TAX CUTS AND JOBS ACT (TCJA) OF 2017 COMPLICATES POTENTIAL SETTLEMENT OF DIVORCE CASES

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The Tax Cuts and Jobs Act of 2017 (TCJA) enacted dramatic changes to several tax issues that directly impact how divorces are settled. If you are a high wage earner, or you’re married to one and you’re contemplating getting a divorce, there’s almost a sense of urgency toward you understanding the financial aspects of your divorce and when to file your marital settlement agreement, should you and your spouse reach one.

Heather L. Locus, an owner and wealth manager at Balasa Dinverno Foltz LLC in Chicago, defines on her Website why this could be important to you. “Many high-net-worth couples may want to move quickly in order to preserve some important financial options,” Locus writes. “Couples who finalize their divorce agreements this year have many more options since the most significant rules impacting divorce go into effect on New Year’s Day 2019.”

In a previous blog we dissected how the Tax Cuts and Jobs Act of 2017 dramatically affects spousal support payments. After January 1st, 2019, all payments between former spouses in executed divorce agreements will be treated in much the same way as shared income was during their marriage. In other words, spousal support and unallocated support payments of any kind will no longer be tax deductible by the payor spouse nor will they be taxable to the recipient spouse. It is similar to how child support payments have always been dealt with in family law. No deductions permitted.

An article written for familylawyermagazine.com entitled, New Tax Law Helps & Hurts High-Net-Worth Divorce Cases, Locus, CPA, CFP, CDFA, reminds us that there are other changes to the new tax laws and how they will impact the way divorces are settled, and they should be kept in mind when negotiating a divorce settlement. They are:

  • The Personal Exemption. It was reduced to $0 for all taxpayers this year but may return to a $4,000 exemption in 2026 unless laws change again.
  • State and Local Taxes. Deductions for state income and property taxes above $10,000 combined are gone. However, this results in fewer taxpayers being subject to the AMT.
  • Moving Expenses. Unless one of the divorcing spouses is a member of the Armed Forces, expenses incurred separating one marital household into two are no longer deductible.
  • Legal and Professional Service Fees. Tax preparation, investment advisory fees, and your legal fees incurred for tax planning and to obtain taxable alimony are also gone. Some other changes — such as the raising of estate values subject to inheritance taxes — may indirectly impact high-net worth divorce negotiations as the need for advance estate planning vehicles such as Life Insurance Trusts and Grantor Retained Annuity Trusts (GRATs) are reduced.

PERSONAL EXEMPTIONS HAVE BEEN ELIMINATED

As Locus stated above, the new tax laws eliminate personal exemptions for the tax years beginning after December 31, 2017, and ending December 31, 2025. During this eight-year period, divorcing parents will not be able to utilize the personal exemption for dependent children, which means there will be no more negotiating which parent will be eligible to take it.

Before this year, tax filers received a deduction from income for their personal exemptions, including themselves, their spouse, and their children. In divorce and separation agreements it was common for parents with children to negotiate who could use the personal exemption deduction for income and in which year, but not anymore.

CHILD TAX CREDIT INCREASES

Even with the changes in the tax laws divorcing parents will still be able to negotiate which parent will be allowed to claim the “Child Tax Credit”, and which parent will not. Similar to negotiating for personal exemptions, someone involved in a divorce would want to negotiate which spouse gets to claim the “Child Tax Credit”. An income deduction merely reduces taxable income. A “Child Tax Credit” provides a dollar-for-dollar reduction of tax owed. It is an important negotiating tool, and the TCJA doubles the “Child Tax Credit” from $1,000 to $2,000 for children under the age of 17.

Possibly of more importance, $1,400 of the $2,000 credit is refundable to the filing spouse, whereas in prior years the “Child Tax Credit” was not refundable. The “Child Tax Credit” might now be more useful than ever in divorce settlement negotiations because it immediately reduces taxes owed and it is partially refundable.

FAMILY RESIDENCE BECOMES MORE EXPENSIVE

The new limits on deductions imposed by the Tax Cuts and Jobs Act of 2017 will make the prospects of being able to afford to keep the family residence a more challenging proposition. If you took out a home mortgage to acquire your home after December 15, 2017, the TCJA now requires mortgage interest deduction to only be available for interest paid on up to $750,000 of debt on first and second homes combined. However, if your loans for first and second homes combined was created prior to December 15, 2017, you are grandfathered in. This means you have a $1 million limit for interest deductions.

The 2017 tax laws also affect how divorcing spouses will deduct their home mortgage interest payments. According to the IRS the new law suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

This means the deduction for home equity indebtedness has been repealed, unless the home equity indebtedness qualifies as “acquisition indebtedness” — ie. it was used to acquire, build, or improve a primary or secondary residence. As written, the repeal of the home equity interest deduction does not have a grandfather provision. This means all equity loan interest, regardless of when the loan was originated, will no longer be deductible if the proceeds of the equity line were not used to buy, build, or improve the primary or secondary residence.

THE WINDOW IS CLOSING

Due to the many changes in the tax laws suffused with much confusion that surrounds the new rules, your ability as a divorcing spouse to tailor your divorce agreements to suit your particular financial needs will disappear in 2019. That’s why you might want to seek guidance from a family law specialist now. Please be warned that many otherwise competent divorce lawyers are not up to speed on many of the new tax changes. So don’t assume that just any family law attorney is capable of guiding you to the best tax results in your divorce. Contact a specialist in family law who is up to date on the latest tax changes that might affect you.

 

 

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GUGGENHEIM’S DODGERS ORDERED TO REVEAL SECRET $ ARRANGEMENT IN JAMIE’S DIVORCE WITH FRANK

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Former Los Angeles Dodgers owner Jamie McCourt wants California’s family law courts to throw out her $131-million divorce settlement.  That’s why, according to the Los Angeles Times, the new owners of the Dodgers must reveal their financial arrangements with Jamie’s ex-husband/partner, Frank McCourt.  Got that?  We’re pretty sure Frank does too.

According to the Times article earlier this month, Los Angeles Superior Court Judge Scott Gordon denied the Dodgers request to seal a summary of the team’s deal with Frank McCourt.  The judge ordered the document to be made publicly available June 17, unless Guggenheim Baseball Management succeeds in an appeal before then.

Jamie McCourt’s attorney, Bert Fields, believes the financial summary could reveal that the deal was worth more than the Dodgers publicly announced sales price of $2.15 billion.  “It shows Mr. McCourt got value way beyond $2 billion.”  And that somebody totally got ripped off in their settlement negotiations.

In her request to have Judge Gordon throw out her divorce settlement, Jamie alleged that Frank fraudulently misled her about the value of the Dodgers and their assets.  Frank denies this charge.  And he also denies extraterrestrials run the White House.

Last year, Guggenheim paid $2 billion for the Dodgers, while an affiliated entity financed the purchase of the land surrounding Dodger Stadium for $150 million.  The accompanying financial arrangements Guggenheim attempted to seal include data about how Frank and Guggenheim were to share profits from the joint investment venture, which is the crux of this whole magilla.

In court, Guggenheim argued that financial disclosure would harm the Dodgers ability to lure another sports team to the Dodger Stadium site.  (Guggenheim’s ownership has since admitted that it is indeed in talks with the NFL about building a stadium on the stated site.)

Although Staples Center owner AEG still has plans to bring the NFL to South Park, the NFL has made it abundantly clear it has its tiny, greedy, little heart set on Chavez Ravine.  As a side note, the NFL made no mention of all the profits to be made – by everyone, except I guess poor, hungry Jamie – from the Chavez Ravine site.

DEBTOR COMMUNITY PROPERTY SUBJECT TO BANKRUPTCY AUTOMATIC STAY

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An interesting unpublished case has come down holding that the community property interests of the debtor and the debtor’s spouse are part of the bankrupt’s estate and are subject to an automatic stay.

Now it’s important to remember the California Rules of Court provide that “an opinion of a California Court of Appeal or superior court appellate division that is not certified for publication ordered published must not be cited or relied on by a court or a party in any other action.”  The only exceptions to this rule are when the unpublished opinion “is relevant under the doctrines of law of the case, res judicata, or collateral estoppel” or “is relevant to a criminal or disciplinary action because it states reasons for a decision affecting the same defendant or respondent in another such action.”

*Any violation of the rule against citing or relying upon an unpublished opinion may lead to monetary sanctions and striking of the brief.  All unpublished opinions, such as this one, should be used for educational purposes only, and should not be cited or relied upon except as permitted under the California Rules of Court.

IRMO Prestholt, an unpublished opinion of District 2, Division 7 (filed may 22, 2012), was a 2006 status-only judgment of dissolution that terminated the parties’ 14-year marriage.  In 2007, the trial court ordered Husband, an attorney, to pay to Wife $5,000 per month in spousal support, “subject to retroactive modification,” until further order of the court.  Due to the fact neither party had worked for at least a year, the court also ordered that certain assets would be refinanced or sold.

Husband filed for bankruptcy in 2009.  Wife moved for relief from the automatic stay to allow Husband’s children and spousal support obligation to be determined, to deal with his withdrawal of $50,000 from a 401(k), and to characterize an annuity.  The bankruptcy court authorized Wife to seek a ruling from the superior court on issues relating to the custody, visitation, and support as well as “to adjudicate the nature of her interest in all of property in the Debtor’s bankruptcy estate.”

In 2010, the bankruptcy court approved the sale of Husband and Wife’s home and the distribution of Husband’s homestead exemption.  In the same year, Wife’s superior court trial brief stated the only issues to be resolved were family support and attorney’s fees, arguing Husband’s separate property was within the jurisdiction of the bankruptcy court and the division of community property would be addressed there.

Husband countered that the bankruptcy court order required the superior court to determine Wife’s interest in the property in the bankruptcy estate.  Wife argued the bankruptcy court order permitted her to do so but that she chose instead to relinquish that right to negotiate a settlement with the bankruptcy trustee.

The superior court ruled the bankruptcy court order gave Wife a choice about how to proceed and that she properly elected to negotiate a settlement with the trustee of Husband’s bankruptcy estate that disposed of any claim she may have in the property.  The superior court also ruled that Husband’s post-petition claim against Wife for breach of fiduciary duty could not be pursued because he did not obtain relief from the automatic stay.

Later in 2010, notwithstanding the earlier ruling by the superior court that it was precluded from adjudicating property issues, the superior court entered a judgment that stated, “All community real property was sold through the bankruptcy court” with proceeds to be distributed through the bankruptcy court, “all community debts have been paid through bankruptcy or will be paid through the bankruptcy court”, and “all community personal property was abandoned by the bankruptcy court.”

Husband appealed, and the California appellate court affirmed in part and reversed in part.  According to 11 U.S.C. § 362, filing a bankruptcy petition triggers an automatic stay of actions against the debtor, the creation of an estate, and the appointment of a trustee.  The stay is one of the most important protections in bankruptcy law and its scope is broad and remains in effect “until such property is no longer property of the estate.”

The bankruptcy court has exclusive jurisdiction to determine the scope and applicability of the automatic stay.  But notwithstanding the breadth of the automatic stay, several types of actions and proceedings are exempted.  In family law, the filing of a bankruptcy petition does not stay commencement or continuation of proceedings to establish or modify an order for “domestic support obligations.”

It also does not stay proceedings concerning child custody or visitation.  But proceedings to determine the division of community property that is property of the bankruptcy estate are not exempted from the automatic stay.

Community property interests of the debtor and the debtor’s spouse at the commencement of the bankruptcy case must be transferred to the estate and bankruptcy courts must then look to state property law to determine the separate or community property character of the property and what is and is not to be included in the bankruptcy estate.  Due to the fact property acquired in joint form during marriage is presumed to be community property, all such property not yet divided by the state court at the time of the bankruptcy filing is property of the bankruptcy estate.

The state court is permitted, however, to divide exempt community property interests or property abandoned by the trustee.  But if a dispute about marital property is to proceed in state court, the non-bankrupt spouse must file a motion with the bankruptcy court to lift the stay for cause.  Because state courts have expertise in family law matters, such a petition is frequently granted.