Monday, April 30, 2018

What is a "Reasonable Period of Time" for Alimony to Continue, when the Law Changes?

Alimony cases come with their complications, and the Alimony Reform Act raised may questions for people who already had alimony orders prior to 2012. As with any other element of domestic law, it truly runs on a case by case basis. To give you an idea, we will dive into two alimony cases that resulted in significant decisions for the parties involved.

But before you head in full force, why don’t we take a moment to go over The Alimony Reform Act of 2011; it’s important to the story trust me. Though the act did not alter the definition of alimony, it did make adjustments to specific aspects such as the durational limits. In the act, it was decided that if a marriage lasted less than 20 years, there may be an option to terminate payments at a certain point.

Now, let’s give some background on the couples shall we? Our first case, featuring Joanne M. Popp and Robert L. Popp, centers around a change in alimony payment due to cut wages. A huge factor in this case is the duration of their second marriage to one another. You heard it right, they were married and divorced twice from one another. Our second case, is about the Arsdales. William Van Arsdale and Susan Van Arsdale were married for less than 20 years. During that time, they had two children. So here, the potential for child support comes into the picture as well.

We will start with Joanne M. Popp and Robert L. Popp, our twice married couple. Joanne and Robert married in 1988 and divorced in 1994. They rekindled their marriage in 1996 and later divorced in 2011. Robert was ordered by the judge to pay Joanne alimony of $12,000 a month.  In 2014, Robert reopened the case and requested that the alimony be modified, as his income had significantly dropped. He was awarded this claim and the judge, using the Alimony Reform Act as reference, determined that his alimony obligation would cease in 2020.

Robert was satisfied in the decision but Joanne claimed the judge had abused her discretion and did not consider all the necessary factors when using the act’s durational limits. Joanne believed that the judge failed to take into account her “ability to maintain marital lifestyle and lost economic opportunity as a result of the marriage”.  The SJC disagreed with Joanne, upholding the trial judge's decision based on the factors listed in the judgment.

Joanne also argued that the retroactive application of the durational limits was unconstitutional, but the SJC had already addressed the constitutionality issue in the Arsdale case. So we will leave Joanne Popp and Robert Popp for a moment, shifting over to the Arsdales.

Originally, William was set to pay Susan $3, 333.33 a month until Susan either got remarried or died. In 2005, William came back to court and submitted a complaint of modification to his alimony payments. It was later agreed upon that he would stop paying child support and rather increase his alimony to $7,571.26 a month.

Ten years later, William came back for more, filing a complaint for an additional modification to his agreement. This time he wanted a termination under the durational limits outlined in the Alimony Reform Act of 2011. This occurred in the wake of his retiring.  Susan filed a counterclaim stating that William was obligated to pay her alimony and continue to pay her life insurance.

The judge sided with William, stating that Susan did not show enough evidence that justified going against the limits outlined in the act. The judge also stated that Susan should not have expected infinite payments of alimony.

Susan appealed stating the applied durational limits were “unconstitutionally retroactive”. The establishment of the act came after the divorce date and the agreement of separation. Susan proposed that the application of the act in this circumstance is unjustified.

In terms of retroactivity the court stated, “When a party argues that a statute is impermissibly retroactive we first "must determine whether the law . . . has a retroactive effect. If not, and assuming the law is otherwise constitutional, no further inquiry is necessary."  If the statute is determined to be retroactive we must ask two more questions: "whether the Legislature clearly intended it to be retroactive" and "[w]here it so intended, . . . whether retroactive application is constitutional."

To answer the first question, the SJC applied the "new legal consequences" test as articulated by the United States Supreme Court in Landgraf.  The SJC though it was important that Susan had an opportunity to show that the durational limits should not apply to her, and only created a presumption.  The SJC indicated that applying a presumption does not attach new legal consequence to the prior events and therefore does not violate due process.  "Thus, the act compels no new legal consequences to the bargains struck by parties in merged alimony agreements entered into prior to the act's effective date."

Both couples dealt with the Alimony Reform Act and both cases were affected by the new duration limits that stripped the obligation for alimony after a period of time. Though the definition of alimony still requires that the party with an ability to pay may be required to support the spouse with a need, these durational limits directly enforce the language added to the alimony definition by the Alimony Reform Act: "for a reasonable period of time."

Written by Justin Kelsey & Patricia Cordischi

Tuesday, April 24, 2018

The Tax Cuts & Jobs Act of 2017 Includes a Divorce “Penalty”

Guest Post from Julie Tolek*

Divorces are difficult, over all, but add to them the stress of trying to understand tax law, and the road ahead looks even darker. One bright spot in the tax laws (pre 2018) was that a tax benefit existed in cases involving alimony. Under the IRS tax rules before 2018, alimony was tax deductible the payor, while being taxable to the recipient. But this has changed under the Tax Cuts & Jobs Act of 2017.

Alimony and Taxes
The issue of alimony is more common in divorces where there is a significant difference in income as opposed to where the parties’ incomes are similar. Where a high income earner is paying alimony they are usually in a higher tax bracket, so the tax deductibility of the alimony can save the payor - and even the family unit as a whole - a significant amount of money. This savings is sometimes so important that parties with potential alimony payments will build all other financial aspects of the divorce around alimony, and calculate which scenario will give the best tax break or keep the most money in the family over all.

The Tax Cuts & Jobs Act of 2017– A Divorce “Penalty”?
Among other changes, under the new tax law, even though the recipient would take the alimony tax free, the total tax bill per family will go up. The payor would pay alimony with post-tax dollars and would no longer have the benefit of that alimony tax deduction. The recipient’s net income would increase, which in this case would be a benefit to the recipient, if the alimony order stayed the same. However, the payor’s detriment will result in a higher tax payment overall for the family and likely lead to lower alimony orders.

Two Classes of Divorced Couples 
Under the new tax law, the change to alimony tax deductibility doesn’t take effect until January 1, 2019, and doesn’t apply to alimony agreements entered before that. This means that people divorced prior to December 31, 2018 will continue to have their alimony payments deductible to the payor and taxable to the recipient (benefiting from the tax bracket differences). Meanwhile, those divorced after December 31, 2018 will not get that benefit (unless the law changes again).

What happens when the alimony payor or recipient wants to modify the alimony order? 
Generally, alimony orders are modifiable when there is a material change (though this is not the case for survived orders). The difference in taxes resulting from the new plan would certainly be considered such a change, except that the provisions don’t apply retroactively to old agreements. So this tax law won’t result in a change that causes the need to modify the order. If other changes occur and the parties are looking to modify their alimony order, the new tax law allows them to keep the tax deduction unless they opt out in their modification agreement. It’s not clear how court orders will be treated until the IRS writes regulations on this issue.

If your divorce takes place after December 31, 2018, how will this tax change affect you?
There are some important things to consider if your divorce is taking place in this new tax scheme:

First, educate yourself about the details of alimony in Massachusetts. The Alimony Reform Act contains language limiting the amount and duration of alimony, as well as defining multiple types of alimony. You can learn more about The Alimony Reform Act and subsequent case-law here: Skylarklaw.com/alimony  The new tax law means that these payments will not tax deductible to a payor for post-2018 divorces, nor will the income be taxable to the recipient.  This may affect how the Alimony Reform Act caps are enforced, but we won't know for sure what the court will do until there is new case law. 

Second, if you intend to obtain an alimony order through agreement, pay attention to the details in the language that will be part of the order or agreement! Remember, survive means that an agreement cannot be changed by a court in the future. So if you have alimony surviving, consider carving out circumstances under which you would want flexibility to modify the order, such as if there is a change in the tax law. If the tax law changes back and alimony becomes tax deductible again, it may make sense to adjust your order. Overall, orders and separation agreements as part of divorces should be written specifically enough to be clear, while at the same time being flexible enough to allow for modifications in extreme or unpredictable circumstances such as changes in the tax law.

Finally, before you file for divorce, consider out-of-court dispute resolution before resorting to litigation. Mediation and Collaborative Law are voluntary processes that give you and your spouse control over your divorce and its terms. Mediation and Collaborative Law allow you to discuss all aspects of your divorce, go over different options, and decide what is best for you and your family. Armed with the knowledge gained from discussion, you can easily write terms that work for you and give you carve outs and flexibility when and where you want it.

*Julie Tolek is an Associate at Skylark Law & Mediation, PC and runs her own practice, Think Pink Law.  Julie's practice includes family law & divorce representation, prenuptial agreements, mediation, firearms licensing & NFA trusts, estate planning & probate, and adoptions.
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