Divorce

Jun/Jul 2021 : Court of Appeals Affirms Trial Court Holding that the Award to W of a Portion of H’s Federal Pension Did Not Include a Survivorship Benefit Gray v Gray, Mich App No. 344636 (June 25, 2020) Unpublished

Posted by Joseph W. Cunningham, JD, CPA

View / Download June/July 2021 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • In their Consent Judgment of Divorce, it was provided that W would receive a coverture fraction share of H’s Civil Service Retirement System (CSRS) pension plan (Plan).
  • The Judgment also provided that W would be “entitled to her prorated share of any and all other ancillary benefits associated with the Plan.”
  • W submitted a proposed Court Order Acceptable for Processing (COAP—essentially a QDRO for CSRS plans—which provided her with a survivor benefit.
  • H objected, claiming that in the divorce negotiations it was noted that his pension did not provide a survivor annuity for W.
  • He further claimed that creating a survivor benefit for W would reduce his pension benefit by 10%.
  • H’s counsel stated that a survivor annuity was not a regular part of the Plan and that such a benefit “would be a separate and distinct benefit.”
  • W’s counsel stated that under MCL 552.101(4), all components of a pension plan are assigned with a retirement plan benefit divided in divorce.
  • The trial court noted that the parties negotiated the specific percentage that W would receive and, further, that they made no provisions applicable on the death of either party.
  • Hence, the court ruled that the parties did not contemplate survivor benefits and that the COAP should not provide for any.
  • W appealed.

Court of Appeals Decision

  • In an unpublished decision, the Court upheld the trial court’s ruling.
  • In doing so, the Court noted that the situation was similar to that in the published case of Hudson v. Hudson, 314 Mich App 28 (2016).
  • In Hudson, the Court ruled that H, an alternate payee of 39.5% of W’s state pension, could not elect a benefit option of a single life annuity based on his life, an option to which W was not entitled to elect on her share of H’s federal pension.
  • H claimed that pursuant to MCL 552.101(4), he was entitled to all components associated with W’s pension.
  • To this the Hudson Court stated the question was whether the right to select a particular payment option was a “component” of the plan subject to the statute. The Court ruled that it was not such a component and held against H’s claim.
  • The Court in Gray held that W’s assertion that the survivor benefit – specifically referred to as a “component” in MCL 552.101(4) – was “foreclosed for the reasons this Court articulated in Hudson.”
  • In a persuasive dissent, Judge Ronayne Krause essentially stated that (1) Hudson did not apply to the Gray circumstances and (2) under the plain meaning of MCL 552.101(4), a survivor benefit is a component of a plan.

Comments on the Case

  • The facts in the Gray case are complicated, including that:
    • The plan involved was federal pension about which less is generally understood than with the more common commercial company plans.
    • It was noted in the trial transcript that it had been agreed at mediation that W’s lawyer was to prepare a letter with questions about the government plan. Apparently this letter, if sent, did not ask about survivor benefits.
    • And, according to H’s counsel, survivor benefits were not part of the plan but rather were “separate
      and distinct.”
  • Takeaway – It is virtually always preferable to specify in the Judgment or Settlement Agreement, as the case may be, what benefits are included with the transfer of a retirement benefit.

Otherwise, issues such as those in Gray and Hudson may arise.

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 Affirms Trial Court Holding that the Award to W of a Portion of H’s Federal Pension Did Not Include a Survivorship Benefit Gray v Gray, Mich App No. 344636 (June 25, 2020) Unpublished”
View / Download June/July 2021 Article – PDF File

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

Read More “Jun/Jul 2021 : Court of Appeals Affirms Trial Court Holding that the Award to W of a Portion of H’s Federal Pension Did Not Include a Survivorship Benefit Gray v Gray, Mich App No. 344636 (June 25, 2020) Unpublished”

Apr 2021 : Court of Appeals Upholds Trial Court Ruling of a Zero Value for a Medical Practice Woolever v Woolever, Mich App No. 351007 (January 28, 2021)

Posted by Joseph W. Cunningham, JD, CPA

View / Download April 2021 Article – PDF File

Tax Trends and Developments Column – Michigan Family Law Journal

Facts

  • H, an orthopedic surgeon, had operated his practice out of a building he leased for most of the marriage. He had many employees.
    • But, in 2016, he sold his equipment to a hospital at which he began working on a contractual basis. He retained one employee, his secretary.
  • At the trial, H said the change was prompted by billing and insurance company issues.
  • H said his practice had no value because he was essentially an employee of the hospital, and, further, that he owned no equipment and had no accounts receivable.
  • He also said that he was easily replaceable and could not assign or sell his contractual position.
  • W’s valuation expert valued H’s practice at $600,000. However, he admitted that he did not have complete information based on which to calculate a value and testified that the $600,000 was in considerable part his “extrapolation.”
  • Further, the expert acknowledged that H was, as he claimed, essentially an employee of the hospital.
  • The trial court ruled that H was an independent contractor with the hospital and no longer operated a practice.
    Hence, there was nothing to value.
  • W appealed.

Court of Appeals Decision

  • The Court upheld the trial court’s ruling.
  • In doing so, the Court noted the concessions that W’s expert made noted above and stated “the evidence supported the trial court’s decision.”

Comments on the Case

  • As was noted in the case, there is a trend in the medical practice arena for doctors to form contractual relationships with a hospital instead of operating an independent practice.
  • Many groups of doctors have done this. It is often mutually beneficial in that:
    1. The hospital has the certainty of access to the doctors’ medical services and has control over the cost thereof.
    2. The doctors, in addition to significant relief from administrative matters now performed by the hospital, have a steady source of need for their services.
  • However, it can be a blurry line between a “practice” as such and being essentially “an employee of hospital.”
  • For example:
    • Assume a medical practice group consists of four doctors who make, on average, $400,000 each annually.
    • Depending on the nature of the practice, there may be a holder’s interest value to each doctor’s practice within the group.
    • For the most part, albeit, not exclusively, the group of doctors performs services for patients of one hospital.
    • The group and the hospital agree to enter a contractual arrangement which, essentially, formalizes the mode in which they had been operating.
    • The agreement provides that the doctors will each make $350,000 annually while being relieved of various administrative responsibilities.
    • So, from a de facto standpoint, are the doctors essentially in a very similar economic position as before entering the agreement with the hospital? Or, perhaps, a better position? If there was a holder’s interest value to their practice, has it disappeared?
  • Some relevant questions to consider in similar situations, under subject agreement, are:
    • Are the doctors in fact employees of the hospital or have they retained independent contractor status?
    • Are the doctors restricted from performing services for non-hospital patients?
    • To what degree are the doctors at the “beck and call” of the hospital?
    • Are the doctors on fixed salaries or is their compensation tied to the amount of services they provide?
    • To what degree does the hospital control the doctors’ schedules?
  • As with so many issues in divorce, the “practice” issue in circumstances where there is a contractual relationship with a medical institution is fact specific.

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 Upholds Trial Court Ruling of a Zero Value for a Medical Practice Woolever v Woolever, Mich App No. 351007 (January 28, 2021)”
View / Download April 2021 Article – PDF File

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

Read More “Apr 2021 : Court of Appeals Upholds Trial Court Ruling of a Zero Value for a Medical Practice Woolever v Woolever, Mich App No. 351007 (January 28, 2021)”

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)

Posted by Joseph W. Cunningham, JD, CPA

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)

Read More “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)”

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)

Posted by Joseph W. Cunningham, JD, CPA

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)

Read More “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)”

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)

Posted by Joseph W. Cunningham, JD, CPA

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)

Read More “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)”