You are currently browsing the Maintenance/Alimony category.
Tax implications for Military Retired Pay
Before I start, let me state that I am not an accountant or tax attorney. Do not make any decisions regarding taxes based upon this posting. Discuss any tax plans with your accountant.
In a recent decision by the U.S. Tax court, Proctor v. IRS, 129 TC No. 12 the division of military retired pay was treated as alimony not a property distribution. This may also have implications for the New York Police or Fire Department VSF.
Under New York law, any benefit to be paid in the future, but earned during the marriage is subject to equitable distribution. Military retired pay is a perfect example. The right to the pay was earned by 20 years of service. The retiree gets paid after she/he retires and as long as he/she lives. Unlike a 401K, there is no account with money to be drawn upon. New York treats this as property, and is subject to property division.
But, apparently, the tax law treats military retired pay differently. In the Proctor decision, the court stated that under Internal Revenue Code section 71(b) payments to an ex-spouse of her share of military retired pay can be considered alimony, and therefore tax deductible to the retiree. The court stated that “in order to qualify as alimony, payments must meet the requirements of section 71(b)(1) (A) through (D)”.
(b) Alimony or separate maintenance payments defined. For purposes of this section–
(1) In general. The term “alimony or separate maintenance payment” means any payment in cash if–
(A) such payment is received by (or on behalf of) a spouse under a divorce or separation instrument,
(B) the divorce or separation instrument does not designate such payment as a payment which is not includible in gross income under this section and not allowable as a deduction under section 215 [26 USCS § 215],
(C) in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made, and
(D) there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.
The court found that payment order met the requirements of the statute. This is true even if the divorce decree refers to the payments as part of the division of martial property. The court stated the divorce court’s classifications do not matter. “Labels attached to payments mandated by a decree of divorce or marriage settlement are not controlling.” The court went on to say that “while the designation need not mimic the statutory (B) will generally be met if there is no ‘clear, explicit and express direction” in the divorce decree stating that the payment is not to be treated as alimony.” Since the decree in question does not contain such language the requirements of section 71(b)(1)(B) were met.
The key point is that the divorce decree must either be silent as to the designation of the payments, or state that the payments will be treated as alimony. If you already have a decree, please don’t use this decision as license to take the deductions, talk to your accountant and follow his/her advice.
Posted 2 years ago at 3:25 pm. Add a comment
New York Divorce Law Pre-Nuptial Basics, Part II
This post will bring together a number of concepts visited in other posts, particularly the ones on maintenance and equitable distribution. New York divorce law and the law of property distribution can be a little hairy and not all the pieces of the Domestic Relations law play well with each other. It really is important to try and understand how the pieces of New York divorce and family law work or do not work together. This area on pre-nuptial agreements is a perfect example.
In the equitable distribution posts I have discussed the issue of separate property versus martial property. The purpose of the pre-nup is to ensure that the lines between the two properties do no cross.
As a general rule, property acquired before marriage is separate property and property acquired afterwards is marital property. But, this simple rule rarely remains simple.
For example, a house is acquired before marriage, and the couple lives there for ten years. During the course of the marriage, the house increases in value from $125,000 to $500,000. The increased value could be considered marital property. Or, wife has a stock account before marriage in the amount of $100,000. During the marriage she uses the money to buy a house, and the couple lives there for the next 20 years. An argument can be made that the entire house is marital. Or, wife gets a personal injury settlement, which is separate property. She puts the money into a joint account with the husband. He claims that since she “co-mingled” the money, he is entitled to half of the personal injury settlement. Finally, husband buys a house before the marriage, ten years into the marriage, he sells the house and uses the proceeds to buy another house. The wife now claims the entire house is martial property.
The way to avoid these problems is to get a pre-nuptial agreement. A will drafted pre-nuptial will reduce if not eliminate headaches and legal expenses. A poorly drafted pre-nuptial could put your lawyer’s daughter through college.
The first step to getting a good pre-nuptial agreement is not to do it yourself. Good legal documents do not come from the internet or by the people who make software packages. Also avoid those places which claim that although they are not attorneys, they can help you with drafting your legal documents.
The next step is to be complete on your assets. I like to get a full list of all the current assets. Then I draft clauses ensuring that not only is the property currently held separate but it will remain separate in the future. I specifically address the issues of increased value, co-mingling and transformation. If these issues are not addressed up front, then you will be opening yourself up for a fight at the divorce.
Finally, consider maintenance. A provision waiving or requiring maintenance can be put into the agreement. But be careful to address not only the current needs of the parties but the future ones as well. An agreement to pay $1,000 a week in 2008 may sound generous, but may be completely inadequate in 2038. The ability to actually pay maintenance must be gauged against future events. I’m sure that many executives at Enron thought their futures were secure.
There are a number of other factors that also need to be considered, but they will vary based upon your particular case. No “one size fits all” pre-nuptial agreement will work. That’s why it needs to be crafted to your particular circumstance. Maybe you don’t have a house, but hold a number of copyrights or patents. May you have an inheritance coming, or have a trust which will mature in a few years. Mature marriages have children from the first marriage to consider. Clauses can be placed in an agreement limited what property can be devised under a will.
For these and other reasons, consider a pre-nuptial agreement, but don’t pull one down from the internet.
Posted 2 years, 1 month ago at 5:46 pm. Add a comment
New York Equitable Distribution, The Former Spouses Protection Act and the National Guard
I just settled a strange little divorce in front Judge Kent, in Suffolk County. On it’s face, it was nothing too strange. A forty year marriage, where the only property was a pension and a house. As I explained in other posts, under New York divorce law, a pension is martial property and is divided according the number of years of marriage by number of years in the pension.
The husband in this case had retired as an AGR New York Guardsman. In 1998 when he retired from the National Guard, he took off for Puerto Rico. Eight years later, the wife decided to get a divorce. Under New York divorce law, the military retired pay is marital property, but under Puerto Rican law, it is not. The question facing Judge Kent was: which law to apply.
Under the Former Spouses Protection Act Congress specifically stated that military retired pay is subject to laws of the state where the divorce is ordered. There is one kicker, the military member must either be a resident of the state or consent to the state’s jurisdiction. If he is a resident of Georgia, and the spouse tries to divorce him in Nevada, the court cannot divide his military pay. It can only be divided in Georgia, or if he consents to the Nevada court.
My case was different. The husband was a Guardsman for 20 years. He never left the state of New York and his boss was the TAG. Upon retirement he moved to Puerto Rico. So, does the Former Spouses Protection Act govern? Is it meant to cover a Guardsman who spent his entire military career in New York working for the TAG, and then moves out of state upon retirement? The answer is: I don’t know. At this time, there is no decision by any judge in the United States that I have been able find on this issue. My argument was that the act should not apply. He worked for 20 years for the Governor, not the President. I argued that the Former Spouses Protection Act was not designed to cover a career Guardsman being sued for divorce in the state where served and retired from. Naturally, my opponent argued the other side. Judge Kent was caught in the middle. Fortunately, the judge,who is a gentleman, and famous for cutting to the heart of an issue, managed to get the parties to settle. So, this question is still unanswered.
The lesson here is to be careful. If you are the spouse of guardsman who is retiring and he intends to leave the state, start the divorce now before he establishes residence in another state. If you are the guardsman, after you leave the state, establish residence and then commence the divorce. Here, because the parties let the matter sit for several years, multiple problems occurred. If we had not settled, the husband was facing 10 years of arrears payments to the wife, if we won. If we lost, the wife was potentially facing not getting any money from the pension.
Posted 2 years, 2 months ago at 3:22 am. Add a comment
Professional Licenses, Property and Maintenance In a Divorce
Professional licenses can be one of the more contentious pieces of property in a divorce. A professional license, whether it is a medical license, law license, CPA or architect’s license has been declared to be marital property. The New York Court of Appeals made that determination over 20 years ago in the landmark decision of O’Brien v. O’Brien, 66 N.Y.2d 576; 489 N.E.2d 712; 498 N.Y.S.2d 743 (1985).
The facts in O’Brien were simple: the parties were married for nine years. At first, both were teachers. In September 1973 the parties moved to Guadalajara, Mexico, where plaintiff became a full-time medical student. While he pursued his studies defendant held several teaching and tutorial positions and contributed her earnings to their joint expenses. The parties returned to New York in December 1976 so that plaintiff could complete the last two semesters of medical school and internship training here. After they returned, defendant resumed her former teaching position and she remained in it at the time this action was commenced. Plaintiff was licensed to practice medicine in October 1980. He commenced this action for divorce two months later. At the time of trial, he was a resident in general surgery.
The Court appeals ruled that the license was martial property: “A professional license is a valuable property right, reflected in the money, effort and lost opportunity for employment expended in its acquisition, and also in the enhanced earning capacity it affords its holder, which may not be revoked without due process of law (see, Matter of Bender v Board of Regents, 262 App Div 627, 631; People ex rel. Greenberg v Reid, 151 App Div 324, 326). That a professional license has no market value is irrelevant. Obviously, a license may not be alienated as may other property and for that reason the working spouse’s interest in it is limited. The Legislature has recognized that limitation, however, and has provided for an award in lieu of its actual distribution.
Remember, in O’Brien, the husband started the divorce only two months after he received his degree. Since he had no medical practice, all that the court could value was the license. But, what if the husband had been practicing medicine for 20 years and had a thriving practice? Would not the license merge with the practice? In other words, would there be only one piece of property to value: the practice? Or would the court value the license and practice?
That question was answered by the court ten years later in McSparron .v McSparron 87 N.Y.2d 275; 662 N.E.2d 745; 639 N.Y.S.2d 265 (1995). The facts are more detailed as this was a long term marriage.
The parties were married in 1969. At the time of their marriage, both parties had undergraduate college degrees and neither possessed any appreciable assets. Defendant husband attended law school during the first three years of the marriage, gaining admission to the Bar in 1973. He thereafter practiced law and was earning an annual salary of $ 97,000 as a Deputy First Assistant Attorney-General when the parties separated in mid-1989.
Plaintiff wife acquired a master’s degree in psychology during the early years of her marriage. Over the next 12 to 13 years, she worked as a school psychologist, taking time off occasionally to care for the couple’s children or to attend graduate school. In 1984, plaintiff began attending medical school. She graduated in 1988 and, after completing a one-year internship, she received a license to practice medicine in July of 1989. Plaintiff commenced this matrimonial action on September 1, 1989, four months before the completion of her second internship.
The Court specifically rejected the concept that the license merges with the career after a period of time. “Such a narrow approach is inconsistent with the equitable goal of assuring both spouses a fair share of all of the assets that were produced by the marital partnership. Application of the merger doctrine is particularly inimical to the statutory purposes because it generally favors the nonlicensed spouse in a shorter marriage over the nonlicensed spouse who is faced with rebuilding his or her economic life after the breakup of a long-term marriage.” Furthermore, care must be taken to ensure that the monetary value assigned to the license does not overlap with the value assigned to other marital assets that are derived from the license such as the licensed spouse’s professional practice. So, the New York Court of Appeals held that in New York Divorce, a professional practice is to be value separately from the license to practice.
This solution now raised a new problem: maintenance. Let’s say that the husband’s license and practice were collectively valued at $1.7 million. Of that sum, the wife’s share was determined to be $770,000. The wife also has asked for maintenance. Should the award of maintenance take into consideration the equitable distribution award of $770,000 or not?
The court addressed that question in Grunfeld v. Grunfeld 94 N.Y.2d 696; 731 N.E.2d 142; 709 N.Y.S.2d 486 (2000). The court split a few hairs here. In Grunfeld, the husband’s law license and practice were valued separately, then the wife was awarded maintenance. The Court of Appeals reversed the appellation division’s decision that did not fully take into account the equitable distribution award. “Here, however, the Appellate Division flatly based its ruling in part on the fact that “defendant’s future earnings”–which only could be expected to come from his own professional endeavors–were likely “to exceed $ 1 million yearly.” Additionally, the Court apparently recognized that income from other resources could only be expected to support “a portion of the maintenance.” Therefore, on the face of the Appellate Division’s decision, in ordering full distribution of plaintiff’s share of defendant’s license without any adjustment of maintenance, the Court engaged in double counting of income. This is inconsistent with McSparron. Thus, that portion of its order cannot be affirmed.”
The appellation division was reversed because the award took into account increased income from the husband’s law practice. But, the Court of Appeals left open the viability of an award of maintenance derived from sources other then the practice. It is possible that if the husband had incoming producing separate property, then the concern about offsetting would not exist.
In conclusion, divorces involve licenses can be complicated as they involve several issues of equitable distribution and maintenance. The valuation of the property can be complicated and expensive. In New York, the judges will order that a forensic account value the practice and the license. These numbers will drive the decisions on the distribution and the ultimate award of maintenance.
Posted 2 years, 4 months ago at 3:01 pm. 1 comment
Basic Maintenance/Alimony Law in New York Divorce Law
One of the big questions I get asked about is alimony. Generally, the question is either “Do I have to pay alimony?” Or “Can I get alimony?”
The problem is that there is so much misinformation out there. From television to friends, there is no dearth of bad information and myths regarding alimony.
So, I’m going to try to shoot down some of these myths and correct some of the misinformation floating around.
First, and most importantly, in New York under the domestic relations law, there is no alimony. Let me repeat it, under New York divorce law, there is no alimony. Just so we are clear, alimony was a permanent life time monthly payment from the divorced husband to the divorced wife.
Second, instead of alimony we have “maintenance.” Maintenance is a temporary periodic payment from one ex-spouse for the purpose of rehabilitating a non-working spouse back into the workforce. Maintenance is not a lifetime paycheck. It is temporary, but, under certain circumstances as I will show below, it can be permanent.
Third, it is not for the benefit of the wife, but for the non-working spouse. The statute is gender neutral.
Now, let’s look at the specifics under the law. When making or denying an application for maintenance the court must consider the listed factors in New York Domestic Relations Law section 236B. This is the main article for divorces in New York.
In determining an award of maintenance the court should have a:
regard for the standard of living of the parties established during the marriage, whether the party in whose favor maintenance is granted lacks sufficient property and income to provide for his or her reasonable needs and whether the other party has sufficient property or income to provide for the reasonable needs of the other and the circumstances of the case and of the respective parties. In determining the amount and duration of maintenance the court shall consider :
(1) the income and property of the respective parties including marital property distributed pursuant to subdivision five of this part;
(2) the duration of the marriage and the age and health of both parties;
(3) the present and future earning capacity of both parties;
(4) the ability of the party seeking maintenance to become self-supporting and, if applicable, the period of time and training necessary therefor;
(5) reduced or lost lifetime earning capacity of the party seeking maintenance as a result of having foregone or delayed education, training, employment, or career opportunities during the marriage;
(6) the presence of children of the marriage in the respective homes of the parties;
(7) the tax consequences to each party;
(8) contributions and services of the party seeking maintenance as a spouse, parent, wage earner and homemaker, and to the career or career potential of the other party;
(9) the wasteful dissipation of marital property by either spouse;
(10) any transfer or encumbrance made in contemplation of a matrimonial action without fair consideration; and
(11) any other factor which the court shall expressly find to be just and proper.
In Hartog v. Hartog, 85 NY2d 36 (1995), the New York Court of Appeals stated that the Legislature, in enacting the 1986 amendments to Domestic Relations Law 236B, specifically charged the courts to consider the pre-divorce standard of living when determining an award of maintenance. The “courts must consider the payee spouse’s reasonable needs and predivorce standard of living in the context of the other enumerated statutory factors, and then, in their discretion, fashion a fair and equitable maintenance award accordingly.”
Based upon this reasoning, the court could award maintenance even for a self-supporting spouse, if it finds that she needs additional money to return to the pre-divorce standard of living.
Let’s look at some examples of how this works. In Wilkinson v. Wilkinson, 149 AD2d 842, the wife was awarded maintenance in the amount $225 per week from 1988 until June 1993. The husband appealed. The appellate division found no fault with the award. “Defendant next challenges the maintenance and child support awards as excessive. Considering defendant’s stable employment for over 30 years as a conductor for Conrail, defendant’s salary of $ 56,000 subject to annual increases, plaintiff’s income of $ 6,400 with a maximum potential of some $ 15,000 and the other statutory factors necessarily addressed by Supreme Court (see, Domestic Relations Law § 236 [B] [6] [a], [b]), we find no reason to disturb the maintenance award. Likewise, the child support award is reasonable under the circumstances as found by the court and supported in the record.”
In Panaggio v. Panaggio 133 AD2d 526, the appellate court increased the award of maintenance. The appellate court found the lower court’s award “does not adequately reflect the parties’ preseparation standard of living or defendant’s capacity to contribute to plaintiff’s support. Based on the circumstances, including the husband’s receipt of large partnership distributions in 1983 and 1984, we exercise our discretion to award the wife $ 500 per week in maintenance. Domestic Relations Law § 236 B (6) (a) (1) requires the court, in fashioning a maintenance award, to consider the “income and property” of the respective parties. Moreover, the evidence establishes that those distributions, while not reported as income by defendant, are not required to be repaid by him and were treated by him as disposable income. In any case, the record establishes that defendant has sufficient means to meet the additional maintenance obligation we are imposing, even disregarding the partnership distributions.”
In Weiss v. Weiss, 213 AD2d 542, “the court found that the defendant earned a gross income of $ 51,351.78 in 1991, which is approximately three times the amount earned by the plaintiff. Under all the circumstances presented, the award of maintenance in the sum of $ 225 per week is not excessive.”
The decision in Schnee v. Schnee 152 AD 2d 665, is very instructive. The case pulls together several factors which a court must consider in awarding maintenance, such as the length of the marriage, jobs skills of the non-working spouse and the lifestyle of the parties:
At the time of their marriage in November 1977, the plaintiff was 48 years old and the defendant was 32. The childless marriage was the second for each party. The defendant owned a lucrative knitwear business which he inherited from his father. The plaintiff was employed in the business as a bookkeeper at a net salary of about $ 275 per week. By 1984 the business was generating substantial and increasing income and numerous perquisites enabled the couple to maintain a lavish home in Brookville, New York, and a vacation home in Boca Raton, Florida. They acquired collections of paintings, porcelain figurines and other objects d’art, and three luxury automobiles; took numerous vacations and enjoyed a generally comfortable life-style. At the time of trial, the plaintiff was approximately 58 years of age and had been unemployed since August 1985, when she commenced this matrimonial action and the defendant had discharged her from her position as bookkeeper with his business. “However, we do find that the trial court’s award to the plaintiff of maintenance in the amount of $ 400 per week for five years was inadequate. In view of her age, which presents an obstacle to finding a new position, her limited earning capacity as a bookkeeper, the parties’ lavish standard of living during their marriage and the defendant husband’s substantial income, we find it more appropriate to grant the plaintiff an award of maintenance in the sum of $ 500 per week, to be paid until she remarries or she or the defendant dies.”
On the other hand in Pontorno v. Pontorno, 172 A.D.2d 734 (N.Y. App. Div. 1991), the appellate division agreed that no maintenance should be awarded. “The Supreme Court properly declined the defendant’s request for maintenance. The parties were married for only 15 months before the plaintiff commenced this action. The record does not support the defendant’s claim that she needs “some rehabilitative maintenance”. Before, during and after the marriage, the defendant had the ability to be self-supporting, having terminated her employment solely as a result of her pregnancy. In addition, at the time of the trial, the defendant indicated that she had already returned to part-time employment.”
Sometimes, neither party is happy. “In the present case, the trial court’s award of maintenance to the defendant in the sum of $ 200 per week for a period of seven years was neither excessive, as claimed by the plaintiff, nor inadequate, as claimed by the defendant. In making the award, the court, inter alia, took into account the financial circumstances of both parties, including their reasonable needs and means, as well as the plaintiff’s present and anticipated income, the defendant’s present and future earning capacity, and both parties’ standard of living. Moreover, the duration of the award was sufficient in length and designed “to render the recipient self-supporting.”Bootle v.Bootle 214 Ad2d 636.
The court must also consider the skill set of the spouse seeking maintenance. In Lord v. Lord, 124 AD2d 930, the appellate court stated: “We reject the contention that the failure to award defendant, who is apparently 45 years of age, permanent maintenance was error. Trial Term determined there was no need to do so in light of defendant’s full-time employment, income from two apartment buildings distributed to her (2nd Avenue and Yale Street), and payment to her of a distributive award of $ 50,000, bearing interest at the rate of 10% annually, in 144 equal monthly installments.”
The appellate court in De Marco v. De Marco 143 AD2d 328, reduced an award of maintenance. “The Supreme Court awarded the plaintiff the sum of $ 225 per week as maintenance for a five-year period and the sum of $ 100 per week thereafter, until she dies, cohabits or remarries. We conclude that the foregoing award is excessive and should be reduced to the sum of $ 75 per week for a period of five years. The record discloses that the plaintiff is now capable of earning $ 200 to $ 250 per week as a bookkeeper. The defendant, on the other hand, is unable to work as a result of his accident. In view of the fact that the plaintiff will be receiving, inter alia, a distributive lump-sum award of 40% of the value of the defendant’s pension in addition to an equitable distribution of all other marital assets, the $ 75 per week figure, for the five-year period, is sufficient. For similar reasons, we also conclude that the plaintiff is financially able to  pay for her own counsel fees.”
The courts will look to earning capacity of the paying spouse rather than the money he actually earns. “The trial court erred in failing to award the plaintiff wife lifetime maintenance in light of the length of the parties’ marriage, the plaintiff’s age and health problems, and her negligible earning potential. The plaintiff worked in the gas station business run by the defendant, but she has no real marketable skills. The defendant, on the other hand, is an enterprising businessman who turned a small, one-island gas station into an extremely lucrative business which supported the parties’ lavish marital lifestyle. While, at the time of trial, the defendant’s employment income was low, an award of maintenance is determined by earning capacity, not by actual earnings. The defendant clearly has excellent business skills and a proven ability to make substantial sums of money. Although it is unlikely that he will ever again earn the income he enjoyed from the gas station business, nor will either party enjoy the lifestyle that they once shared, the defendant does have the experience and proven earning ability to pay an award of maintenance. Under the circumstances, we find it appropriate to award the plaintiff lifetime maintenance in the sum of $ 150 per week.” Borra v. Borra 218 AD2d 780.
Looking over these cases, we can find some basic principles. If the marriage was a long term, ten years or more, and the working spouse had a good income, and the non-working spouse has no skills, then the court can order maintenance, and may order lifetime maintenance. If there is a serious disparity of income, the court can also award maintenance. Lifestyle will be considered as a factor. By the same token, if the marriage is of a short term, and/or there is a reasonable parity of income, then maintenance probably won’t be ordered.
