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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HOW DO I FIND THE BEST FAMILY LAW MEDIATOR TO SETTLE MY DIVORCE?

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You’ve already made two important decisions with your spouse like agreeing that it’s time to get a divorce. The two of you also communicated well enough to agree on mediation rather than litigation, but you and your spouse are miles apart regarding other important issues like the custody and support of your children and the division of the community assets accrued during the marriage. Your spouse claims he wants to take the children back east to live with his family, but you’ll have nothing to do with that. But you will claim a half share of his pension, you want to keep the family residence for the kids and you to live in, and you want your spouse to assume all of the community debt and take that back east instead of the kids.

You and your spouse have major disagreements as to how the life of your family as a whole and the lives of each individual member shall continue down the road. That may be why you’re getting a divorce in the first place. Who’s going to help you resolve these major issues in a fair and equitable manner is an important question to answer. And how do you find that person who possesses the requisite skills and experience to be able to guide the two of you and your children into the best possible position to succeed in what has become a very tumultuous and challenging economic time period in all of our lives? These are questions that have to be asked if you’re going to find the right mediator for your family.

Your divorce mediator should be competent and qualified to resolve the financial issues that are unique to your specific situation in the realities of today’s world. The divorce mediator needs to understand your family issues in dealing with the children and custody so that all parties will win. You’re going to want to find someone who has the years of training, education, and experience to identify the issues regarding the financial and tax considerations involved with dividing up the family business, retirement and / or investment accounts.

You’re not going to want to leave your divorce up to an inexperienced mediator. You’re not going to want someone involved who’s inexperienced in family law matters. You’re going to want to have the best and most experienced family law specialist your money can afford who has a reputation within the legal community for possessing the skills to mediate and cajole two parties into a fair settlement agreement. Your success in the mediation process lies squarely on the experience level and competency of your mediator to bring about a mutual settlement agreement, and you have the control of that. So how do you find such a person?

Take the time and do the research. Your family’s future life depends on it. If you already have an attorney, ask that attorney who they might recommend to mediate your divorce. Maybe you know someone who’s recently gone through a divorce, and they’re pleased with how their attorney handled it, and see if you can speak with that attorney. If not, see who the opposing attorney was. Take the extra step to speak with as many successful family law knowledgeable persons as possible. Interview them. Ask questions and get answers. Take notes. Get professional legal opinions and use them as advise toward helping you make the important decision as to whom you’re going to hire. That’s smart business sense. Take your attorney-shopping seriously.

When considering prospective mediators, keep in mind the following 5 important points:

1) Peaceful high quality mediation is considered a blessing in family law circles.

It is difficult to find the right attorney who possesses sufficient family law experience and people skills to mediate divorce to fair settlement agreement. Peaceful high quality mediation creates a people friendly environment providing great opportunity for turning sit-down meetings into final agreements. Find a mediation attorney who knows how to make peace with others. Find a family law mediator who knows how to transform peace of mind into fair settlement agreement.

2) Cost effectiveness and fair results in any settlement agreement are essential.

Ask your prospective mediator what they anticipate the mediation process will require in your case to bring it to a close to your satisfaction. You need legal completion in this matter and you want to make sure this mediation lawyer prospect will bring that quality to the table. How much money does the potential family law mediator believe the mediation process will cost you? How long will it take reasonable parties to reach a successful settlement agreement? Of course yours and your spouse’s willingness to cooperate and compromise with each other, and to communicate your differences will play a critical role in any effort to reach agreement. But, again, one of the major points to consider in mediation is saving money. Mediation can be more satisfactory than litigation, if you do it right.

3) Your Divorce Mediator must be thorough and any settlement agreement must be in the best interests of all parties concerned, and that means the children.

You want a divorce mediator who’s been doing family law for a while. You want someone who’s had many life experiences, which probably includes having a family and children of their own; a family law attorney who from personal experience can empathize with what you’re experiencing personally in your divorce. Is your potential mediator a person who is in tune with the world as it revolves very fast around them at this time? Or does this attorney have their proverbial head in the sand on important social issues? A family law mediator should be someone who strives to understand the issues of the world as it relates to the needs of your children and their parents, and how that relates to your soon to be changed-for-good life after divorce.

4) It is important to choose a Divorce Mediator who can utilize heart, knowledge, and experience while working to help you resolve your unique family law issues.

You can’t have a robot regurgitating the law back to you if it has no practical application toward the realities of your personal situation and where you go from here. You need someone who can assist you and your spouse and lead you to that higher step; someone who understands what it is like to be you, to feel your pain, to know your desires of what your future happiness really means in the family law arena. Experience can be summed up in a prospect mediator’s CV or resume. Knowledge comes in many forms and can be applied to creating greater understanding leading to ultimate agreement in your case. Understanding many different aspects of life, and being able to utilize learned skills and crafts from these many aspects, can be important in helping someone to better facilitate equitable agreement in any form. Knowledge plus experience equals understanding. And throw in a little heart, which is sometimes a unique experience in the family law industry, then you and your family can realistically set out with hope for a future filled with prosperity and good health. It helps to have a mediator who understands this.

5) If you research the Internet be sure to seek a divorce mediator not business or general mediator.

You want the best brain surgeon for brain surgery, but probably not to deliver your baby or fix your speech problem. You’ll leave that up to other kinds of specialists. Same thing for family law mediation. You need someone who lives and breathes family and law. If your search for a family law mediation specialist is being done on the Internet, search for family law specifically, not mediators in general. Mediators specialize in bringing about resolution and agreement to disputes. It’s an alternative form of dispute resolution. Mediators are generally trained with skills in bringing about resolution without any specific application to family law understanding. You want in a mediator someone who lives, breathes, and mediates family law, someone who understands how it is to mediate a family law matter to a reasonable conclusion.

WHAT IS FAMILY LAW MEDIATION?

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What is divorce mediation?

Family Law mediation is one of the more common methods of negotiating to settlement the legal issues that arise in a divorce. It is not going into court and litigating each issue tooth and nail. In divorce mediation matters, you and your soon-to-be-ex-spouse may hire a specialist in family law as mediator, someone who will meet with you in an effort to resolve your differences and come to a negotiated agreement. The family law specialist acts as mediator and facilitator who will help you and your spouse resolve your issues in a fair and equitable manner.

Mediation of a divorce is an important option both parties should consider as it saves costs and stress for both parties. Mediation is designed to help both parties and has a long list of benefits for families. The benefits include, but are not limited to:

• Mediation usually costs much less than litigation which may require a series of court hearings.
• With your direct participation, mediation should result in a comprehensive settlement of all the issues in your matter.
• Mediation is confidential, meaning there is no public record of declarations or financial information.
• A lawyer of your choice can still give you legal advice during your mediation.
• Your spouse and you are in control of the entire process of mediation.
• The mediation process allows time for you to improve communication with your spouse.
• Mediation will help minimize the emotional damage children may experience during their parents’ divorce.
• Maybe most importantly, mediation allows you to negotiate the terms of your agreement based on your own ideas as to what is fair in your situation and what is best for your family as a whole as opposed to having a solution imposed upon you by a family law judge that is based upon impersonal legal principles.

Mediation is not for all divorcing couples. Matters where there is a history of domestic violence or an imbalance of power between the parties may not be right for mediation. But if your spouse and you are willing to communicate and compromise with each other in a rational manner with open minds you could mediate.

Your Divorce Mediator should be a specialist in family law who will help the two of you stay on track with the issues and in tune to one another, to listen to each other, to respect and understand each other’s opinions. It is important to listen to your spouse’s perspective and to be willing to compromise. Compromise is key to reaching a fair and mutually beneficial settlement in the mediation process.

Being able to empathize with your spouse’s position is important. Hopefully your spouse will do the same. They will feel what it’s like to be you. The idea is that you reach an agreement based on trust and understanding where both of your best interests, and those of the children if there are any, are taken into account and addressed.

This mutual understanding will be drafted by the mediator into a settlement agreement. If children are involved, a parenting schedule or a parenting plan will be needed. Other legal documents will be drafted such as a Petition for Dissolution or Legal Separation, and Financial Disclosure documents. The mediation process allows you and your spouse to decide the terms to live by in a divorce, terms that you agree to live by, without your family having to suffer through the negative emotions and financial costs of a courtroom trial.

MEDIATION MAKES YOU A DIRECT PART OF YOUR FAMILY LAW SOLUTION

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Savings on emotional and financial costs are not the only reasons to mediate rather than litigate your family law matters, or any legal matter, for that matter. Some people mediate their family law cases so they can have a direct hand in exactly what the terms of their settlement will be. They can agree to the terms they are forced to live by. That’s because the agreement will be negotiated by and between the parties themselves, with legal understanding and helpful cajoling provided by their mediating attorney, as they reach a mediated family law settlement agreement, rather than fighting it out in court.

If you do choose to litigate your child custody, spousal support, or community property division issues in court you could become soundly disappointed with the legal results. A litigant loses control of the outcome of his or her case when it goes to court, where your heart and pocket book can be broken for any number of reasons.

First of all, in court someone else is deciding your case for you, and he or she is called the Judge. Secondly, the law may not be on your side of your family law issues to start with. And you may have to learn the expensive way why you can’t just get up and move out of state with your children if dad/mom on the other side doesn’t want you to.

Or maybe you’re not able to prove up to the court your ownership interest in certain alleged community assets. Or the child custody and visitation mediator doesn’t deem you the best custodial parent of your child in this particular legal arrangement, and the judge follows the mediator’s recommendation against granting you custody of your children.

The point is that you don’t control the outcome to your family law dispute when you litigate in court. The judge takes over that duty for you, aided by input in the form of motions and pleadings filed by your attorneys, and the opinions of family law and financial experts. The judge decides your fate and the fate of your family for every issue that you put before him or her. It’s all a very expensive proposition.

When you litigate, the Family Law Judge is the only person in the universe to decide whether your children live with your soon-to-be-former-spouse or you; whether you get to stay or whether you have to move out of your family residence; whether you or the other party gets half of whose pension, or not. These are the risks involved with litigating your case in court.

That’s why some parties mediate their legal issues with an experienced family law specialist. If they can understand the law as it truly applies to them, and if they can agree to work together, in many instances like they never have before, and if they can understand how to communicate with one another, to rationally discuss the important issues of their family’s present day-to-day realities, and then be willing to compromise on some if not all of those issues, then those who were once adversaries can now become a winning team. Your family can thrive.

Honest communication and ultimate agreement between otherwise disagreeing spouses is critical to successfully mediating family law matters. If you cannot communicate with your spouse and ultimately come to agreement about issues that you haven’t previously been able to agree upon, then you may have to litigate your case, which turns into great emotional and financial expense for everyone involved. It wears on parents and children alike.

But if the parties do communicate productively, and the two sides can sit down with a seasoned family law specialist to mediate your differences about custody, visitation, property division and the like, into a fair settlement, that you will personally help to create, a settlement that’s truly in yours and your children’s best interests, then you will be able to save yourself a lot of money and negative emotion.

You will be able to breathe easier and move forward in your life, rather than fight and stress-out with your ex. Your children will have a better chance to prosper and move forward with their lives along with you, just as you planned it. That’s because you and your spouse communicated well enough to hammer out the specific terms of your family’s future with a mediated family law settlement agreement, and you didn’t leave it up to the family law court to decide your family’s fate for you.

 

7 DAY REQUIREMENT OF FAMILY CODE §1615(c)(2) NOT APPLICABLE TO PARTY REPRESENTED FROM OUTSET

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An important case came down last year that helped to further define California family law regarding premarital agreements.  In the case of Marriage of Cadwell-Faso & Faso (2011) 191 CA4th 945, 119 CR3d 813, the California Courts of Appeal determined the requirement of Family Code §1615(c)(2) that a party against whom enforcement of a premarital agreement is sought have at least 7 calendar days “between the time that the party was first presented with the agreement and advised to seek independent legal counsel and the time the agreement was signed” does not apply when that party was represented by counsel from the outset of the transaction.

The facts of Cadwell-Faso were as follows:  Before their marriage, a couple entered into a premarital agreement.  Husband’s attorney prepared the initial draft of the agreement, presented it to the prospective wife and advised her to seek independent counsel.

Prospective wife hired an attorney, who, over the course of several months, prepared five draft addenda.  The 5th addendum was faxed to prospective husband, who transmitted it to his attorney 3 days later.  Three days after that the parties met with his attorney and signed the agreement, after final working changes were made.  They married two days later, separated four months after that.

In later marital dissolution proceedings, Husband moved to set aside the premarital agreement, which imposed both spousal support and property obligations.  He claimed that he signed the agreement without the benefit of the statutory time period of Family Code §1615(c)(2), which requires “seven calendar days between the time that [the] party was first presented with the agreement and advised to seek independent legal counsel and the time the agreement was signed.”

THE REALITY OF SETTLING DIVORCE CASES

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The reality is that most family law cases should and do ultimately settle.  The key is that you have an open mind when going into a divorce, and a reality check wouldn’t hurt either.  You can’t go into your divorce assuming that an absurd offer will lead to a reasonable settlement.  This often can be counterproductive in the settlement process, and it can spiral the parties further apart in their negotiations.  It can create questions as to whether the parties’ lawyers even comprehend the basic concept of negotiated settlements and what they can reasonably do to reach one.  But the key lies with the party and his or her reasonableness in understanding the nature of today’s economic and legal conditions.

The first thing to understand about settling your divorce case is this:  any offer made has to be within the range of possible outcomes that would result if everyone went to court on the matter.  This is where it is important to have a seasoned family law attorney representing you.  Again, the key question is whether the terms offered are within the reasonable bounds of results that could be expected in a family law courtroom.

Making or evaluating settlement offers requires great objectivity on both the clients’ and their attorneys’ parts.  They both must understand how to analyze the facts of their case against the applicable law.  Evaluating one’s position cannot be done through wishful thinking.  Parties cannot act as if unpleasant realities or negative considerations just don’t exist.  They must keep an eye on what is legally and economically realistic in today’s unstable climate.  The alternative is an expensive and disheartening experience through the courtroom process.