Monday, July 18, 2016

Alimony or Unallocated Support: What's the Difference?

Guest Post from Jennifer Hawthorne*

When contemplating a divorce, one of the first questions most parties to a divorce ask themselves is “how will I support myself during and after the divorce?” Determining how much support can or should be paid by the higher income earner to the lower income earner can often be one of the most contentious issues in a divorce. Both parties often feel like they just will not have enough income to support themselves and their children. This uncertainty can be unsettling. 

In many cases trying to find the right balance of support can lead the parties to do a tax analysis that compares the benefits of agreeing to a child support order, an alimony order, or some combination of both, sometimes called unallocated (family) support.  Often times the tax analysis will show that moving away from child support even though there are unemancipated children will leave more money in the hands of both parties. This happens because alimony and unallocated support are taxable to the recipient and tax-deductible to the payor.

Child support on the other hand is taxable to the payor and tax free to the recipient. When one spouse earns a significantly larger income than the other spouse, it can be beneficial to shift a portion of the tax burden to the lower income earner, which then lowers the tax the family owes to the Internal Revenue Service (IRS) thus allowing more money to stay in the family, benefiting both parties and the parties’ children.

Alimony and unallocated support can save some families money 
by shifting income to a lower tax bracket.

You may be thinking, “but isn’t child support presumptive?” Will a court approve a separation agreement that does not have child support? Generally, if the parties have negotiated an out-of-court separation agreement through mediation, the Collaborative Law process, or lawyer-to-lawyer negotiations, the judge will accept a complete waiver of child support as long there is language explaining that the waiver of child support was a factor in determining and agreeing to the alimony or unallocated support order.

In fact, even in the absence of this language, in a recent case decided by the Supreme Judicial Court, Duff-Kareores v. Kareores, the justices presumed that because there were unemancipated children but no language discussing child support in the parties’ separation agreement, the alimony order included child support. In other words, even though the parties called the support order alimony, the court decided that it was really some form of unallocated support. 

That leaves the question, if alimony is presumed to include child support when there are unemancipated children, why not just call it unallocated support?

One benefit to calling the support order alimony is that there is a statutory framework and case law that can be used to help parties (or a judge) figure out the details of the order. For example, by statute, alimony is based on the recipient’s need and the payor’s ability to pay. In figuring out the amount of support paid, a court would look at the need of the recipient or the order can be based on 30%-35% of the difference in the parties’ incomes. This can give parties a starting place for their negotiations. There are also statutory durational limits to alimony based on the length of the marriage. There are clear rules for what income should be included when calculating alimony. There is case law discussing the modification standard for alimony. In other words calling the support order alimony can provide clarity.

Clarity - advantage Alimony: Alimony 1 v. Unallocated Support 0

Of course, in some instances, this statutory framework may cause more harm than good. For example, depending on the length of the parties’ marriage, the payor’s age, and the age of the children, calling the support alimony and using the statutory framework to determine the durational limit may cause the support order to end while the children still need financial support. Likewise, if alimony or unallocated support is reduced or terminates within the same 6 months or 1 year of emancipation (depending on how often reductions occur), the IRS can turn around and say the support was really child support.  This is called alimony recapture and it also applies to unallocated support. If this happens, the benefit to having chosen alimony or unallocated support over child support can disappear when the payor is assessed penalties and fines.

Recapture - Tie: Alimony 1 v. Unallocated Support 0

In order to avoid these pitfalls, parties may agree it is better to create their own rules around when and how the support order can be modified and if and when it terminates.  In other words, calling the support unallocated support may provide more autonomy for the parties to craft a support order that works best for the parties.

Flexibility - advantage Unallocated Support: Alimony 1 v. Unallocated Support 1

If parties choose this option, they must be very careful when drafting the language because there is no predicting how a court will interpret that order if they need to go before a judge for modification.  Flexibility can create uncertainty unless the terms of unallocated support and potential modification in the future are very clearly defined.

Future Uncertainty - advantage Alimony:  Alimony 2 v. Unallocated Support 1

Another reason to call the support order alimony rather than unallocated support occurs when the higher income earner is also the custodial parent. If the higher income earner is the custodial parent, an unallocated order would not include child support.  In a recent Appeals Court case, Rosenwasser v. Rosenwasser, the parties’ separation agreement called the support order unallocated support because it included child support and alimony while the lower income earning spouse (the mother) was also the custodial parent.

The unallocated support order included a base order and a percentage of income over the base amount.  However, when the support payor (the father) became the custodial parent and filed for a modification of the support order (along with a request to move to florida), the court used a similar formula (base and percentage) to calculate alimony despite the fact that the father was no longer paying child support.  The Rosenwasser decision focuses primarily on the removal issue, but the court's use of an unallocated support agreement to inform a pure alimony calculation is informative and shows how future application of unallocated support language can be unpredictable.  On the other hand, it's unclear that the court would have handled this any differently if the original order had been called alimony.

More Future Uncertainty - tie:  Alimony 2 v. Unallocated Support 1

Finally, and this may be the biggest deciding factor for some parties in deciding whether to call support alimony or unallocated support, the idea of alimony itself just does not sit well with everyone. While parties are usually comfortable with the idea of continuing to support their children following a divorce, many people are not comfortable with the idea of paying support to their spouse. It can conjure images of the ex-spouse shopping or taking lavish vacations or owning a roomy home while the payor spouse works diligently to earn an income, skips vacations, and lives in a smaller home. Whether this would be reality or not, if parties find themselves deadlocked in a mediation or negotiation over support because the term alimony is toxic to one party, one way to move forward toward an agreement may be to change the name to unallocated support. Maybe calling the support order unallocated support or family support will take away the sting and allow the parties to resolve their divorce amicably, while still taking advantage of the tax benefits.

The Title Dilemma - advantage Unallocated Support:  Alimony 2 v. Unallocated Support 2

Whatever the parties decide to call the support payments, the parties should work with their divorce practitioners including their mediator, respective attorneys and/or financial neutral to determine what support makes the most sense for their family.  The recent Appeals Court and SJC cases also suggest that parties should take particular care in drafting Agreements that involve alimony or unallocated support to ensure that their intentions are clear.  

*Jennifer Hawthorne is a Mediator and Collaborative Law attorney who runs her own practice in Framingham. Jennifer's practice includes family law mediation, divorce representation, and estate planning. Click here to visit her website.

Monday, July 11, 2016

Should Mediators be Held to a Higher Standard?

The more I write and speak about mediation, the more opportunities I have to hear from people who still have questions about how it works.  Recently one attorney on LinkedIn asked me about whether there are rules for financial disclosure in mediation like there are in court.  This is, in fact, a common complaint about mediation; that many mediators don't require the parties to share information that the same parties would have to share in court.  Specifically in Massachusetts there is a rule, called Probate and Family Court Supplemental Rule 410, which requires the sharing of certain documentation in a divorce case within the first forty-five days of the case.

Should mediators be enforcing this rule and requiring financial disclosures in a non-litigated case?

I know mediators who would answer this question yes and others who would answer no.  My answer is no, mediators should not be enforcing financial disclosure (and I explain why below).  That answer troubles many lawyers because they fear that clients will make bad and uninformed decisions in mediation that they supposedly wouldn't make if they went to court.  However, that concern is based on a false equivalency.  Those who have this concern about mediation are usually comparing unrepresented parties in mediation with represented parties in court.  They are comparing apples and oranges.  When we remove that misconception, then we can stop holding mediation to a higher standard than other processes.
Those who have this concern about mediation are usually comparing unrepresented parties in mediation with represented parties in court. They are comparing apples and oranges.
Pro se Mediation v. pro se Litigation (apples to apples):

Court rules don't automatically guarantee disclosure because the court doesn't check to see what discovery has been exchanged or enforce specific discovery unless a party makes a request, and many unrepresented parties don't know how to make that request.  Similarly in mediation, information may not get shared unless one party knows to request it.  However, there are some advantages of the mediation process over court, even when attorneys aren't involved.

Mediation is a voluntary process, which has both pros and cons.   One con is that there are not enforceable rules about disclosure like in court. However, I inform clients that if they do not produce information requested by the other party then that person may not continue to voluntarily participate.  That's a motivation to cooperate that people don't have when they are forced to participate in a court process.  

Judges and mediators also have something in common, as neutrals they can't provide legal advice. Mediators, however, can provide legal information.  This is something the court process doesn't allow Judges to do, both practically given time restraints and for fear of how it might appear.   While a mediator can't require the production of documentation like a judge can, the mediator's ability to educate the parties about legal information is often much more useful because it empowers parties to know what information they need and how to apply that information.  What good is financial disclosure if people have no idea what to do with it?

Finally, mediation is a self-determined process so the parties can decide what level of financial disclosure is necessary.  Some cases may not require all of the Rule 410 documentation, and some will need much much more.  Rule 410 in court could give some parties a false sense of security if they didn't know to ask for more.  When parties lack knowledge or experience they are more likely to make bad decisions, which is why it's always better when parties are represented, regardless of the process.

Mediation with Attorney Representation v. Litigation with Attorney Representation (oranges to oranges):

Having a lawyer involved in a case provides many advantages to a party.  The lawyer's experience is likely to lead them to ask questions that the party may not know to ask on their own, and they can advise the party on how the law applies to their case.  The mediator, even when they are a lawyer by training, is not acting as a lawyer for either party so they don't provide these services.  The best protection for both parties whether participating in mediation or a court process is to hire experienced counsel to help them know the right questions to ask.  
The mediator, even when they are a lawyer by training, is not acting as a lawyer for either party.
Mediating with attorney representation can happen with the attorney in the room during the mediation or just advising the client in separate meetings.  Either way, mediation has some advantages and some disadvantages when compared to the court process with attorneys involved.

An advantage of the court process is that the court can create enforceable rules and orders and this provides protection when one party is the "bad actor."  When protection is necessary, for example when one party is trying to hide information, the law can be an equalizer, a hammer that nails down necessary compliance.  However, this advantage can also be a disadvantage when there isn't a "bad actor."  In divorce cases, there isn't always a good guy and a bad guy, but "if the only tool you have is a hammer, [it's tempting] to treat everything as if it were a nail."  The mediation process doesn't force parties into an adversarial process and instead gives them the opportunity to focus on the problem instead of the people.

Another advantage of the mediation process is that it is flexible.  Lawyers and parties are often frustrated by the court's schedule moving too fast or too slow, or both.  Mediation allows parties to move at their own pace and to determine both the process and outcome that is best for both of them.

Finally, mediation is usually less expensive than court, and provides more value.  Consider a meeting to resolve a parenting plan vs. a court hearing to do the same.  In a meeting with a mediator and attorneys, the parties are paying for three people instead of two so the per hour cost may be more.  However, in a meeting all of the focus is on settlement and that usually means faster resolution than in court where the lawyer has two jobs: they have to prepare for the fight while at the same time trying to settle.  This makes it harder to settle and therefore less likely.  Also, time in court often involves a lot of waiting around, which is time the parties are paying attorneys but not receiving value.

Also, parties are more likely to follow agreements than comply with orders, because they have buy-in to the process of creating the agreement.  This means that there is a long-term savings by reducing the likelihood of additional future conflicts replaying the same issue over and over.

Apples and Oranges:

I previously wrote an article entitled "Should we also talk about when Mediation fails?" which was re-posted by Mediate.com.  That article tries to honestly address the fact that sometimes mediation fails.  Despite the advantages not every mediation will succeed, and not every mediator is a good mediator.  But I've noticed lately how quick lawyers are to point out bad mediators, and how slow they are to point out bad lawyers.  Where are the complaints from the bar about all the poor agreements drafted by litigators, or caused by bad representation?

Both the legal and the mediation professions benefit from high quality legal representation and from high quality mediators.  We should be encouraging each other and partnering as much as possible to help resolve conflict effectively, instead of comparing apples and oranges in an effort to tear each other down.  As a mediator, I truly appreciate when my clients work with effective experienced counsel that understand mediation.  I hope that more attorneys will take the time to educate themselves about mediation and even take a mediation training so that they can understand that in most cases it is also true that lawyers can benefit from having effective experienced mediators involved.

Wednesday, July 6, 2016

The Serious Problem with (most) Divorce Court Settlements

Very few divorce cases actually go to trial.  Even cases that start out with both parties intending to litigate, or "have their day in court", usually settle.  I've heard many litigators argue that since most of their cases settle anyway, the court process is better than mediation because it offers more protection to the participants.  However, there is a serious problem with settlements that happen during the litigation process:  they are rushed and people often feel pressured into signing at the last minute.

Despite the fact that the court process of a divorce typically takes longer than a mediation, the court process has a lot of what I call "hurry up and wait."  The litigation process typically involves long periods of waiting for deadlines to pass and for the next court hearing and then a flurry of activity right before the court hearing is scheduled.   Then, if that flurry of activity doesn't result in a settlement you're back to waiting.

For example in Massachusetts, approximately six to eight months after the filing of a Complaint for Divorce, the court will hold a pre-trial conference.  Before the pre-trial conference, the parties are supposed to complete discovery and meet at least once to try and settle the case.   For most people they didn't need 6-8 months to completely exchange the relevant information, and meeting much earlier would help them move closer to settlement.  Instead, many litigators wait until two weeks prior to the pre-trial conference to have their first face-to-face meeting with the other side.  Then, in that two week period they try to settle everything.

From a litigator's perspective, when that two week period arrives you should have all the information you need to settle (completed discovery), and after you meet then you know whether you agree or disagree on how the judge will apply the law to the facts of this case.  If you disagree, then you go to the pre-trial and ask the judge for guidance on the law, and with that guidance you settle the case that day.

From a divorcing couple's perspective, they have been waiting for 6-8 months for something to happen in their case.  They feel anxious and afraid of what's going to happen, and many don't understand how a pre-trial is supposed to work.  Now all of the important financial and family decisions they need to make have to be made in a short period of time, or they are threatened with the possibility of a much bigger bill and a trial.  The pressure is ratcheted up with little time to understand the consequences of the options put in front of them.  Yet, this is how many cases settle in the litigation process.  It's no wonder that many spouses leave this process feeling resentful and second-guessing their deal.  Like any trial by combat, where the event takes far less time than the preparation, they will always be left wondering what if.  What if I had more information before I settled?  What if I had the opportunity to explore more options?  What if I had more time?

This procedure for divorce cases is copied from other civil disputes, without any recognition of the additional emotional, financial and family pressure that divorcing couples feel.  Mediation, Collaborative Law and other out-of-court negotiation processes offer a way of avoiding this serious problem.  By allowing the couple to set the timeline they can have multiple meetings scheduled at their convenience (not the court's timeline).   The individuals may still feel pressure to settle to reduce costs or to get the divorce over with, but that pressure isn't exacerbated by the process.  Rather than forcing the parties into an adversarial last-minute negotiation, mediation and collaborative law give them space and time to explore options fully and make informed and rational decisions.

How do you avoid a last-minute rushed settlement?

If you aren't in court yet and neither person has filed a Complaint against the other, then explore all of your options before making a decision.  Interview a mediator, and a collaboratively-trained attorney, and a litigator.   In some cases you may be able to find people who have experience in all three, like the attorney/mediators at Skylark Law & Mediation.   There are also some professionals who offer assessment consultations where the professional can meet with one or both spouses for the sole purpose of helping them decide which process is best for them.  For this type of assessment meeting the professional would disqualify themselves from being the attorney or mediator in the process, so there is no conflict of interest in the assessment.  Justin Kelsey offers assessment consultations as a service, as does Heidi Webb of Consilium Divorce.

If you are already in court there are still things you can do to avoid a last-minute rushed settlement.  Unless there is domestic violence, there is no reason why you shouldn't meet more than once before a pre-trial conference.  There is no need to wait until all discovery is complete or a deadline is looming to have a settlement conference.  Request that you have your first settlement conference as soon as possible and always keep the next one scheduled.  If you think you need neutral assistance to settle (e.g. if communication is particularly difficult) then hire a mediator to work with you.  Just because the court process has started doesn't mean you can't work with a mediator, and most mediators are fine meeting with both lawyers and clients together.

In short, if you want to have control over how your settlement is reached, not just when, then take control and choose a process that offers the appropriate space and time to reach fair and thoughtful solutions.

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