Recent Articles

Aug / Sept 2015 : Comments on Equitable Awards for the Non-Degreed Spouse Pursuant to POSTEMA

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

by Joseph W. Cunningham, JD, CPA

Excerpt:

Background on Postema

In 1990, 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 (1990) (“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 en- titled 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.
e 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 a equitable award.

  1. Lost or Forgone Earnings – The non-degreed spouse’s 50% marital share 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 after-tax earnings during those years.
  2. Cost of Education – The non-degreed spouse’s 50% share 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. e non-degreed spouse’s share of such “make-up” compensation is 50% for years during the marriage and, possibly, 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 normal time 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.

Mistakes Periodically Made in Calculating Postema Awards
…

Continued in PDF file below… “Comments on Equitable Awards for the Non-Degreed Spouse Pursuant to Postema”
View / Download August/September 2015 Article – PDF File

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

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June / July 2015 : Tailored Installment Payments to Balance the Scales without Breaking the Bank

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

by Joseph W. Cunningham, JD, CPA

Excerpt:

The author’s recent experience indicates (1) the high value of using “tailored” installment payments to balance a property settlement involving a business interest and (2) the lack of awareness of many family law practitioners of the utility of this technique.

Thus, below is a repeat of a Tax Trends column published a few years ago.

The value of a closely held business or professional practice often dwarfs the value of other marital assets. If there are not sufficient suitable assets to award the non-owner spouse, installment payments are frequently used to balance the settlement.

In structuring the payments, two objectives often compete with one another:

  1. Don’t Kill the Golden Goose – It is important not to impose an undue strain on the owner’s cash flow, part of which may also be required for spousal and/or child support.
  2. Don’t Make Me Wait ‘Til I’m Old and Gray – On the other hand, it is generally not fair to require the non-owner spouse to wait a long period of time to receive his or her share of the marital value of the business.

Tailoring payments around other divorce obligations is a way to achieve both objectives.

Example

As part of their divorce settlement, H and W have agreed that he will pay her $200,000 for her half interest in his business. He will also pay combined transitional alimony and child support for their youngest child totaling $30,000 for each of the next 3 years.

H receives an annual salary of $60,000, supplemented by a bonus depending on company profit. He proposes that he pay the $200,000 by transferring a sufficient amount of his 401(k) plan to net W $50,000 after tax and that the $150,000 balance be paid over 15 years with interest at 4%, resulting in monthly payments of $1,110.

W responds that this is unacceptable; that it is unreasonable to expect her to wait so long for her share of the marital value of the business. She demands payment over 7 years, resulting in monthly payments of $2,050, almost twice what H proposed.

H claims he cannot afford to pay that much. The effects of new competition has reduced pro ts such that the business has not been able to pay bonuses of late. So, cash will be tight over the next few years with the alimony and child support obligations.

The attorneys meet with their joint CPA expert and work out the following payment terms to achieve both objectives.

  • No payments of principal and interest for three years. Adding the $18,000 of unpaid compound interest brings the principal to $169,655 as of the beginning of the fourth year.
  • Years four and five – $1,500 per month
  • At end of year five – $50,000 balloon payment
  • Years six and seven – $2,000 per month
  • At end of seven years – $55,500 balloon payment.

Tailored to Fit – The above illustrates a way in which payments can be tailored to accomplish both objectives. The use of balloon payments enables the non-owner spouse to receive his or her share within a reasonable time frame. It also gives the owner spouse ample time to make arrangements to fund the balloon payments.

Practice Pointers

Consider Section 71 Payments ….

Continued in PDF file below… “Tailored Installment Payments to Balance the Scales without Breaking the Bank”
View / Download June/July 2015 Article – PDF File

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

Read More “June / July 2015 : Tailored Installment Payments to Balance the Scales without Breaking the Bank”

May 2015 : Overview of the Division of Retirement Benefits in Divorce – Part 2

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

by Joseph W. Cunningham, JD, CPA

Excerpt:

The following is a continuation of the materials presented in the March 2015 Tax Trends column.

III. Defined Contribution (DC) Plans

  1. A DC plan–such as a 401(k) plan – provides for separate account for each participant.
    1. E.g.–W’s account balance under the XYZ 401(k) plan was $50,000 on December 31, 2014.
    2. Other types of DC plans include pro t-sharing plans, money purchase pension plans, and 403(b) annuities.
  2. Division of DC plan accounts is also accomplished either by the o set method or by deferred division using a QDRO/EDRO.
  3. Offset method – Valuation
    1. The present value of the DC plan interest is generally considered its account balance as of the valuation date. See above for an example.
    2. As with the present value of pensions under DB plans, it is typically appropriate to tax affect the value of the account balance.
    3. It is important to specify a valuation date, generally close to when other assets will be divided.
    4. If there is a plan loan, the account is (1) valued net of the loan and (2) responsibility to repay the loan is assigned to the participant.
      Example:

      • The total pre-tax value of W’s 401(k) account is $50,000 – $40,000 of plan investments and (2) a $10,000 loan she drew from the plan.
      • Equal division under the offset method:
        (Table shown in PDF)
  4. Deferred division method – QDROs/EDROs
    …
Continued in PDF file below… “Overview of the Division of Retirement Benefits in Divorce – Part 2”
View / Download May 2015 Article – PDF File

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

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April 2015 : Four Federal Income Provisions Relating to Divorced or Legally Separated Parents Providing Child Support

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

by Joseph W. Cunningham, JD, CPA

Excerpt:

The following presents basic information on four federal income provisions relating to divorced or legally separated parents providing child support for one (or more) dependent child. These provisions (1) often provide significant tax savings – particularly to parties of modest means – and (2) are often overlooked by divorce counsel who can provide a valuable service by advising clients to check to see if they qualify for any of such tax benefits.

Dependency Exemptions General Rule

IRC Section 152(e) provides that if the parents, on a combined basis, (1) provide more than half a child’s support for the year and (2) have physical custody for more than half the year, then the parent having physical custody for more than half the year (the custodial parent) is entitled to the exemption.

The custodial parent may “release” the exemption to the other parent by executing a written waiver for (1) one year, (2) a specific number of years, or (3) all future years. IRS Form 8332 is the waiver that the custodial parent must execute to release the exemption. e non-custodial parent must attach the executed Form 8332 to his/her tax return for the year(s) for which the exemption has been released.

Other Aspects of the Dependency Exemption

  • The above applies to parents living apart for the last six months of the year as well as to divorced or legally separated parents.
  • “Physical custody” for more than half the year is deter- mined based on overnights. If overnights are equal, the parent with the higher adjusted gross income is deemed the custodial parent.
  • The waiver can be used to, effectively, provide that the parents will claim the exemption in alternating years.
  • Support provided by a parent’s new spouse, or his/her parents, is deemed provided by the parent.
  • The custodial parent may revoke the waiver by executing Part III of Form 8332. Such a revocation applies to the succeeding tax year.
  • The federal income tax exemption amount is $4,000 for 2015.

Phase-Out of the Tax Benefit of Personal and Dependency Exemptions

The tax benefit of personal and dependency exemptions is phased out for high income taxpayers.

The adjusted gross income (AGI) amounts at which the phase-out applies are as follows for 2015:
(Table shown in PDF below)

A taxpayer’s deduction for personal and dependency exemptions is reduced by 2% for each $2,500, or fraction thereof, that his/her AGI exceeds the above threshold amounts.

Example: A single individual has a $300,000 AGI. In addition to his personal exemption, his ex-wife has released the dependency exemption to him for their minor child who lives with her. The phase-out works as follows:

  • Two exemption deductions unreduced – 2 x $4,000 = $8,000
  • Number of $2,500 amounts, or a fraction there- of, by which AGI exceeds threshold – $300,000 – $258,2500/$2,500 = 17
  • Percent reduction in exemption deduction – 2% x 17 = 34%
  • Reduced exemption deductions – 100% – 34% = 66% x $8,000 = $5,280

Practice Pointers
…..

Continued in PDF file below… “Four Federal Income Provisions Relating to Divorced or Legally Separated Parents Providing Child Support”
View / Download April 2015 Article – PDF File

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

Read More “April 2015 : Four Federal Income Provisions Relating to Divorced or Legally Separated Parents Providing Child Support”

March 2015 : Overview of the Division of Retirement Benefits in Divorce – Part 1

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

by Joseph W. Cunningham, JD, CPA

Excerpt:

Introduction

  1. Under Michigan law, every judgment of divorce (JOD) must provide for the rights of the parties to both vested and unvested pensions, annuities, and retirement benefits. MCL 552.101(4)
    1. Vested benefits must be taken into account in property settlements. MCL 552.18.
    2. Unvested benefits may be considered “where just and equitable.” MCL 552.18
  2. Age of specialization
    1. Certainly applicable to handling retirement benefits in divorce.
    2. Many traps for the unwary
  3. As with taxation, the key is awareness of issues
    1. Obtain necessary knowledge or assistance
    2. Better serves clients and avoids unpleasant surprises down the road

Defined Benefit (DB) Plans

  1. DB Plans – Traditional pensions – Monthly payment for life often based on (1) final average compensation, (2) years of service, and (3) plan formula.
    1. E.g., $3,500 a month for life.
    2. Many units of government and large employers – such as the “Big 3 Automakers” – have DB plans.
    3. But, the trend is definitely to defined contribution (DC) – or, “account balance” plans, such as 401(k) plans.
  2. Division of interests in DB plans is achieved via (1) offset method or (2) deferred division.
    1. Offset method involves (1) determining the present value of the pension and (2) awarding the other party property equal value. E.g., The after-tax, present value of W’s pension is $50,000. H shall receive $50,000 of other property as an offset.
    2. Deferred division refers to actually splitting the marital portion of the pension between the parties pursuant to a Qualified Domestic Relations Order. E.g., H and W will equally share his $4,000/month pension by means of assignment of half of his share to W pursuant to a QDRO.
  3. Offset method – Valuation
    1. Many professionals calculate the present value of a pension by using the discount rates published and updated monthly by the Pension Benefit Guaranty Corporation (PBGC).
      1. The PBGC, a federal government agency, uses the rates for the same purpose–that is, to determine the present value of future pension payments.
      2. The updated monthly rates can be accessed at the PBGC website (www.pbgc.gov) by clicking on “Practitioners.”
    2. Generally, it is appropriate to reduce the present value of the pension by the tax rate to which it will be subject when it becomes payable after retirement.
      1. Rationale – The pension cannot be used in any beneficial way until received, at which time it is taxable.
      2. The federal and state tax rates used to “tax affect” retirement benefits are those projected to apply after retirement.
      3. Because of the certainty of taxation, case law supports valuing retirement interests net of future tax. Nalevayko v Nalevayko, 198 Mich App 163, 497 NW2d 533 (1993)
    3. In some cases, there may not be sufficient other property suitable to award the other party as an offset.
  4. Deferred division method – QDROs/EDROs
    ……
Continued in PDF file below… “Overview of the Division of Retirement Benefits in Divorce – Part 1”
View / Download March 2015 Article – PDF File

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

Read More “March 2015 : Overview of the Division of Retirement Benefits in Divorce – Part 1”