divorce

An issue that befuddles some business owners during the course of their divorce litigation is how to regulate the operation and management of their businesses. In cases where both spouses own interests in the business, they may struggle for control of important business and financial decisions.

Some issues may be resolved under the company’s partnership agreement, shareholders’ agreement, limited liability company (LLC) agreement, or corporate by-laws. Yet, these agreements are often too vague to deal effectively with disputes between divorcing spouses who own businesses together.

Early in the evolution of the Divorce Code, the Superior Court of Pennsylvania authorized the Courts to appoint receivers or trustees to prevent the dissipation of an ongoing business concern. Mayhue v. Mayhue, 485 A.2d 494 (Pa.Super.1984). The Superior Court in Mayhue held that 23 Pa.C.S. § 3505(a) and 23 Pa.C.S. § 3323(f) authorized the Courts to enter an injunction to prevent a spouse from continuing a course of conduct calculated to defeat his wife’s property rights in the business. The Superior Court in Mayhue approved the trustee’s powers to liquidate assets to pay business debts, pay delinquent taxes, and satisfy intercompany debts.

The appointment of a receiver is not practical in every case because the expense of paying a receiver may not be justified. Still, there are some cases in which third party supervision of the business might be the only practical way t0 ensure continued smooth operation of a business caught in the middle.

For each of the past four years, I have been privileged to teach lawyers about the latest developments in child support as one of the hosts of Family Law Update, a satellite broadcast presentation sponsored by the Pennsyvlania Bar Institute. Since I joined the panel in 2005, several important decisions have influenced the direction of Pennsylvania child support law. Here is my summary of the six most important cases (and one change in the law itself) since 2005:

#6 – Reinert v. Reinert, 926 A.2d 539 (Pa.Super.2007). The Superior Court in this case affirmed the continuing viability of the “nurturing parent doctrine,” a policy in which the courts may excuse the mother of a young child from working to contribute toward the support of the child. Prior to this decision, it was established that a mother may refrain from working even to raise the child of a subsequent relationship. Yet, in Reinert, the Superior Court took the policy to its extreme. The Court terminated the support obligation of a mother who did not have custody of her eldest child when she gave birth to twins by a subsequent relationship and elected to stay at home to raise them.

#5 – Murphy v. McDermott, 2009 WL 2365992 (2009). The question of whether a parent must pay private school tuition may be raised in child support proceedings, but it is also a legal custody issue. The problem is: the legal standards to answer that question are different in support and custody proceedings. The Murphy case demonstrates how important “status quo” can be, compelling a parent to pay tuition even if he or she objected at the time when the child was enrolled in private or parochial school. The lesson: parents must get involved in the choice of schooling before the question of paying comes up.

#4 – Berry v. Berry, 2006 Pa.Super. 98 (2006). When child support becomes an issue between divorcing parents, the courts must decide whether certain income sources – such as pensions, rental properties and businesses – should be considered as marital property or income for support purposes. Generally, they cannot be both. In Berry, the Superior Court held that severance pay would be counted as marital property if acquired before separation or income if acquired after separation.

#3 – Estate of Johnson, 970 A.2d 433 (Pa.Super.2009). While this decision might be limited to its unique factual circumstances, the Superior Court certainly affected settlement practice by holding the estate of a deceased parent responsible for the payment of child support. The deceased parent had entered into a marital settlement agreement with his ex-wife, promising to pay child support until the youngest child was 18 years of age. The agreement did not specify whether the obligation would terminate upon the death of a parent, so the court held that it did not. The estate ended up owing nothing, however, because the Social Security derivative benefits received by the child as a result of the parent’s death satisfied the child support obligation. This case has prompted many lawyers to specify death as cause for terminating child support in their agreements, and has also motivated support recipients to demand life insurance as a security device.

#2 – Krebs v. Krebs, 944 A.2d 487 (Pa.Super.2008). The Superior Court fortified its prior admonitions warning support payors to report increases in their income. In cases where a payor fails to report an increase, even an increase not precipitated by a job promotion or change in employers, the court may increase child support retroactively to the date when the income increase occurred, even years later. The Superior Court in Krebs granted such a retroactive increase in child support even after the custodial parent

#1 – The 2010 Amendments to the Pennsylvania Child Support Guidelines. The 2010 amendments eliminated the Melzer formula, which was a budget-based method of calculating child support in high-income cases. The uppermost limits of the child support guidelines have been extended to $30,000 per month combined net income, and an income-based formula has been promulgated to calculate child support in high-income cases.

The South Carolina Family Law Blog contains a great list of frequently-overlooked or hidden assets in divorce. Some of the more interesting items are:

1.Frequent flyer mileage
2.Security deposits (e.g., utilities, car lease)
****
8.Unused vacation, sick leave
****
10.Income tax refunds
11.Income tax capital loss carry-forwards
****
24.Burial plots
****
30.Cash
****
34.Options to purchase property
35.Unpaid commissions on deals set to close
****
39.Taxes prepaid

In our area, don’t forget about subsurface mineral rights, another overlooked asset.

What factors inflence a spouse’s eligibility for alimony after divorce under Pennsylvania law?

Under Pennsylvania law, post-divorce alimony “is a secondary remedy . . . available only where economic justice and the reasonable needs of a party cannot be achieved by way of an equitable distribution award and development of an appropriate employable skill.” These are the well-known words of the Superior Court of Pennsylvania in its Opinion in Nemoto v. Nemoto, 620 A.2d 1216 (Pa.Super.1993). Most of the important concepts in alimony jurisprudence are covered in this sentence. First, the trial courts must attempt to divide marital property in a way that avoids the need for post-divorce alimony. Why? Because the courts encourage a complete cessation of financial ties between divorcing spouses. If enough property (particuarly income-generating property) can be conveyed to a divorcing spouse, then that property can fulfill all of the spouse’s economic needs without the financial “umbilical cord” of alimony.

• The value of the assets and liabilities distributed to each of the parties must be considered before awarding alimony. 23 Pa.C.S. § 3701(b)(10), (16); Fee v. Fee, 496 A.2d 793 (Pa.Super. 1985).
• In its determination of alimony, the trial court must consider the income generated by a spouse’s marital and nonmarital assets. Ressler v. Ressler, 644 A.2d 753 (Pa.Super. 1994).

Second, our Courts encourage spouses to maximize their earning capacity and income potential through appropriate employment. In the first decade of the Divorce Code, enacted in 1980, the law provided that alimony could be awarded only for rehabilitative purposes, such as paying for college or vocational training. Alimony was not permitted in Pennsylvania prior to 1980, and the legislators who enacted the  Divorce Code worried that spouses would lose their incentive to become self-supporting if they could easily receive post-divorce alimony. The alimony law has been revised since 1980, allowing alimony for other reasons, such as meeting the budgetary shortfall of a spouse who is incapable of self-support. Still, the old law remains a strong influence among judges and lawyers in Pennsylvania. Several attempts to modernize the alimony law have failed, primarily because they might reduce a spouse’s incentive to go back to work. 23 Pa.C.S. § 3701(b)(1), (9), (17).

• The Court imputed an earning capacity to a dependent spouse who devoted her time to an unproductive start-up business instead of seeking gainful employment. Thomson v. Thomson, 519 A.2d 483 (Pa.Super.1986).
• An award of alimony for ten years was deemed excessive when a college education leading to a self-supporting job would require just four years. Barrett v. Barrett, 614 A.2d 299 (Pa.Super.1992).
• In cases where there is no evidence of an impediment that would prevent a spouse from becoming self-supporting, the court is authorized to limit an alimony award. Adelstein v. Adelstein, 553 A.2d 436 (Pa.Super.1989).
• In cases where a spouse’s earning capacity was limited by a medical disability or the disability of a custodial chid, Soncini v. Soncini, 612 A.2d 998 (Pa.Super.1992), the court may decline to impose a full time earning capacity upon a dependent spouse, justifying an award of alimony.

Finally, the law looks to the reasonable needs of a spouse. After a divorce, each spouse must have sufficient cash flow to meet his/her monthly household expenses. Yet, judges realize that two households cannot exist as cheaply as one combined household. The marital standard of living is just one of the seventeen statutory criteria for alimony awards, and in practice, it is one of the least influential. The expenses associated with custody of a child is more influential in an ex-spouse’s request for alimony. Just as important is the ability of a dependent spouse to become self-supporting through appropriate employment and the financial hardship that alimony may cause to the payor. When determining the amount and duration of an alimony award, the courts scrutinize the budget of a spouse seeking alimony carefully. 23 Pa.C.S. § 3701(b)(7), (8), (13).

• The Court will not allow an award of alimony that would divert twice as much income to the alimony recipient as the payor, which would allow her to enjoy a better standard of living than she had enjoyed during the marriage Ressler v. Ressler, 644 A.2d 753 (Pa.Super.1994).

Marital misconduct is just one of the seventeen factors in awarding alimony, and it has remained one of the least influential since the enactment of the Divorce Code. 23 Pa.C.S. § 3701(b)(14); Nuttal v. Nuttal, 562 A.2d 841 (Pa.Super.1989).

The Guardian ran a news story today about a London department store where they’ve established a new kind of gift registry …. for divorcees. Perceptively, the Debenhams department store realized that newly-separated people need toasters, towels and china, just like fiancees. Apparently England was also the site of the recent “Starting Over” show, a divorce version of a bridal show. These phenomenon were cited by the article’s author as harbingers of a trend toward celebration of divorce, instead of commiseration.  Ironically, the author’s name was Lisa Bachelor.

A recently-issued IRS ruling (Rev.Rul.2008-41) addressed the issue of whether a charitable remainder annuity trust (CRAT) or charitable remander unitrust (CRUT) can be divided into two equal trusts upon divorce. A charitable remainder annuity trust is a trust in which the grantor receives income in the form of an annuity payment until his or her death, after which the trust principal is donated to charity. The annuity may not be less than 5% nor more than 50% of the trust principal. A CRUT is the same thing, except that the income payments are a fixed percentage of the principal.

Rev.Rul. 2008-41 established that it is possible to divide a CRAT or CRUT into two equal trusts whose terms are identical to the original trust, except that each spouse is the income beneficiary of one of the two resulting trusts. The resulting trusts are qualified as CRATs or CRUTs under IRS regulations, and no excise tax is triggered by the division of the trusts.

A more detailed article on this subject is available from our friends at Strategic Valuation Group in Warren, Ohio.

This post is not intended as tax advice and should not be used to avoid tax penalties by our readers, who should seek tax advice that is specific to their individual circumstances.

This time each year, divorce lawyers everywhere face the same question from clients: are my legal fees are tax-deductible? For guidance on the subject, I turn to the definitive treatise: Divorce Taxation by Melvin B.  Frumkes. The main principal to keep in mind, when considering whether legal expenses are deductible, is whether they are paid or incurred for the production or collection of taxable income. IRC § 212. Legal fees incurred to collect alimony, for instance, are deductible, but legal fees related to child support are not. Legal fees related to marital dissolution are not tax-deductible, but fees for a spousal support modification proceeding are. The fees related to a divorce lawyer’s advice about tax issues – such as alimony issues, valuation and division of retirement plans, allocation of dependency exemptions, deductibility of mortgage interest, taxpayer filing status, and innocent spouse relief – are likely to qualify as deductible expenses.

Incidentally (and ironically), this post is not intended as tax advice and should not be used by any person to avoid any penalties under the Internal Revenue Code. Readers are urged to contact their divorce lawyers and qualified professionals for advice specifically suited to their factual circumstances.

A constellation of Rising Stars has ascended! My law firm, Pollock Begg Komar Glasser LLC, is proud to announce that four of our associates – Stephanie Jablon, Dana Levine, Ben Orsatti and Angel Revelant – were named as SuperLawyers Rising Stars. Congratulations to Stephanie, Dana, Ben and Angel for this recognition of their hard work and dedication to the practice of family law.

For months now we have been telling our clients that a change in the child support guidelines was imminent. On January 12, 2010, our predictions were realized: the Pennsylvania Supreme Court Domestic Relations Rules Committee enacated new child support guidelines, effective May 12, 2010.

The amount of child support was revised at all income levels. Some child support guidelines increased while others decreased. The most significant change in the guidelines was the elimination of the Melzer formula, applicable only to high-income cases.

Prior to the 2010 guideline revision, high-income cases were treated differently than ordinary cases. In cases where the parents’ combined net income exceeded $20,000 per month, the chart of child support figures did not apply. Instead, parents were required to submit budgets of their monthly expenditures for the children, which were allocated between them in proportion to their available net income after paying their own living expenses. This budget-based formula for determining child support in high-income cases was totally different from the income-driven formula for ordinary cases. That distinction has been eliminated in the 2010 revisions.

The child support guidelines have been extended upward to $30,000 per month combined net income. They were formerly limited to $20,000 per month combined net income. As mentioned above, the amount of child support has been revised at all income levels, sometimes upward, sometimes downward.

The amended Rules also overruled the Isralsky decision, which held that the mortgage subsidy under Rule 1910.16-6(e) might apply in cases where a custodial parent lived in the former marital residence after the divorce.

Further details will be posted in this space. Come back soon!

[This post originally appeared on BV Source in July 2009.]

It’s natural to feel sad about divorcing. A marital separation or divorce can bring changes that cause stress or discomfort, at least for a while. Yet, recent research by a Harvard psychology professor has shown that the human brain contains a built-in capacity to recover happiness in a relatively short time. Prof. Daniel Gilbert is the author of the book “Stumbling on Happiness” (Random House 2007). Professor Gilbert has done extensive research of the frontal lobe cortex, the area of the human brain that generates our imagination. One thing that separates us from the animals is our ability to imagine experiences we haven’t actually had and judge whether those experiences might be good or bad. But our imagination is flawed. When we imagine what might happen to us, we usually misjudge how good or bad an experience might be. Here’s the hopeful part: when bad things happen to us, our frontal lobe cortex is programmed to “synthesize” happiness in a short period of time. Professor Gilbert found that survivors of catastrophic illnesses were just as happy as million-dollar lottery winners after the crisis period had passed. In fact, most people who have experienced bad events return to normal levels of happiness in an average of three months. More research from Prof. Gilbert: The “synthetic” happiness that our brains create when we recover from bad experiences is just as real and satisfying as the “natural” happiness we feel when good things happen. You might think that we are just fooling ourselves when our brains make lemonade from sour lemons, but Professor Gilbert’s studies show that synthetic happiness is just as good as “real” happiness. The moral of the story? We must keep hope alive as we are surviving a crisis period, like a marital separation or divorce. Our minds tend to exaggerate the good that we remember in the past and over-emphasize the bad when we imagine the future. Knowing that our minds will naturally return us to happiness, we can better survive the change.