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spouses in New York will soon be left to face a new maze where guideline amounts exist based upon a presumption that is no longer valid.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.
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.
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.