. 

1. Why are pre-nuptial agreements beneficial?

"One of the common reasons to get a pre-nup is to protect the interests of children from a prior marriage. A sizable portion of assets (called the elective share) may automatically go to a spouse upon death in most states, but this can be avoided by using a pre-nup."

This elective share can be waived in a pre-nup. This is an important consideration, particularly where there are children from a prior marriage.

"Another scenario when a pre-nup makes sense is when there's a significant disparity in wealth. It's also worth considering if you or your spouse-to-be owns a small business or a stake in a family business; a pre-nup can ensure ownership isn't contested in a divorce."

2. Cost

While a pre-nup may be expensive to draw up, the cost of litigating a contested divorce is even greater.

3. What should a pre-nuptial agreement include?

The main purpose of a premarital agreement is sort out who owns what in the event of a divorce.
The agreement may not only define what is a person’s separate property, but it will also specify what assets or debts will be joint or marital and direct how they will be split in the event of divorce.

The agreement can also direct if, and how, alimony or spousal maintenance will be paid.
 

Some agreements even go as far as to provide how household expenses will be paid during the marriage.

It is important to note that the agreement cannot be procured by fraud, coercion or duress and the terms of the agreement cannot be unconscionable.  Crying to the court that “I only signed the agreement because he would not marry me otherwise” is not duress.
 

The New York Times is reporting that a husband (a lawyer), who, entered into a settlement agreement distributing marital assets, which included an investment in Madoff’s hedge fund, is seeking contribution from his ex wife for the post-divorce losses sustained in the Ponzi scheme.

Rather than splitting an investment in the Madoff hedge fund, the husband gave the wife $2.7 million in cash and held onto the account. Of course, the account is now worthless. The husband wants his ex wife to share in his loss.

Good luck!

Had the wife participated with Madoff in the fraud or had knowledge of the wrong-doing, the husband might have a case. But, the husband simply made an unfortunate choice and, through no fault of the wife, lost his investment.

Had the account value gone up, it is doubtful that husband would have shared the profits with his ex-wife. Alternatively, had the wife poorly invested the cash she received from the husband, she would have no claim against the ex-husband for her loss. And what about all the people who bargained for the marital home, which is now worth substantially less than it was one year ago-should they look to have their former spouses share in the loss?

There is a practical reason why the husband cannot win this case-if the mere fact that some former marital asset lost value could subject a settlement agreement to attack, there would be no finality to divorce. Every agreement would be at risk for a post divorce attack. In order for there to be finality, in absence of fraud, duress or coercion etc, agreements must be enforced, without the benefit of hindsight
 

It has long to the policy of courts to hold parties to the terms of their agreements. An agreement between spouses, which is fair on its face, will be enforced even if one party received less than one half of the value of the marital assets unless there is proof of fraud, duress, overreaching, or unconscionability.

In the recently decided case of Shultz v. Shultz, the Appellate Division detailed what makes an agreement unconscionable:

An unconscionable bargain is one which no person in his or her senses and not under delusion would make on the one hand, and no honest and fair person would accept on the other, the inequality being so strong and manifest as to shock the conscience and confound the judgment of any person of common sense.  However, an agreement is not unconscionable "merely because, in retrospect, some of its provisions were improvident or one-sided" and simply alleging an unequal division of assets is not sufficient to establish unconscionability.

The reason for this strict standard is obvious-no agreement would be free from attack if it could, in retrospect, be reviewed for fairness

In Shultz, the Court cited two factors why it found the claims of unconscionability to be lacking. First, the defendant was represented by independent counsel during negotiations involving the parties' post nuptial agreement. Secondly, the agreement recited that the defendant entered into it "freely, voluntarily and with full knowledge of its consequences.

In a poll conducted this spring by the Kaiser Family Foundation, a health policy research group, 7 percent of adults said someone in their household had married in the past year to gain access to insurance. The foundation cautions that the number should not be taken literally, but rather as an intriguing indicator that some Americans “are making major life decisions on the basis of health care concerns.”

The issue of medical coverage has long been a consideration in divorce. In fact, many couples, after negotiating their settlement agreements, delay seeking an immediate divorce and, instead, opt to divorce on the basis of their living separate and apart for a year pursuant to a written separation agreement. The one year separation allows a party who would otherwise be without access to medical insurance to remain eligible for medical coverage on the basis of the marriage. Some couples put off the divorce for even more than a year for this very reason.

Amplifying this consideration, New York requires parties to acknowledge that they are aware that they will no longer be allowed to receive health coverage under their former spouse's health insurance plan once the divorce is granted.

Following the divorce the parties may be eligible to continue medical coverage under COBRA (which can be prohibitively expensive) or purchase insurance on their own
 

What are “post-nuptial agreements”? Well, unlike pre-nuptial agreements, which deal with parties interested in getting married before they’re actually married, and unlike property settlement agreements, which deal with parties interested in not being married after they’re actually married…post nuptial agreements are intended for a married couple who did not previously enter into a premarital agreement and, despite wanting to be married, would like to plan for the division of property in case they later get divorced.

1) There needs to be full disclosure by the parties.
2) Each party must have independent representation by his/her own lawyer.
3) There needs to exist the absence of coercion or duress.
4) The terms must be fair and equitable.

[D]espite her asserted lack of understanding, she acted in accordance with the terms of the agreement throughout the marriage, maintaining separate bank accounts in her own name in which she deposited income from properties she inherited from her family, which properties were themselves also retained by plaintiff solely in her name.

[T]his State favors " individuals ordering and deciding their own interests through contractual arrangements'" (Van Kipnis v Van Kipnis, __ AD3d __, 2007 NY Slip Op 06074, *5 [July 12, 2007], quoting Bloomfield v Bloomfield, 97 NY2d 188, 193 [2001]), and thus, duly executed prenuptial agreements, including agreements executed in a foreign country, are accorded the same presumption of legality as any other contract.

”I]f defendant "did not read or understand the agreement, or have any explanation of the same, his conduct evidenced a degree of carelessness or negligence not to be expected of a sophisticated and mentally brilliant person" (id.). One need not be an attorney or a Fulbright scholar to know the folly of signing a legal document without an understanding of its import.

Surrogate Lopez-Torres noted that a "duly executed prenuptial agreement is given the same presumption of legality as any other contract, commercial or otherwise. It is presumed to be valid in the absence of fraud." The court further referred to section 5-1.1-A(e)(2) of the Estates Powers and Trusts Law which sets forth the requirements for an effective waiver of a spouse's right of election against the estate of a deceased spouse. Such a waiver or release must be in writing, signed, acknowledged and in "recordable" form which means that such a waiver must follow the same form as would be used to provide for the recording of a deed to real property.

because there is no mechanism by which to determine how much of defendant's 37½; acres must be from the "westerly side" of the parcel. Stated otherwise, the stipulation provides no basis from which to discern a dividing line.

 Child custody is based upon the best interests of the children.   It would be virtually impossible to make a best interests determination when the parties are first getting married and before children are even born. For this reason, a custody determination should only be made at the time parents elect to divorce.  

• There is a "strong public policy favoring individuals ordering and deciding their own interests through contractual arrangements" (Bloomfield v Bloomfield, 97 NY2d 188, 193 [2001] Thus, "[d]uly executed prenuptial agreements are accorded the same presumption of legality as any other contract.”
• "Agreements are to be construed in accord with the parties' intent."
  
• The best evidence of what parties to a written agreement intend is what they say in their writing."
• A written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.
• Extrinsic evidence of what the parties really intended is generally inadmissible, and will be considered only if the agreement is found to be ambiguous, W.W.W. Assoc., v Giancontieri 77 NY2d 162 [1990]).
• Extrinsic evidence may not be utilized to create an ambiguity that would otherwise not exist