When a business owner gets divorced, the business is often the major asset subject to distribution. Accordingly, the business and its’ ongoing operations are almost always implicated in the divorce. In most cases that I see, the business is a small business with one owner or a few owners. In the best case scenario, the business owners have planned in advance for situations that arise in a divorce through a Shareholders Agreement, Prenuptial Agreements and/or Postnuptial Agreements. Hopefully, the parties’ respective family law and business law attorneys can work together to best protect the business owner to ensure as smooth a transition as possible. Hopefully, the relevant agreements have set forth a valuation formula which can be upheld at law for purposes of the divorce. Counsel can also work together to insure that income is clearly defined and reported so that support is less contentious. Additionally, advance planning can be used to address the below issues so that a divorce does not mean the end to the business. While advance planning is not a guarantee, it will provide additional protections to the business owner.
A divorce can impact internal and external business relationships, support (between spouses and child support), equitable distribution (division of marital property) and business control. In terms of business relationships, banking relationships can come into play, especially if the spouse is a personal guarantee of the loan. It is often not easy or possible to have the spouse removed from the guarantee. The spouse may also have a role in the business and it may not be feasible for them to remain involved. For example, in cases where the spouse is client facing, a delicate balance will be necessary to transition the spouse out of the business without negatively impacting the business. This can be a challenge if the divorce is acrimonious. Finally, the roles of the parties within the business may create sustainability issues going forward. In some cases, one spouse has a particular talent (i.e. software development, marketing creativity or scientific knowledge) which cannot be easily replaced and without which the business may not be able to survive. Such issues impact valuation but also succession and strategy on distribution of assets.
As for support, when a business owner is a party to a support action, whether for support for a spouse or for a child, calculating income can be challenging. The definition of income for purposes of determining support is very broad and is not the same as taxable income. There can be practical issues in obtaining information and documents which reflect the income. Legal issues can also arise, such as whether income is being reported or if the court can compel income or retained earnings to be distributed from the business to the owner to pay support.
In equitable distribution, the business must be valued so that division of the assets can occur. Business control also comes into play. It is unusual for parties to retain joint ownership or for the non-business owner spouse to receive shares of the business so creativity and/or structured payments are often necessary unless there is enough cash reserved for an outright payment. The payout can cause a financial strain for the business.
To best protect a business in the event of a divorce of the business owner, it is advisable for business owners to have advance planning through the mechanisms listed above. While not a guarantee, it will place the business owner spouse in a much better position than ignoring these issues all together.
The holiday season can be a stressful time of the year, especially for children whose parents have recently separated or have a tense custody arrangement. I often remind my clients to keep in mind that the children have not asked to be put in this position, and parents should do all they can to ensure a happy and stress-free holiday for their children. After all, the children should be the focus in the holiday season. Here are some tips to help reduce tensions for your children over the holiday season .
1. Make it clear to your children that you are genuinely happy for them to spend time with the other parent.
2. Help them make cards and gifts or take them out to buy something for the other parent. It doesn’t have to be extravagant, but this small gesture will go a long way in bringing happiness to your children, and hopefully foster more civility with their other parent. The children will be excited that they have a gift to give, and hopefully the other parent will reciprocate in the future.
3. If your children are having fun at the other parent’s house, spending time with family they haven’t seen in some time, and want extra time with that family, consider allowing them to spend a little extra time before you pick them up, especially if your plans are flexible.
4. Don’t cancel Christmas or Hanukkah. Some parents decide that because they are not going to have their children at a specific time on the holiday, they are not going to celebrate this year. The only ones hurt with this approach are your children, who – after all - did not ask to be subject to a custody order. Make it clear to your children that you were excited to celebrate with them, and that you will be celebrating when they are back at your house. That will also give them peace of mind to enjoy the holiday more when they are with the other parent free of guilt and worry that you are sitting home alone and sad since they are not there with you.
5. Make sure you look at the custody order in advance. If you have any questions make sure to have those questions answered by your attorney or resolved in a discussion with the other parent well in advance to avoid disputes on the eve of the holiday .
If your children see that you are happy to celebrate the holiday, no matter what the schedule is, that will allow them to more fully enjoy the holiday as well.
Wish you and your family a very happy holiday season.
It seems that Labor Day has just come and gone, but the snow is already moving in and the holiday season will be here before we know it. You have already transitioned the children from summer vacation into another school year, hopefully without too much stress. While it can be hard to focus on the details of the season, if you have minor children and a custody agreement or order, it is time to take a look at your custody documents and give some thought to what lies ahead in the next month and a half. Prior to scheduling family dinners, holiday celebrations and travel, it is important to see what the holiday schedule is for this year. Which days of the holidays are your children with you, what times are they with you, and who is responsible for transporting the children? It is important that you know the answers to all of these questions. Take out your custody agreement or order now and look through the schedule for Thanksgiving through New Year’s. If you have questions, now is the time to ask your attorney, not on Thanksgiving morning. We all know that a lot of advance planning occurs for the holidays, and family gatherings are scheduled. If it is important to you that your children celebrate with you and your extended family, you want to be sure to make your plans around when you have physical custody of the children. The last thing that you want to do is put your children in the middle of a dispute and have them miss plans with either parent that they were looking forward to. Knowing the details of the holiday schedule now will enable you to make plans based upon the custody schedule and keep everyone happy, which should result in a more peaceful holiday for you.
On July 4, 2018, recent changes to the Pennsylvania custody law will go into effect. These laws take into account changes in the family structure and the expansion of classes of individuals who may qualify to file for physical or legal custody of minor children.
The new class of individuals (third parties) who will have standing to file for custody must meet all of the following criteria as set forth in 23 Pa. C.S. 5324: 1. The individual has assumed or is willing to assume responsibility for the child; 2. The individual has a sustained, substantial and sincere interest in the welfare of the child; and, 3. Neither parent has any form of care and control of the child.
In order to have standing, the individual must prove all three criteria by clear and convincing evidence, which is a high burden of proof. Presumably, the burden is high to ensure that the child is protected and does not end up in the custody of someone unsuitable. This opens up the possibility for neighbors, family friends, aunts and uncles or even sports coaches being awarded custody of children. The law also has a further limitation in that, if there is a dependency proceeding, meaning that there is a pending dependency petition alleging that the child(ren) is without proper parental care and should be supervised by the court, then the above criteria will not apply.
It should be noted that grandparents could have standing under two sections of the Custody Code. While grandparents and great-grandparents may have standing under 23 Pa. C.S. Section 5324, above, they may also have standing to seek partial physical custody or supervised physical custody of their grandchildren or great-grandchildren under 23 Pa. C.S. 5329. There have been changes to this section that will be effective July 4, 2018 as well. Case law previously struck the sections that allowed for grandparents’ standing if the parents of the child(ren) were separated for at least six months or were getting divorced. This is because it is unconstitutional for intact families and families that are not intact to be treated differently. The new revisions reflect that case law, and also strike those sections, but also added an additional section to allow for grandparent standing: 1. Where the relationship with the child began either with the consent of a parent of the child or under a court order and where the parents of the child: A. Have commenced a proceeding for custody; and, B. Do not agree as to whether the grandparents or great-grandparents should have custody under this section.
Essentially this change allows a grandparent or great-grandparent who has an existing relationship with the grandchildren or great-grandchildren to be added as a party to a custody proceeding when the parents of the child cannot agree if the grandparent or great-grandparent should have any custody.
The final change to 23 Pa. C.S. 5329 changes the word parent to party in the section for consideration of criminal conviction. The court must consider criminal convictions and make sure that there is no threat to the child(ren) before entering a custody order. This consideration relates to entering an order of custody to a party (not just a parent) who does have certain criminal convictions.
The timing of these changes to the custody law coincides with the rise of the opioid epidemic both nationwide and in the local area specifically. Sadly, there has been a rise in the past few years of parents battling drug addiction and unable to care for their children, to the extent that Pennsylvania legislators have felt compelled to address the impact of this crisis on minor children. These changes to the custody law increase the potential third parties who could seek to assume custody of the children in these situations. The changes in the law reflect the reality that some of these third parties may already be caring for the child, but did not have standing to file for physical and/or legal custody previously. As of July 4, 2018, they will be able to do so.
Prior to the tax act, taxpayers who required additional cash for a variety of reasons, including buying our their spouse’s interest in the residence, would regularly refinance the mortgages on their residence for a larger amount. The benefit was that the mortgage interest on the refinanced mortgage could be deducted up to a $1,000,000 cap.
The passage of the Tax Cuts and Jobs Act has effected a huge change limiting the mortgage deduction in this scenario, which may have a significant impact on parties going through a divorce. The new law limits the amount of the mortgage to funds needed to acquire a residence, construct a residence or substantially improve a residence. So, if you are refinancing for one of these allowable expenses, and stay below the $1,000,000 cap, the interest would still be deductible. However, in a divorce that is often not the case.
In a divorce, the party retaining the residence will have to refinance the loans related to the residence to remove the other party’s name. Often, this will be both a mortgage and a home equity line of credit. Moreover, the party retaining the residence often has to refinance for a larger amount to make a cash payment to the other party to “buy out their interest” in the house. With the new law, the parties refinancing the marital residence to take cash out to pay off the other spouse will be limited to the principal balance prior to the cash out refinance in terms of the interest that can be deducted. For example, if the principal mortgage balance is $300,000 and the party retaining the residence is refinancing for $500,000 to pay off the other spouse, they will be limited for purposes of the deduction to the interest on the $300,000. Interest on the additional $200,000 cannot be deducted. In addition, there will be no deduction when the mortgage is refinanced to now include the home equity line of credit. Parties are going to have to give more consideration to the tax consequences and resulting true cost of retaining the residence.
In my prior installment of this series (Family Law Tip #2), I discussed the substantial reduction in the allowable amount of mortgage interest which is now tax deductible on any mortgage taken out after December 15, 2017. The 2017 Tax Cuts and Jobs Act reduced the deductible amount by $250,000 on homes purchased after the cut off date - capping the allowable interest deduction to mortgage principal of $750,000 (reduced from $1,000,000 prior to December 15, 2017). Beyond the lower mortgage cap, another big change is that, in general, the interest on home equity lines of credit is no longer deductible (with some very limited exceptions). This is true regardless of whether the home equity line of credit was taken out before or after the change in tax law.
These changes to the allowable mortgage interest deduction will have a bearing on the decision of divorcing parties as to whether to keep their second residence post-divorce. In the past, people often kept the second residence, in part knowing that they were able to deduct the mortgage and home equity line of credit interest on their tax returns and the maximum amount of $1,000,000 in indebtedness allowed for flexibility. In the advent of the Tax Cuts and Jobs Act, some will have to rethink this decision. If the expenses related to their vacation homes cannot be deducted, the cost to maintain the home will be higher.
While there was some back and forth in the various drafts of the tax code revisions, ultimately the deductions for the mortgage interest apply to both the primary residence and a second home as well. However, as stated above, the $750,000 cap makes it more likely that parties will not be able to deduct all of the interest on the mortgages for the primary residence and secondary residence when those amounts are combined. Consulting your attorney and accountant will help you to determine the actual increase in the cost of maintaining your vacation home so that you can make an informed decision.
The Tax Cuts and Jobs Act includes a substantial change to the allowable amount of mortgage interest which is tax deductible. For those who are contemplating purchasing expensive homes and taking out a mortgage with a principal balance of more than $750,000, the interest on the amount over $750,000 will not be tax deductible. For mortgages issued prior to December 15, 2017, the mortgage interest is deductible for principal mortgage amounts of up to $1,000,000. However, after December 15, 2017, that amount is reduced to principal amounts of up to $750,000. This only applies to properties purchased after December 15, 2017. Absent any extension of this law, the amount reverts to $1,000,000 in 2026.
Another big change relates to home equity lines of credit on your residence. In the past, the mortgage and home equity line of credit could be lumped together, and the interest on both deducted up to the maximum allowed loan amount. That is no longer the case. It does not matter if the home equity line of credit was taken out before or after the change in tax law. In general, the interest on home equity lines of credit is no longer deductible. There are some limited exceptions to this where the funds are used to substantially improve the residence, but even this exception requires very specific requirements to be met. This tax change could have a large impact on those who intentionally took out a home equity line of credit rather than refinance their mortgage to a larger amount. Without this deduction, taxable income will be higher.
As everyone has heard by now, the 2017 Tax Cuts and Jobs Act was signed on December 22, 2017, and is now law. While the name may be confusing, what it means for taxpayers is that many tax laws are changing. Attorneys and accountants are still figuring out what the impact of the Act will be, and more direction will be provided by the IRS in the coming months and years. This is the first in a series of blogs designed to demystify the new tax laws that may impact those who are divorced or currently in the process of getting divorced.
Alimony has long been tax deductible to the payor (person paying alimony) and added to taxable income to the recipient (the person receiving alimony), as long as specific requirements set forth by the IRS are followed. The result has been an income shift from the party that pays a higher tax rate to the party that pays a lower tax rate. In the end, both parties under this scenario end up with more money than if alimony were not taxable or deductible. This treatment has applied to spousal support, alimony pendente lite and alimony.
With the passage of the Tax Cuts and Jobs Act, such treatment of alimony will change, but not right away. As of now, the change is only for tax years 2019 through 2025, and specifically will only apply to agreements signed after December 31, 2018. It remains to be seen what will happen after 2025, or possibly before if there are additional changes to the tax code. There is an exception made, however, for those who have already entered into an agreement on or before December 31, 2018. The law changes for all agreements entered after December 31, 2018, so that the alimony will no longer be deductible for the payor, or count as income to the recipient. It remains to be seen if there are any changes to how the amount of spousal support, alimony pendente lite or alimony are calculated given the change in the tax law. If there are no changes to the calculations, the result will be a loss of tax advantage for the party paying support, while the party receiving support will receive the benefit. If there are changes to the support calculations, I would anticipate that we will know by the end of this year. Stay tuned.
Although the weather is just starting to change to cooler temperatures, the holiday season is fast approaching. Holiday displays are up, holiday music is already playing and even the pre-Black Friday sales have started. It seems that with the warmer temperatures well into the fall, the holidays have snuck up on us all. While it is easy to get wrapped up in the spirit of the season, if you have minor children and a custody agreement or order, it is time to take a look at your custody documents and give some thought to what lies ahead in the next several weeks.
Before you make plans with your children, it is important to see what the holiday schedule is for this year. Which days of the holidays are your children with you, what times are they with you, and who is responsible for transporting the children? It is important that you know the answers to all of these questions. Take out your custody agreement or order now and look through the schedule for Thanksgiving through New Year’s. If you have questions, now is the time to ask your attorney, not on Thanksgiving morning. We all know that a lot of advance planning occurs for the holidays, and family gatherings are scheduled. If it is important to you that your children celebrate with you and your extended family, you want to be sure to make your plans around when you have physical custody of the children. Knowing the details of the holiday schedule now will enable you to make plans based upon the custody schedule and keep everyone happy, which should result in a more peaceful holiday for you.
Prior to Pennsylvania legally recognizing same-sex marriages, other states did offer same-sex marriages or civil unions. A problem for couples who entered into an out-of-state marriage or civil union was that if they later decided to divorce, they could not do so in the Pennsylvania family courts. This was because Pennsylvania did not recognize those marriages or civil unions as legal. In June 2013, in United States v. Windsor, the United States Supreme Court ruled that the Defense of Marriage Act’s (DOMA) defining marriage as between one man and one woman was unconstitutional, but the Court limited the impact of their decision. In May 2014, the United States District Court for the Middle District of Pennsylvania ruled in Whitewood v. Wolf that Pennsylvania’s definition of marriage and refusal to recognize out-of-state same-sex marriages were unconstitutional. Then, in June 2015, the United Stated Supreme Court in Obergefell v. Hodges ruled that same-sex couples must have the right to marry. This decision applies to every state.
While these decisions expanded rights to same-sex couples, a lot of questions were left unanswered. One of the big questions was whether civil unions entered into in other states prior to the legalization of same-sex marriage would be recognized by Pennsylvania. If the civil unions were not recognized as legal marriages, then Pennsylvania courts did not have to grant divorces, divide the assets and liabilities through equitable distribution or address support issues There were potential child custody ramifications as well. This left Pennsylvania same-sex couples who legally entered into out-of-state civil unions without the ability to divorce or deal with the economics related to their marriage through the family courts in their home state.
On December 28, 2016, the Superior Court of Pennsylvania addressed this question in Neyman v. Buckley. The Superior Court of Pennsylvania ruled “that a Vermont civil union creates the functional equivalent of marriage for the purposes of dissolution.” In this case, the parties, Pennsylvania residents, entered into a Vermont civil union in 2002 and separated later that year. From 2014 through 2015 the parties unsuccessfully sought a divorce in Pennsylvania and appealed their case to the Pennsylvania Superior Court arguing that the Pennsylvania family court should have jurisdiction to dissolve their Vermont civil union and that the Vermont civil union should be treated as a legal marriage in Pennsylvania. It is important to note that Vermont intended same-sex couples that entered into civil unions to have the same rights and access to the family court system as those who were married. The Superior Court of Pennsylvania used this reasoning to “conclude that the legal properties of a Vermont civil union weigh in favor of recognizing such unions as the legal equivalent of marriage for purposes of dissolution under the Divorce Code.” This decision allows same-sex couples who entered into out-of-state civil unions the same rights as if the civil union were a marriage. It also allows these couples access to Pennsylvania family courts to address those issues permitted under the Pennsylvania Divorce Code.