Family Support

Aug / Sept 2018 : Calculation of an Equitable Award for the Non-Degreed Spouse Under the POSTEMA Decision

Posted by Joseph W. Cunningham, JD, CPA

View / Download Aug / Sept 2018 Article – PDF File

— Background on Postema

In 1991, the Court of Appeals set forth the divorce settlement remedy for a non-degreed spouse who made “sacrifices, efforts, and contributions” to enable the other spouse to attain an advanced degree and, often, professional training. Postema v. Postema, 189 Mich App 89 (1991) (“Postema”).

Prior to the Postema decision, there was a split among different Court of Appeals panels on the proper remedy for such a non-degreed spouse in cases in which a divorce prevents such spouse from sharing in the “fruits of the degree” after its attainment.

Some panels had decided that the non-degreed spouse is entitled to part of the “value of the degree” – that is, the present value of the difference between (1) projected earnings of the degreed spouse over his/her work life expectancy with the advanced degree and (2) projected earnings of such spouse without the advanced degree.

Other panels ruled that the non-degreed spouse was entitled to be reimbursed for sacrifices, efforts, and contributions
made, but not to a share of the value of the degree. To resolve the split, the Supreme Court ordered that the next case on the issue would become binding precedent on the appropriate remedy. That case was Postema.

The Court ruled in Postema that the purpose of an equitable award is to reimburse the “non-degreed” spouse for “sacrifices, efforts, and contributions” made to enable the other spouse to attain a professional degree. However, this does include a share of future incremental earnings attributable to the professional degree.

The Court stated an equitable award applies in situations in which “the degree was the product of a concerted family
effort.”

Components of a Postema Award

Under Postema, there are generally four components to be considered in calculating an equitable award.

  1. Lost or Forgone Earnings – The non-degreed spouse’s 50% marital share of the difference between (1) what the degreed spouse could have earned, after-tax, during years of education and training and (2) his or her actual aftertax earnings during those years.
  2. Cost of Education – The non-degreed spouse’s 50% share of the out-of-pocket costs of the education and training paid with marital funds
  3. Subordination of Career Aspirations – Compensation to the non-degreed spouse for the cost of either (1) not pursuing career aspirations or (2) delaying such pursuit solely due to allowing the degreed spouse to do so. The non-degreed spouse’s share of such “make-up” compensation is 50% for years during the marriage and, possibly, 100% of the present value of lost future earnings.
  4. Intangible Sacrifices, Efforts, and Contributions – Compensation to a non-degreed spouse for intangible sacrifices, efforts, and contributions such as loss of companionship, and additional time devoted to household/parenting responsibilities in excess of the normal time spent doing so, occasioned solely by the degreed spouse’s time constraints due to pursuit of the advanced degree and training.

The Court also stated that the equitable award should be reduced by the non-degreed spouse’s 50% share of the degreed spouse’s incremental earnings after attaining the degree and training.

All amounts are converted to the value of current dollars since the award will be paid in current dollars.

Information Required to Calculate a Postema Equitable Award

The components of an equitable Postema award are, in the main, fact intensive. Thus, input from both parties is essential. Information required includes a timeline including:

  • Date of marriage;
  • Time periods of (1) advanced degree education and, if applicable, (2) professional training;
  • If applicable, time period working as a professional after attainment of the degree and training; and,
  • Dates of birth of children during marriage.

The following is a “Postema Information Request List” used by the author when performing a Postema award calculation.

Information Required to Determine an Estimated Equitable Award According to the Postema Case

  • Date of marriage; length of “courtship”
  • Birthdates of children of the marriage.
  • Detailed chronology (year by year) of attainment of advanced degree and professional training (e.g., for a doctor – medical school; internship; residency; board certification training; etc.)
  • Current résumé of the professional
  • Educational background and employment history of the degreed spouse prior to pursuit of the advanced degree. Provide his or her annual earnings from such employment.
  • Annual earnings of each party during years of the marriage – both before attainment of the advanced degree and professional training, and afterward.
  • Other sources of funds such as student loans, loans or cash gifts from family, inheritances, etc. Please indicate (1) the year in which such funds became available and (2) the party to which the funds are attributable.
  • The costs of the advanced degree and professional training, including tuition, books, fees, travel, additional housing, etc. Please specify the source of funds used to pay these costs. If financed by loans, please indicate the extent to which such loans have been repaid with marital funds.
  • An estimate of hours per week the non-degreed spouse devoted to household and other family responsibilities, including parenting, in excess of the hours such spouse would have devoted to such responsibilities if the other spouse were not pursuing the advanced degree and professional training.
  • Comments on the extent to which the normal companionship generally existing between spouses was unavailable due to pursuit of advanced degree and professional training.
  • Extent to which, if any, the non-degreed spouse subordinated his or her career aspirations to allow the other to pursue his or hers. Please specify the future plans regarding such postponed career aspirations, including the timetable for same.
  • Copies of federal income tax returns of the degreed spouse’s practice for each year since commencement of the practice.
  • If the degreed spouse did not start a practice immediately on being licensed to so, please provide his or her employment history, including annual income, since he or she became licensed to practice.

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… “Calculation of an Equitable Award for the Non-Degreed Spouse Under the POSTEMA Decision”
View / Download Aug / Sept 2018 Article – PDF File

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

Read More “Aug / Sept 2018 : Calculation of an Equitable Award for the Non-Degreed Spouse Under the POSTEMA Decision”

February 2018 : Highlights of 2017 Tax Reform Act’s Effects on Divorce

Posted by Joseph W. Cunningham, JD, CPA

View / Download February 2018 Article – PDF File

— The 2017 Tax Reform Act was signed into law in December 2017. Some of its significant effects on divorcing couples are summarized below.

Alimony Deduction:

New Law

Alimony, that is, spousal support, will not be deductible by the payer or taxable to the payee for divorce and separation
judgments and decrees entered on or after December 31, 2018.

This also applies to modified judgments of divorce or separation effective after 2018.

And, it applies to divorce and separation decrees entered before December 31, 2018 if the parties elect to have the new law apply.

But, it does not apply to other divorce and separation decrees entered before December 31, 2018. Thus, for all existing divorce settlements and those entered by year-end, alimony will continue to be taxable/deductible.

Comments on the New Law

1. Window for Creative Use of Section 71 Payments— Because most alimony payers are typically in a considerably higher tax bracket than most payees, the tax saved by the payer usually exceeds the tax paid by the payee. This has set the stage for creative uses of “Section 71 payments” under which the disparity in tax brackets can be used to provide a tax subsidy.

Examples include using Section 71 payments to:

  • Divide non-qualified deferred compensation on a taxable/deductible basis.
  • Structure installment payments of a business buy-out of the non-owner spouse’s marital interest on a taxable/deductible basis.
  • Pay attorney fees on a taxable/deductible basis. However, after 2018, these opportunities and similar others will no longer be available. So, in situations where there is significant disparity in brackets, consider whether using Section 71 payments would be beneficial.

2. Fundamental Change in the Dynamic of Alimony/Spousal Support— When the alimony deduction was enacted in 1948, the theory was that, if a former family’s income is split between the parties in some manner post-divorce, the tax treatment should correspond.

As noted, the result in many cases has been less combined tax paid on the payer’s income. Because of budgetary concerns – including the enormous cost of 2017 TRA – eliminating the alimony deduction became a revenue raising option to help alleviate the deficit increasing effect of the TRA.

This creates a new paradigm for divorce practitioners and alimony guideline providers, that is, thinking in terms of aftertax dollars for spousal support, similar to child support.

3. Effect of Post 2018 Judgment Amendments— If a pre-2019 divorce or separation judgment or decree is amended on or after December 31, 2018, the new nontaxable/nondeductible law applies.

Query: Would this be the result even if the amendment does not pertain to spousal support? If the answer has not become clear by year-end, the distinct possibility of losing taxable/deductible status of spousal support payments must be considered before advising the post-2018 amendment of a pre-2019 judgment providing for taxable/deductible alimony.

Personal And Dependency Exemptions:

New Law

The federal personal and dependency exemption – $4,050 in 2017 for each taxpayer and each of his/her dependents – is repealed beginning in tax year 2018.

The $4,000 Michigan income tax personal and dependency exemption is based on the number of exemptions claimed on a taxpayer’s federal return. Thus, it too would be lost incident to the federal repeal. But, at the time this article is written, there is reason to believe that Governor Snyder will push legislation to preserve the Michigan exemption.

Comments on the New Law

1. Michigan Exemptions— Since the Michigan income tax personal and dependency exemptions are likely to be preserved, it still is advisable to specifically provide for who is entitled to the exemption for dependent children.

2. Need for a Michigan Form 8332?— As noted, the entitlement to Michigan exemptions has been tied directly to the number of exemptions claimed on a taxpayer’s federal return and there is no Michigan income tax provision allowing the custodial parent to release an exemption to the non-custodial parent.

Thus, it seems that, accompanying new Michigan law to preserve the exemption for state tax purposes, should be a provision allowing the release of the exemption from one parent to the other.

Perhaps by a Michigan counterpart to federal Form 8332, the execution of which has allowed for such releases for federal tax purposes.

Standard Deduction:

New Law

The standard deduction—used in lieu of itemizing deduction—was almost doubled under the 2017 TRA. For joint filers, it is $24,000 in 2018; single – $12,000; head of household – $18,000.

Comment on the New Law

Offset, More or Less, by Repeal of Exemptions— The benefit of the increased standard deduction is reduced, or eliminated, by the loss of personal and dependency exemptions.

Example:

For a family of 4 filing a joint return: Under TRA  Pre TRA
Standard Deduction $24,000 $13,000
Personal & Dependency Exemptions 0  16,200
Total Deduction $24,000  $29,200

The decrease in the total deduction is offset in part by the TRA’s lower tax rates (see below).

Miscellaneous Itemized Deductions:

New Law

Currently, certain expenses are deductible as miscellaneous itemized deductions to the extent they exceed 2% of adjusted gross income (AGI). Such expenses include tax preparation fees, investment advisory fees, unreimbursed employee expenses.

They also include attorney and accounting fees incurred in divorce that are attributable to (1) efforts to obtain spousal support and (2) tax advice.

Under the TRA, effective January 1, 2018, deduction of all such fees and expenses is eliminated.

Comment on the New Law

The deduction of a portion of divorce related fees has made them less expensive for clients who itemized deductions.

However, except for higher asset cases, more clients will be using the higher standard versus itemizing deductions.

New Tax Rates:

New Law

Tax rates have been, in the main, modestly reduced and are as follows effective January 1, 2018:

Taxable Income
Tax
Rates		 Single Married Filing
Jointly		 Head of
Household
10% 0-9,525 0-19,050 0-13,600
12% 9,526-38,700 19,501-77,400 13,601-51,800
22% 38,701-82,500 77,401-165,000 51,801-82,500
24% 82,501-157,500 165,001-315,000 82,501-157,500
32% 157,501-200,000 315,001-400,000 157,501-200,000
35% 200,001-500,000 400,001-600,000 200,001-500,000
37% Over 500,000 Over 600,000  Over 500,000

Comments on New Law

1. Lower Rates— The 7 tax rates ranging from 10% to 37% are 2%-3% lower than previous rates. For instance, a married couple with $75,000 of taxable income will pay $8,619 versus $10,297.

2. Tempered by Loss of Certain Deductions— The lower rates are offset, to varying degrees for different taxpayers, by the elimination of personal and dependency exemptions and loss of some itemized deductions.

Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

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… “Highlights of 2017 Tax Reform Act’s Effects on Divorce”
View / Download February 2018 Article – PDF File

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

Read More “February 2018 : Highlights of 2017 Tax Reform Act’s Effects on Divorce”

November 2017 : Court of Appeals (1) Approves Trial Court’s Award to W of Part of H’s Pension Accrued Before Marriage and (2) Rules It Is Not an Invasion of His Separate Property – Koch, Mich App No. 333020 (7/18/17)

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Facts

  • H and W were separated in 2014, in part due to alleged multiple incidents of spousal abuse, and were subsequently divorced after 27 years of marriage.
  • At the time of divorce, H, 55, was receiving a pension of $51,880 annually while W, 54, was earning $15,058 at a parochial school district where she had worked for 22 years.
  • Part of H’s pension was accrued before the 1987 marriage.
  • H had health insurance as part of his retirement package while W did not have employer paid health insurance.
  • In view of (1) H’s fault for the breakdown of the marriage and (2) the disparate financial circumstances of the parties, the trial court awarded W 55% of H’s pension as spousal support.
  • H appealed, claiming that by awardingW 55% of his pension, the trial court inappropriately invaded his separate property.

Court of Appeals (COA/Court) Decision

  • The COA upheld the trial court decision and ruled that it did not invade H’s separate estate.
  • The COA stated the following regarding whether a trial court’s jurisdiction was limited to retirement plan contributions made during marriage:
[M CL 552.18(1)} does not expressly restrict the circuit court’s jurisdiction to pension contributions made within the confines of the marriage. Although that statutory provision
provides that pension contributions made during the marriage must be considered, it does not expressly provide that contributions made before the marriage may not be considered. That is, the language is inclusive and mandates what must be taken into account, but does not expressly exclude consideration of other contributions. [Boonstra, 209 Mich App at 562]
  • Further, the Court stated that the following rationale has been adopted regarding whether pension benefits accrued pre-marriage may be divided in divorce:

The major consideration is the security of the family and the court may utilize any property in the real and personal estate of either party to achieve suitable support for the family as the court considers just and reasonable after considering the ability of either party to pay and the character and the situation of the parties, and all the other circumstances of the case. [Booth, 194 Mich App 284,290(1992); Pickering, 268 Mich App 1,9(2005).

  • Thus, the COA decided that in light of the circumstances of the case,“it was ‘just and reasonable’ for the trial court to include in its considerations the portion of Defendant’s pension that had accrued before the marriage. Booth, 194 Mich App 291.”
  • Finally, the Court stated that because the trial court did not consider H’s pension accrued before marriage as his separate property, it did not have to consider the statutory exceptions (i.e., need or contribution) for invading a separate estate under MCL552.23.

Comments on the Case

  • Essentially, the COA ruled that when pre-marital retirement benefits are involved, a “just and reasonable” standard for providing “suitable support of the family” is the paramount consideration.
  • And, if awarded as spousal support, neither exception for invading separate property need be established to justify the award.
    Rather, ensuring the “suitable support of the family” takes precedence.
  • This seems to run counter to typical compliance with the Reeves mandate to first identify the (1) marital and (2) separate components of the parties’ various property interests.
  • What then is done in lock-step fashion is to treat the respective marital and separate property components of the total estate accordingly.
  • But, as we know, if one party establishes “need” under MCL552.23, the other’s separate property may be invaded to suitably provide for the need.
  • What the unpublished Koch decision indicates is that when a pre-marital retirement benefit is involved and need is established, paying it as spousal support vs. an invasion of separate property is an option.
  • This seems somewhat at odds with the 1997 Reeves decision mandate. However, if “need” is established, the substantive result is similar either way – that is, use of pre-marital retirement benefits to satisfy the need.

Food for Thought

  • “Need” sometimes consists of inadequate retirement security coupled with the lack of ability and/or time post-divorce to establish sufficient funds for support in retirement years.
  • In such a case, if the other party has a 401(k) or qualified plan savings account which includes a pre-marital component, the, “suitable support of the family” standard might justify use of one party’s pre-marital retirement account to provide for the other’s suitable support in retirement years.

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 (1) Approves Trial Court’s Award to W of Part of H’s Pension Accrued Before Marriage and (2) Rules It Is Not an Invasion of His Separate Property – Koch, Mich App No. 333020 (7/18/17)”
View / Download November 2017 Article – PDF File

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

Read More “November 2017 : Court of Appeals (1) Approves Trial Court’s Award to W of Part of H’s Pension Accrued Before Marriage and (2) Rules It Is Not an Invasion of His Separate Property – Koch, Mich App No. 333020 (7/18/17)”

October 2017 : Court of Appeals Approves Trial Court’s (1) Disallowance of Some Business Expenses and (2) Imputation of Income to H in Determining His Income for Support – Bridge, No. 335453 (8/15/2017)

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Facts

  • H and W were divorced in 2016 reaching a settlement with the assistance of a “conciliator.”
  • In 2015, H was an employee earning $300,000 as a salesperson.
  • But, in 2016, as an independent contractor, his income declined substantially to, H claimed, around $75,000.
  • Thus, he petitioned the court to reduce his spousal and child support obligations, and to do so retroactively.
  • The trial court acknowledged the steep decline of H’s income and that such was involuntary.
  • But the court disallowed some of H’s claimed business expenses and, further, imputed income to him based on what his partner, with whom he split commissions, was making, in deciding that his income was $132,000 for support purposes.
  • The reduction was not applied retroactively to extent petitioned by H.
  • H appealed.

Court of Appeals (COA/Court) Decision

  • The COA upheld the trial court decision.
  • Regarding business expenses disallowed, the COA cited the 2017 Michigan Child Support Formula Manual 2.01(E)(4)(e) which provides:

    For a variety of historical and policy reasons, the government allows considerable deductions for business-related expenses before taxes are calculated. Those same considerations are not always relevant to monies a parent should have available for child support. Therefore, some deductions should be added back into a parent’s income for purposes of determining child support ….

  • In this regard, the Court stated that H did not explain how expenses paid for a conference in Wyoming related to his Lansing based business.
  • There was also not an adequate allocation of his auto expenses to personal use.
  • The Court noted that “the trial court must add back into a parent’s income insurance, utility, entertainment, and automobile expenses, as well as travel expenses, unless they are ‘inherent in the nature of the business or occupation,’ even if those expenses are tax deductible. See 2017 MC- SFM 2.01(E)(4)(e)(iv).”
  • The COA also upheld the trial court’s imputation of $132,000 annual income to H. His partner, with whom he split commissions, testified that he made $76,604 for the first 7 months of the year – a monthly average of $10,943, and an annual total of $131,322.
  • Finally, the Court also ruled that modification of a support order that is part of a judgment of divorce may apply only for the period during which there is a pending petition for modification.

Comments on the Case

  • Money spent on necessary business expenses is not available for support.
  • But, if such expenses are not demonstrated as “inherent in the nature of the business or occupation” they may be added back to income available for support.
  • Further, as noted in 2017 MCSFM 2.01(E)(4)(e), “That the IRS may find the expenses reasonable is not determinative.”
  • With automobile and cell phone expenses, it is important to have a reasonable allocation to personal use.
  • And, for travel and entertainment expenses, it is required for tax purposes that documentation of date, business purpose, and expense is maintained. the same information should be on hand if requested for determining income for support.

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 Approves Trial Court’s (1) Disallowance of Some Business Expenses and (2) Imputation of Income to H in Determining His Income for Support – Bridge, No. 335453 (8/15/2017)”
View / Download October 2017 Article – PDF File

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

Read More “October 2017 : Court of Appeals Approves Trial Court’s (1) Disallowance of Some Business Expenses and (2) Imputation of Income to H in Determining His Income for Support – Bridge, No. 335453 (8/15/2017)”

October 2015 : Overview of Unallocated Family Support Payments

Posted by Joseph W. Cunningham, JD, CPA
Michigan Family Law Journal : TAX TRENDS AND DEVELOPMENTS Feature

by Joseph W. Cunningham, JD, CPA

Excerpt:

Tax Benefit

  • Combined payments of spousal support and child support – referred to as “family support” – are taxable/deductible under IRC Section 71.
  • Family support is advantageous from a tax standpoint if the support payer (assume H) is in a significantly higher tax bracket than the payee (W).
  • By structuring payments as family support, the child support component – which is generally nontaxable/nondeductible – is converted to taxable/deductible.
  • However, so W is not short-changed, the child support component of the family support payment must be in- creased to cover the tax thereon.
  • To illustrate:
    • H’s average combined federal and state tax bracket is 40% and W’s is 20%.
    • In their divorce settlement, spousal support is $2,500 a month and child support is $1,000.
    • After-tax, the payments are as follows:
      (Table in PDF file)
    • If the child support component is increased to $1,450 and included with spousal support as $3,950 family support, the result is:
      (Table in PDF file)
    • So, by converting child support to family support, Uncle Sam kicks in $3,420 a year, split approximately evenly between H and W.

Requirements to Qualify as Family Support
…

Continued in PDF file below… “Overview of Unallocated Family Support Payments”
View / Download October 2015 Article – PDF File

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

Read More “October 2015 : Overview of Unallocated Family Support Payments”