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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.
As family law attorneys and parties to custody orders can attest, shared custody and co-parenting arrangements are often fraught with ongoing tensions, stress and conflict. Using the court system to litigate smaller disagreements in the aftermath of a custody order is inefficient, costly and time-consuming. In addition to the burden it places on the Court system, it is a strain on not only the parents, but most importantly, the children who are subject to the order. Fortunately, a common sense alternative is soon returning which can mitigate some of the strife of custody disputes in the future.
On March 1, 2019, the Parenting Coordination program, which was terminated in May 2013, is being reinstated by the Pennsylvania Supreme Court. The rule allows the Court to appoint a parenting coordinator to resolve parenting issues arising from the final custody order issued in the case. The rule clearly establishes that parenting coordination is not intended for every case. Coordinators will not be appointed where there is a protection from abuse order in effect between the parties to the custody action, a finding by the Court that a party has been a victim of domestic violence by a party to the custody action during the case or within 36 months of the filing of the custody action or where a party has been the victim of a personal injury crime.
A parenting coordinator will be appointed for a period not to exceed 12 months; however, this may be extended. The rule also sets certain qualifications that must be met prior to the coordinator’s appointment. Once appointed, the parenting coordinator will have the authority to recommend resolutions to the court on specific custody related issues including, but not limited to: deciding on locations and conditions for custody exchanges; temporary variations of the custody schedule due to special or unique events and circumstances; and any school-related issues.
There are, however, specific areas into which the coordinator is explicitly prohibited from making any decisions such as: changing legal or primary physical custody; changing the custody schedule (a permanent change, rather than a “temporary” one); changing the child’s residence or their relocation; financial issues; major decisions affecting the health, education or religion of the child; and any issues limited by the appointing judge.
Under the new rule, after giving the parties or their counsel the appropriate notice and the opportunity to be heard on the issue(s), the coordinator submits to the court, and serves copies on the parties or their counsel, a written summary and recommendation within two days after hearing from the parties on the issues. An objecting party has five days from the service of the summary and recommendation to file a petition appealing the coordinator’s recommendations on all or specific issues. If neither party appeals the recommendation, the court undertakes one of the following options: approve the recommendation and make it an order of court; approve the recommendation in part and hold a hearing on the remaining issue(s); remand the recommendation back to the coordinator for more specific information; decline to enter the recommendation as an order and conduct a hearing on the issues. If a timely objection is made and a hearing is required, the recommendation will become an interim order pending the hearing and issuance of a further order by the court.
Custody matters are typically the most high-conflict and costly type of family law cases. By reintroducing the amended parenting coordination rule, the Supreme Court has returned a functional tool to the courts, attorneys and litigants to expedite custody disputes and reduce stress and costs for all parties involved. The hope is that this additional tool will assist all parties involved in achieving the best interests of the children in custody cases.
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.
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.
Most people believe that they have plenty of time before they have to start considering their 2016 taxes to be filed in 2017, and for most, the tax return process is not something they just can’t wait to get started. That being said, if you are separated or in the process of a divorce, now is the time to start thinking about your tax filing status for your 2016 income tax returns. Some thoughtful planning and discussion now can go a long way in avoiding stressful emergency issues in the weeks leading up to April 15th, and instead provide adequate time to address and resolve any concerns. If you are separated but not divorced by December 31, 2016, you have a few different options of how you can file your taxes: married filing jointly, married filing separately or perhaps even head of household. You cannot file single if you are not divorced in 2016.
The reason to start thinking about your 2016 tax filing status now is that if you want to file as married filing jointly, your spouse must agree. Now is the time to speak to your accountant to determine the most advantageous tax filing status. You should also decide if there are any concerns that you have that would prevent you from choosing one of the options. If you and your accountant determine that married filing jointly is the best option, and your spouse disagrees, you will have time to involve the attorneys and work towards an agreement as to tax filing status. In many cases, an Agreement to File Joint Income Tax Returns/Tax Indemnification Agreement is the best way to proceed in order to set forth each spouses’ responsibilities in terms of preparing and filing the returns, addressing any taxes due or refunds that might be received, and to protect you from any potential tax liability related to your spouse.
You can set yourself up for a less stressful tax season in 2017 by starting the discussion now.
Few experiences in life are as emotionally challenging as divorce. It is not surprising that clients may focus on the issuance of the Divorce Decree as the end of a very painful chapter in their lives. After all, as of the signing of the Divorce Decree, the parties are divorced, and the work is over. Unfortunately, in most cases, there is still important work to be accomplished even after the judge signs the Divorce Decree. Family law clients will have an easier time accepting this reality if they know in advance that the Divorce Decree is not the last step in their case.
There are many important matters that may remain outstanding when a Divorce Decree is issued, and some of the key factors are discussed here. Most divorce clients resolve the division of their assets by entering into a settlement agreement, or a judge issues an order resolving all claims related to the marriage. Those assets are then typically divided after the Divorce Decree is issued. Bank accounts are divided and closed. If there are retirement accounts to be transferred, there are very specific and time consuming rules to follow to transfer the retirement assets from one spouse or ex-spouse to the other. The retirement assets can take many months to divide which is understandably frustrating for clients. Mortgages on real estate may have to be refinanced and deeds transferred. While these procedures can be time consuming and frustrating to complete, clearly, they are critical to the future financial well-being of the parties involved, so perseverance and patience will pay off in the long run.
After those issues relating to marital property, claims and assets are resolved, there are still some items that we suggest clients accomplish after the Divorce Decree to ensure that they have all the legal documentation completed to address their needs post-divorce. A spouse may want to retake her maiden name. Also, we suggest that Wills and Powers of Attorney be updated so that the ex-spouse is no longer included in the Will or has Power of Attorney. Beneficiary designations should be updated for life insurance policies, retirement accounts and other assets as well. These are merely some of the items that may have to be accomplished post-Divorce Decree.
In order to have realistic expectations of the divorce process, it is important to understand from the start that everything is not finished when the judge signs the Divorce Decree. There is usually more work to be accomplished before the case is completed.
By Elizabeth Fineman, Esquire
As a family law practitioner, I’d like to share some information that could help prepare potential clients for the kind of personal questions they will be asked when they make their first call to schedule a consultation. Many people are taken aback by being asked for details about sensitive personal and financial details on their initial contact with a family law attorney’s office. I want to reassure you that, while these initial interviews can be difficult, there are good reasons why the questions need to be asked, and ultimately, you are better served if we gain a fuller picture of your issues before the first meeting with the attorney.
First things first. The firm is ethically obligated to take names and identifying information related to all parties involved in the case before the attorney consults with the client. We do this so that we can confirm that there are no conflicts. A conflict check involves a review of prior cases that the firm and attorneys have handled to make sure that we have not previously represented the opposing party. Once the firm confirms that there are no conflicts, a meeting with a domestic relations attorney can be scheduled.
You should also expect to be asked some questions related to jobs, incomes, assets and liabilities. This information is all provided to the attorney before you meet, enabling that attorney to walk into the initial consultation knowing what issues (divorce, child support, alimony pendente lite, spousal support, alimony and/or child custody) are pertinent to your case and time can be allotted accordingly so that all areas are covered in enough detail at the consultation.
While the first steps in a divorce or family law matter are, by their nature, very personal and fraught with emotion, knowing what to expect before you make that call can hopefully lessen the impact, and lead to a better and more productive exchange.
The initial divorce consultation is your first meeting with the attorney. It occurs before you retain the attorney and can be utilized to determine if you and the attorney can work effectively together. Sometimes this meeting occurs because you want to have the knowledge and information if you foresee potential divorce, support or custody issues in the future or are considering a prenuptial agreement. Other times, there may be issues which require you to hire a family law attorney immediately.
Prior to the first meeting, our office will ask you to be aware of relevant topics and materials to ensure a productive meeiting. At the first meeting you are asked to bring information related to your income, assets and liabilities. If you do not have access to this information, the meeting can go forward without the information, as it can be acquired from the other party during the divorce process. Expect to be asked questions related to these areas as that will allow the attorney to provide you with a better overview of the anticipated range for a resolution of your case, whether by agreement or court order. The asssessment made at the initial consultation is based on the financial data provided, and may change as more specific information is made available. It's a good idea to make a list of your questions in advance of the initial consultation, so that the meeting will be more productive, and you do not forget to ask about your concerns.
The purpose of the first meeting with a domestic relations attorney is to gain information and have your questions answered. Over the course of an hour you will be provided with an overview of aspects of family law that may affect you: divorce, support (child support, spousal support, alimony pendente lite and alimony), custody and/or a prenuptial agreement. You may be provided with the anticipated range of outcomes for your case based upon the information provided at the consultation. Most importantly, you will have an opportunity to have your questions answered. Having a general understanding of the process and answers to your questions is important at a stressful time like this.
While this is a difficult meeting for many clients, it is important to remember that the attorney is the one who is providing information and answering questions. Family Law practitioners are well aware that clients are going through a very emotional process, and it the attorney's responsibility to put the client at ease, and help to navigate this unfamiliar and emotionally fraught territory as painlessly as possible.