There Are No "Do Over's" of Divorce Settlements to Recover Madoff Losses

Posted by Daniel Clement on April 04, 2012

Don’t you just love it when you are right? 

Three years ago, I wrote about the lawyer who was trying to re-open his divorce settlement to recover his Madoff losses.  In consideration of the wife retaining the marital residence and other assets, the lawyer had retained his “investment” in Madoff funds. Of course, after the divorce, the Madoff investment became worthless.  The Husband wanted to  reopen the divorce settlement.

At the time, I wrote:

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.

The case wound its way up to the New York Court of Appeals which ruled that the agreement could not be reopened.   In Simkin v Blank, New York’s highest court stated in language eerily similar to my prediction:

This situation, however sympathetic, is more akin to a marital asset that unexpectedly loses value after dissolution of a marriage; the asset had value at the time of the settlement but the purported value did not remain consistent. Viewed from a different perspective, had the Madoff account or other asset retained by husband substantially increased in worth after the divorce, should wife be able to claim entitlement to a portion of the enhanced value? The answer is obviously no.

The Husband had argued that the agreement should be set aside because the parties made a mutual mistake about the existence of the Madoff account.  The Court rejected that theory because there was an actual Madoff account which the Husband could have cashed out of any time prior to the collapse of the Ponzi scheme.

Had this settlement been reopened, every agreement, not just divorce agreements, could be subject to attack with the benefit of hindsight.  At least now, a settlement agreement has some finality.  

Five Tax Tips to Maximize Your Divorce Settlement

Posted by Daniel Clement on April 27, 2011

Bottom line- money  disputes fuel divorces.   While the parties fight for every penny in dividing the marital assets, the parties often fail to tax impact their settlements.  The failure to consider taxes could “steal defeat from victory.”  

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

Divorce Real Estate Agents: A New Specialty

Posted by Daniel Clement on January 20, 2011

The sale of a home is always a tension inducing experience. If the transaction is incident to a divorce, the tension increases exponentially. 

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.  

New York Divorce Settlement May Be Set Aside- Mutual Mistake that Money "Invested" With Madoff

Posted by Daniel Clement on January 07, 2011

I previously wrote about a lawyer who was attempting to re-open his divorce settlement because, he claimed, there was a mutual mistake - he retained money invested with Madoff  in lieu of other assets retained by his wife.  Of course, the assets invested with Madoff proved to be worthless.  

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. 

 

 

Eliminating the Risks of Separation for the "Un-Divorced"

Posted by Daniel Clement on August 03, 2010

Pamela Paul, in her New York Times article, The Un-Divorced, discusses the trend of couples separating, but not divorcing.   The primary reasons that parties remain married, but separated are the practical and financial, not familial. The effect of endless separations on the children rarely seems a priority.

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.

Health Insurance: A Consideration in Divorce

Posted by Daniel Clement on August 14, 2008

The New York Times ran a front page story detailing how the availability of medical insurance has become a major consideration in the decision to divorce or to wed.

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
 

 

Domestic Partnerships and the Continuation of Maintenance

Posted by Daniel Clement on August 01, 2007
Postings in two divorce and family law blogs highlight a growing conflict between the states on how to deal with a parties continuing obligation to pay alimony or maintenance, as it called in New York, if the former spouse enters into a domestic partnership.

To frame the issue, what happens if you are obligated to pay maintenance to your ex, but your ex rather than  re-marrying, enters into a domestic partnership? A number of states have enacted civil union or domestic partnership statutes which grant same sex couples some, but not all, of the rights and privileges of marriage. Maintenance or alimony typically terminates when the receiving spouse remarries.

The New Jersey Law Blog provides an excellent survey of the issue, contrasting a case from Virginia, which held as a result of the domestic partnership alimony should terminate, and one from Oregon, which held that the support obligation should continue.

The Florida Divorce Blog reports on a California decision in which the court ruled that a domestic partnership “is mere cohabitation and not a marriage.” Therefore, the alimony payments were ordered to continue.

To avoid uncertainty and litigation, this issue must be addressed in a settlement agreement at the time of divorce. If it is the parties’ intention that maintenance should terminate in the event of a cohabitation (same sex or opposite sex), the entry into marriage or a domestic partnership or civil union, the settlement agreement should make special provision. The failure to address t his issue exposes the parties to an unknown and presently unpredictable future determination.