The U.S. tax code has long been a labyrinth of convoluted legal jargon that has left even the most astute of wanderers lost in its maze. Decades’ worth of opinions from the Tax Courts have served as guiding lighthouses to aid in navigating its many wayward roads , but with the recent passage of the “Tax Cuts and Jobs Act of 2017” the maze’s pattern has suddenly changed, potentially rendering those opinions null and void. One of the areas that has seemingly been flipped on its head by the tax code is Alimony or Spousal Maintenance (as it is called in New York).
Under the old code, maintenance awards were deductible to the payor and included as taxable income to the payee, which generally resulted in more money to be distributed to the payee. Why? Well the answer is best illustrated by way of example. Say the payor (the higher earning spouse) is obligated to pay maintenance in an amount of $30,000 per year to the payee (the lower earning spouse). The payor, who earns more is taxed at a much higher rater of 33% than the payee who is taxed at only 15%. Under the old code, the payor would be able to deduct the $30,000 and thus save on paying the 33% due in taxes on that amount for a total savings of $9,900. Meanwhile the $30,000 is included to the payee and taxed at the lower rate of 15% and the payee only owes taxes in the amount of $4,500. The parties have saved $5,400 by using the deduction. This deduction has served as a critical tool in negotiating prenuptial, separation and divorce agreements as it encourages the payment of more funds to the payee. New York’s recently amended law on maintenance guidelines went into effect on January 25, 2016 and was enacted based upon the presumption that the payor was entitled to deduct maintenance.
The new law under the Tax Cuts and Jobs Act of 2017 terminates this deduction, thereby reversing the current maintenance dynamic. In other words, the payor must now pay taxes on the maintenance award and the payee shall not be taxed on the money received. The new law will not go into effect until after December 31, 2018. Divorcing spouses in New York will soon be left to face a new maze where guideline amounts exist based upon a presumption that is no longer valid. Without suitable guidance, litigants will be left fighting over the proper amount of maintenance (a fight that the new maintenance guidelines had sought to put to rest). Dynamic problems require creative “outside the box” solutions. The attorneys at the Law Offices of Steven E. Rosenfeld, P.C. are here to guide you through this new and complicated frontier and insure that you make it out of the maze in one piece.
Businesses using outside financial advisors may be surprised to learn that according to courts in New York City, those financial advisors are not considered professionals. In a recent appellate case, Starr v. Fuoco Group LLP, 2016 N.Y. Slip Op. 02143 (1st Dept. 2016) the Court ruled that so-called “financial advisors” were not professionals. Therefore, unlike an accountant, attorney, engineer, or doctor, financial advisors cannot be held liable in tort for failing to exercise reasonable care. The Court found that any duty to render financial advisory services competently must arise out of the contract itself. Some of these contracts, but not all, may be boiler plate, but both financial advisors and potential clients would be well advised to obtain competent legal counsel before entering into such an agreement. Proper execution can prevent substantial litigation expenses.
In a recent appellate case Castellotti v. Free, 2016 NY Slip Op 01625 (Mar. 8, 2016) the Appellate court recently reversed the dismissal of a plaintiff’s unjust enrichment and promissory estoppel claims against his sister. The plaintiff, Peter Castellotti, brought suit against his sister, defendant Lisa Free, claiming breach of contract, breach of fiduciary duty (duty of loyalty), unjust enrichment, and promissory estoppels (you’re prohibited from claiming there was no agreement). Peter and Lisa’s mother was a wealthy business owner. Shortly before her death, the mother removed Peter from her will, leaving Lisa as the sole beneficiary. The mother did this because Peter was going through a nasty divorce with his then-wife Rea Castellotti, and the mother did not want Rea benefiting in any way, directly or indirectly, from her estate. At or around the same time, Peter and Lisa entered into a verbal agreement whereby Peter agreed to pay all of the estate taxes on the mother’s estate on condition that Lisa transfer 50% of all the assets from the mother’s estate to Peter once his divorce with Rea was finalized. The mother passed away in June 2004. Peter and Rea finalized their divorce in 2008 without Rea knowing of Peter’s rights to a multi-million dollar inheritance based on his verbal side-deal with Lisa.
After Peter’s divorce was finalized, he sought to collect his half of his mother’s estate from his sister who said there was no deal. Peter sued. In reversing the lower court’s dismissal of the unjust enrichment and promissory estoppels claims, the Court specifically mentioned the divorce proceeding and stated “we do not condone parties in matrimonial actions being less than candid with their spouses about their assets. Peter’s alleged fraudulent behavior, however, should be explored in the matrimonial action, but should not preclude him from moving forward with at least some of his claims here.” The Court further advised that Rea’s remedy, if any, was to move to vacate the divorce judgment, based upon Peter willfully concealing his alleged oral agreement with Lisa.
The bottom line here is that this entire costly nightmare could have been avoided by retention of both competent matrimonial and trust & estate counsel.
If your prenuptial agreement includes wording to the effect that the property of the parties acquired before and during the marriage is to remain separate, you may be wondering how such provisions would be applied in the event of a divorce. As noted, NYC divorce lawyer advises the Court of Appeals of New York handed down an answer to this very question on December 18, 2008. In Van Kipnis v. Van Kipnis the Court enforced a prenuptial agreement agreed to in France, and gave effect to a provision barring the equitable division of property.
In the provisions of the Van Kipnis agreement, the parties elected to follow a separation of estates scheme, rather than the community property system that is the default in France. The terms of the contract were that, “each spouse shall retain ownership and possession of the chattels and real property that he/she may own at this time or may come to own subsequently by any means whatsoever.” One party contended that this provision was only intended to apply to property ownership while the parties were married, but not its distribution should a divorce occur. The Court disagreed based on the plain language of the contract, which contained nothing to that effect. Courts enforce the terms of a prenuptial agreement based on the intent of the parties executing. The way that courts determine that intent is by looking at the plain wording of the contract, not the claims of the parties make about it’s meaning after the fact.
The party opposing the separate property provisions also contended that because the agreement was not an express waiver of New York’s equitable distribution default, but instead an opt out of France’s community property system, the property had to be divided equitably under New York’s Domestic Relations Law §236(B)(5). Again, the Court disagreed, reasoning that there are two ways that prenuptial contracts may be worded to circumvent the default system of equitable distribution. First, parties may include specific wording that expressly waives equitable distribution, and second, they may designate property that would normally be considered marital property subject to equitable distribution, as separate assets, never to be construed as jointly owned. The Court held that the Van Kipnis agreement was an example of the latter method of bypassing equitable distribution.
As a couple negotiates the terms of a prenuptial agreement, it is important that both individuals ensure that the language therein is a complete, clear, and unambiguous representation of their intentions in the event of a divorce. This language is what courts will use to interpret the meaning of the agreement, not any other statements of the intended meaning. Moreover, the fact that a prenuptial contract does not explicitly opt out of the default property division scheme of equitable distribution does not mean that the terms of the agreement are not providing for exactly that.
Two businesses, Abakan, Inc. (Abakan) and Uptick Capital, LLC (Uptick) entered into a Consulting Agreement. Thereafter, Abakan commenced a breach of contract action against Uptick with respect to the agreement. Uptick moved for an order requiring Abakan to advance Uptick’s legal fees. The basis for the motion was a provision in the contract providing that Abakan would indemnify Uptick for legal expenses resulting out of Uptick’s activities under the agreement. On May 2nd, 2013 the US District court for the Southern District of New York found in favor of Abakan on the legal fees motion.
The Court held that a contract between two parties, which includes a provision wherein one party agreed to indemnify the other in legal matters arising out of their agreement, should not be construed to provide for indemnification for legal matters arising between those two parties. The exception to this rule would be if the terms of the contract made it clear that indemnification was exclusively intended for legal disputes between the contracting parties or unequivocally included such interparty disputes.
The Court reasoned that, in the present case, the indemnification provision was clearly meant for application in the event of a legal dispute with a third-party, not between Abakan and Uptick. The terms of the contract called for Uptick to notify Abakan in writing of any claims against Uptick, and provided that Abakan was entitled to assume the defense of any suit in Uptick’s place. These provisions would not make any sense if they were intended to be applied in disputes between Abakan and Uptick. So, because the terms of the agreement did not unequivocally or unmistakably cover disputes between the contracting parties, the Court ruled that Uptick was not entitled to indemnification from Abakan in this instance. It followed, the Court reasoned, that Uptick was not entitled to receive an advance of its fees in the dispute with Abakan.
The key take away from Abakan, Inc. v. Uptick Capital, LLC 934 F.Supp2d 410 (S.D.N.Y.2013) is that when entering into a commercial agreement that includes an indemnification provision, it is important to be unambiguous on whether that indemnification applies to legal disputes between the parties to the contract. In the absence of that clear language, the assumption will likely be that indemnification does not extend beyond disputes with third-parties. This case exemplifies the necessity for an experienced commercial litigator to assist in drawing up commercial agreements.
A recent Third Department case, Myers v. Myers, demonstrates the consequences which may befall a spouse who owns property prior to marriage and then transfers same into joint name in order to satisfy a mortgage lender’s requirement that the other spouse’s name appear on the deed, as well. As noted by an experienced NYC Divorce Lawyer, In Myers, the wife owned the marital residence prior to the marriage, but approximately five (5) years into the marriage, transferred it into joint name, consistent with the mortgage lender’s demands. The purpose of obtaining the mortgage was to consolidate debt.
In December 2011, the wife commenced an action for divorce. The parties resolved all issues of equitable distribution, save for the distribution of the marital residence. The wife claimed that the value of the residence at the time of transfer was approximately $165,000.00 – and she was entitled to a separate property credit.
The Supreme Court issued a Decision & Order that both the marital residence and the mortgage debt were to be divided equally between the parties. The wife appealed such Decision & Order. On appeal, the Third Department, while noting that its 2012 decision in Campfield v. Campfield (upon which the Supreme Court based its Decision & Order), did not necessarily require the result as determined by the Lower Court. The Appellate Division noted:
“…To the limited extent that Campfield may be read to limit a court’s discretion to award a separate property credit to a spouse, like the wife, who transmutes separate property into marital property without changing the nature of the property itself, it should no longer be followed.”
The Court also noted that the decision to award a separate property origination credit is a determination left to the sound discretion of the trial court. The facts of the case were determinative that a separate property origination credit was not strictly mandated. Moreover, the trial court did not abuse its discretion.
Any spouse thinking of transferring separate property into joint name should think seriously about doing so for fear of what may transpire in the event of a divorce.