Dec 2020 : Michigan Court of Appeals Rules on Dispute on Calculation of Interest on a Divorce-Related Installment Obligation and, a Better Way to Do It. Elam v Elam, Mich App 348201 (10/15/20)

View / Download December 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal


Facts:

  • As part of their 2005 Settlement Agreement, H was obligated to pay W $1,000 principal & interest payments a month over 12 years on a $175,000 debt to her.
  • The obligation was to be secured by certain real property and, further, H was to sign a “mortgage note” – which he never did.
  • Interest on the obligation was provided as “accruing interest as a traditional mortgage note in the amount of 3.75%.”
  • After the final payment in 2017, W claimed that H owed her over $50,000 in accrued interest.
  • H claimed that a simple interest rate should apply resulting in accrued interest of $6,250.
  • W’s expert testified that “a traditional mortgage note meant a bank mortgage calculated under an amortized interest schedule” – which means interest compounded monthly.
  • H’s expert testified that, without a note, he could not determine the interest owing.
  • In short, the trial court applied laches and ruled that, because W did not seek to enforce the provision that H sign a note, H’s interest calculation should apply.
  • W appealed.

Court of Appeals Decision

  • In pertinent part, the Court ruled that the language in the Settlement Agreement providing for “interest as a traditional
    mortgage note in the amount of 3.75%” was not ambiguous and, accordingly, that the trial court erred by adopting H’s calculated simple interest.
  • It also held that the trial court could not sua sponte raise the defense of laches. H had not claimed laches as a defense but rather that W’s calculation was incorrect.
  • The case was remanded so that the accrued interest owing would be calculated as it would be under a traditional mortgage note.

A Better to Way to Provide for Interest on a Divorce-Related Installment Obligation

  • The IRS has ruled that interest on an obligation between divorced spouses is “personal interest” and, hence, not deductible by the payor.
  • But, it is nonetheless taxable to the payee.
  • To avoid this tax whipsaw, the interest rate can be converted to its lower, after-tax equivalent and “baked in” to the payments.
  • For example, 2.5% is the approximate after-tax equivalent of a 3.5% pre-tax rate for an individual in a 25 percent tax bracket.
  • The first step is to calculate the payment by running an amortization schedule using the after-tax rate – 2.5% in the above example. Then provide in the divorce document for the payor to make the payments with no stated interest.
  • The use of an unstated after-tax rate avoids having the payee pay tax on interest the payor cannot deduct.
  • This is a viable approach since the IRS has stated that the imputed interest rules do not apply to divorce settlement obligations. Tech Adv Mem 200624065 (Dec 6, 2005); Priv Ltr Rul 8645082 (Aug 14, 1986).
  • Prepayment can be accommodated by providing for a discount equal to the after-tax rate applied to the remaining payments over the period they are scheduled to be paid. Here is a sample clause:

    “Plaintiff is entitled to prepay this obligation, either in full or in part, by making payments in excess of the required payments. If Plaintiff does prepay the obligation, in full or in part, [he / she] is entitled to a discount on the remaining balance of the installment payments equal to 2.5 percent of the amount prepaid for each year (prorated for a partial year) between when the prepayment is made and when such amount would otherwise be due pursuant to the terms provided above.”


About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Michigan Court of Appeals Rules on Dispute on Calculation of Interest on a Divorce-Related Installment Obligation and, a Better Way to Do It. Elam v Elam, Mich App 348201 (10/15/20)”
View / Download December 2020 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Nov 2020 : Court of Appeals Rules on Use of Pension as Income for Spousal Support Despite the Pension’s Treatment as Property in the Divorce Settlement. Osim v Scott, Mich App No. 342237 (10/31/2019)

View / Download November 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal


Facts

  • After a 35-year marriage, H and W agreed to a settlement which provided, inter alia, that (1) H was awarded his pension – “free and clear of any claim” of W – and (2) W received the marital residence which had an equity of around $100,000.
    • However, they asked the trial court to determine spousal support. The judge awarded W, who had some health issues, permanent spousal support of $2,000 a month.
    • The judge notified the parties that H could ask for spousal support to be modified when he retired.
    • When H did retire, he took an approximately $440,000 lump sum pay-out for his pension which is what he had to live on for the rest of his life.
    • H petitioned the court to terminate spousal support since his only source of income was his pension which he received as his property in the settlement.
    • The trial court, after reviewing the circumstances of each party – including the disparity between $440,000 pension and the $100,000 home equity – reduced spousal support to $961.50, calculated by taking the approximate $300,000 difference and dividing it by W’s life expectancy.
    • H appealed.

Court of Appeals Ruling

  • The Court upheld the lower court’s decision to reduce, but not terminate, spousal support.
  • But, the Court ruled that the trial court failed to consider several relevant factors including:
    • The taxes H had to pay on receipt of the lump-sum;
    • That contributions were likely made to H’s retirement after the divorce and, hence, were not marital; and,
    • That the lump-sum was all H had to live on for the rest of his life.
  • The Court noted that the parties agreed that H would have the pension as his property and, further, that once an asset is awarded, it “is not subject to invasion by the former spouse, even indirectly, which is precisely what occurred when the trial court … considered the pension” as H’s income for determining spousal support.
  • However, the Court also noted that a previously awarded pension is a consideration in balancing the “incomes and needs of the parties in a way that will not impoverish either party.”
  • Thus, the Court remanded the case so that the trial court takes these factors into account.

Comments on the Case

  • The Court’s ruling is essentially as follows:
    • Income from a retirement bene/t awarded as property in a divorce settlement may not be included as income in a subsequent modification of spousal support.
    • But, such income is properly a consideration when doing so because the principles governing modification of spousal support are that “support must be just and reasonable under the circumstances and should balance the incomes and needs of the parties” so as not to impoverish either.
    • The tension between these two principles presents a tightrope to tread in attempting to achieve an equitable result in the “case specific” nature of divorce.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Court of Appeals Rules on Use of Pension as Income for Spousal Support Despite the Pension’s Treatment as Property in the Divorce Settlement. Osim v Scott, Mich App No. 342237 (10/31/2019)”
View / Download November 2020 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Oct 2020 : Court of Appeals Rules on JOD Provision for the Division of Restricted Stock Redemption Proceeds—Blight v Blight, Mich App No. 349034 (6/25/20) (Unpublished)

View / Download October 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal


Facts

  • H and W agreed to a divorce settlement at mediation which was then recorded and later incorporated into a Judgment of Divorce (JOD) entered in 2015.
  • H owned 102,857 shares of restricted stock which the JOD awarded to him except that –

    if the restricted stock were redeemed pursuant to a specific Company agreement – then W would receive 50% of the portion attributable to the years of marriage during which H owned the stock.

  • In pertinent part, the JOD provision stated that the marital portion of potential redemption proceeds would be:

    “proportional to the number of years Plaintiff owned said stock while the parties were married and the total number of years Plaintiff owned said stock prior to the date of redemption.”

  • The restricted stock was redeemed about a year after the divorce.
  • H applied the coverture fraction in determining the marital portion of which W was to receive 50%.
  • W filed a motion claiming that, according to the JOD, she was entitled to 50% of the total redemption proceeds.
  • The trial court, after (1) conducting a hearing on the issue, (2) reading briefs of both parties, and (3) reviewing a relevant portion of the transcript of the settlement recording, decided that (1) the JOD provision regarding the restricted stock was ambiguous and (2) W was entitled to 50% of the total redemption proceeds.

H appealed.

Court of Appeals Decision

  • The Court of Appeals (Court) found that the JOD provision regarding the restricted stock was not ambiguous but rather clearly set forth a formula for determining the portion of eventual redemption proceeds to be deemed marital.
  • The Court noted that the latter half of the JOD provision designates that W’s share of the proceeds to be “proportional” and would need to be ignored by the trial court to award W 50% of the total redemption proceeds.

Comments on the Case

  • Use an Example – For provisions regarding the future divisions of various forms of executive compensation, it is often advisable to include an example using hypothetical amounts. This significantly reduces the chance of differing interpretations down the road.
  • Provide for Tax Consequences – It is noteworthy that the JOD restricted stock provision in Blight was silent on tax consequences. Restricted stock is generally taxable on the expiration of the last of restrictions to which the stock is subject. It is advisable to provide for tax consequences when dividing various forms of compensation in a divorce settlement.
  • Skelly Does Not Prevent Parties’ Agreement – In the Court of Appeals published Skelly v. Skelly decision (286 Mich. App. 578 (2009)), the Court ruled that an executive benefit awarded during marriage but subject to a vesting event occurring after divorce was not marital property.

It has previously been expressed in this column that:

  • The Court’s decision in Skelly is over broad and arbitrary, and could result in inequitable divisions of property in fact attributable to years of the marriage.
  • However, parties, in reaching a divorce settlement, are free to disregard Skelly in reaching an equitable division of property. Whether done knowingly or not, that is what the Blights did in dividing H’s restricted stock which they knew would not vest until after the divorce.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Court of Appeals Rules on JOD Provision for the Division of Restricted Stock Redemption Proceeds—Blight v Blight, Mich App No. 349034 (6/25/20) (Unpublished)”
View / Download October 2020 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

June / July 2020 : Division of Pensions – Court of Appeals Upholds Equal Division of Two Pensions Having Different Features. Reed v Reed App No. 346520 (2/13/20) (Unpublished)

View / Download June-July 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal


Facts

  • H and W both had pensions to divide after a nineteen year marriage.
  • W had a Michigan county pension and H a Michigan public school pension.
  • A CPA testified that there were two basic differences in the pensions:
    1. H’s school pension included an automatic COLA provision (MIP) by which it would increase by 3% a year. W’s county pension had no such provision.
    2. Also, H’s school pension allowed an alternate payee to access his/her share before the participant retired.
      W’s county pension, however, did not allow alternate payee access until the participant actually retired.
  • H, 45 years old, could retire at age 48 and intended to do so. He was free to seek other employment after retiring. W, also 45, had to wait until age 60 to retire.
  • The CPA proposed a partial offset method to adjust for the differences in the two pensions.
  • The trial court ruled that “the most equitable method for division” was to award each party a 50% interest in the other’s pension.
  • H appealed, claiming in part that when he retired at age 48, he could not live on half of his pension.
  • He also claimed that his ability to work after retiring would be relevant only if the court were determining an award for spousal support.

Court of Appeals Ruling

  • The Court upheld the lower court’s decision.
  • Essentially, the Court ruled that both pensions, with their respective features, were marital assets and that dividing them equally was appropriate.
  • The Court also noted that earnings ability is relevant to property distribution as well as to spousal support.

Comments on the Case

  • Since H stated no reason (e.g., health) why he could not work after retiring at age 48, his claim was not very persuasive.
  • Determining the present values of the two pensions would not likely have provided a workable solution in this case. Reason – H’s pension would probably have been far more valuable than W’s pension – making an offset not feasible because:
    1. It was payable from age 48 for life vs. W’s being payable from age 60 for life.
    2. The twelve extra years were earlier, more valuable years in the present value calculation.
    3. H’s pension increased each year whereas W’s did not.
  • Though not an issue in the Reed case, whenever dealing with a Michigan public school pension, one needs to be mindful of recoupment.
    Recoupment occurs if (1) the alternate payee begins drawing his/her share before the participant (1) is age 60 and (2) retires, and (2) the participant works beyond normal retirement age of 60. The resulting reduction of the participant’s bene.t is drastic.
    A way to prevent recoupment is to provide that the alternate payee cannot begin drawing before the participant reaches age 60.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “Division of Pensions – Court of Appeals Upholds Equal Division of Two Pensions Having Different Features. Reed v Reed App No. 346520 (2/13/20) (Unpublished)”
View / Download June-July 2020 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)

Jan 2020 : State of Michigan Tax Exemptions for Divorce Related Transfers of Real Property

View / Download January 2020 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal


General

For most Michigan transfers of ownership of real property, there are two tax adverse consequences:

  1. The Michigan Real Estate Transfer Tax imposes a tax of $3.75 for every $500 of value transferred. Additionally, the county transfer tax rate is $.55 for every $500 of value transferred.
    .
    So, the total transfer tax on $50,000 of property transferred is $2,150.
  2. Transfers of Ownership result in the “uncapping” of the taxable value of the transferred property.
    .
    This can be significant since the annual increase in taxable value for property tax purposes is otherwise limited by law to 5% or the rate of inflation, whichever is lower.
    .
    So, for property held for several years which has appreciated significantly in value, a transfer will likely result in a substantial increase its taxable value for property tax purposes.

Exemptions Applicable to Divorce Related Transfers

The following are exemptions that avoid both (1) imposition of a transfer tax and (2) the uncapping of taxable value.

  1. Transfers pursuant to a judgment provided no money is ordered by the court to be paid as consideration for the transfer are exempt. MCL 207.526(l); MCL 211.27a(7)(h)
  2. Transfers between spouses creating or disjoining a tenancy by the entireties are also exempt. MCL 207.526(j); MCL 211.27a(7)

Observations

  1. Apparently, a divorce related transfer occurring after divorce–when the parties are no longer spouses–for which money consideration is paid–does not fall within either exemption.
    .
    In such an instance, no consideration should be specifically provided for the transfer.
  2. And, if relying on the “pursuant to judgment” exemption, it seems advisable to provide for the transfer in the divorce judgment instead of, or in addition to, the property settlement agreement.

About the Author

Joe Cunningham has over 25 years of experience specializing in financial and tax aspects of divorce, including business valuation, valuing and dividing retirement benefits, and developing settlement proposals. He has lectured extensively for ICLE, the Family Law Section, and the MACPA. Joe is also the author of numerous journal articles and chapters in family law treatises. His office is in Troy, though his practice is statewide.

Download the PDF file below… “State of Michigan Tax Exemptions for Divorce Related Transfers of Real Property”
View / Download January 2020 Article – PDF File

Complete Michigan Family Law Journal available at: Michigan Bar website – Family Law Section (subscription required)