The website of Fox Rothschild LLP, a large firm of nearly 750 lawyers, features a blog to help you deal with the divorce process. Fresh and useful posts, regular updates and a professional approach to a common situation.
On April 30, 2019, the Superior Court published a panel decision related to a retirement benefit divided in divorce. This wasn’t just any pension, but one established for a Pennsylvania municipality. As this author learned in organizing a recent seminar for the Doris Jonas Freed American Inn of Court, municipal pensions are a very special and unwieldy animal. The decision in Conway v. Conway v. City of Erie Police Relief & Pension Association demonstrates why.
The facts are easy. The Conway’s married in 1991 and separated in 2007. Husband was a cop in Erie, Pennsylvania. On August 19, 2016 they executed a Property Settlement Agreement by which husband would transfer to wife $30,000 from his Erie Deferred Compensation Plan and “a share of his pension,” via a Qualified Domestic Relations Order (QDRO). The educated reader is stopping here to ask, “what share?” A great question, but not one addressed in this case.
Municipal pensions are not the creatures of state or federal law. State law authorizes them, but the plans are governed by municipal ordinance. Erie’s 2011 pension ordinance expressly allowed for QDRO’s, and that such Orders could grant a former or surviving spouse a share of the employee’s pension.
The parties must have known that something was brewing in Erie’s City Council because they were divorced three days after the Settlement Agreement was signed. But before they could race a QDRO through the courts, Erie passed an amendment to its Pension Ordinance expressly forbidding former spouses from acquiring any interest in a municipal pension.
The QDRO was drafted and submitted to the pension administrator six days after the new Ordinance was passed, seven days after the Decree incorporating the Agreement was entered. The Plan administrator rejected the QDRO because it did not conform to the current Ordinance. Wife appears to have sued to join the Pension Plan as an additional defendant and secure an order compelling it to honor the Agreement formed before the Pension Ordinance was changed. The Erie County Court decided in favor of the Plan noting that the amendment preceded the pension administrator’s receipt of the QDRO.
Wife appealed not to Commonwealth Court but to the Superior Court. In a lengthy footnote, the Superior Court concludes that it is not the Pension Plan’s rights that are involved, but those of the employee. This argument seems attenuated as the assets of the pension plan would seem to be the property of the Plan subject to the claims of its creditors, viz., the employees who are Plan participants. A quick and incomplete search of pension cases decided in recent years seemed to show they were all brought to the Commonwealth Court as municipalities and their plans are creatures of statute.
As if matters were not complicated enough, husband had the misfortune to die a few months after the trial court decision. This foreclosed any power a court might have asserted to modify the equitable distribution based upon impossibility.
Wife argued and the Superior Court ruled that her rights to the pension vested at execution of the Property Settlement Agreement and a subsequent amendment of the plan could not alter those vested rights. The Appellate Court relies upon the law of contract to state that the courts are bound to apply the intent of the parties. It then recites familiar principles of equity and even notes that wife could be without a remedy as husband has died.
Were the pension plan a mere custodian of funds as one might conclude with the deferred compensation plan, (which appears to be a define contribution plan) this argument might glide by easily. However, a defined benefit plan of this kind is a contract between a municipality and a labor force employed by the municipality by which the latter agrees to pay money to the Plan, which agrees to pay annuities in accordance with prevailing municipal law. Therefore, we have a couple of contracts here and we have a municipality, which would seem to have the right to alter or even discontinue a pension benefit. Principles of equity and administrative law do not often work in harmony.
Having said that, husband worked and part of his compensation consisted of deferred retirement benefits paid on his behalf by the municipality to the pension plan. He accrued those rights and he assigned a portion of those rights to his former spouse at a time when the Plan document expressly allowed assignment via QDRO. Arguably, had he accrued marital benefits after the Plan was amended to exclude assignment, those benefits would not be assignable. Nevertheless, this is an issue where some reference should have been made to the collective bargaining agreement with the Erie police.
In the end, the former spouse got her pension and that is the right result. However, this case demonstrates just how unregulated the world of municipal pensions can be. Since passage of the Retirement Equity Act in 1984, private pensions regulated by the U.S. Department of Labor are assignable under 26 U.S.C. 414. But, state and local units of government are not subject to federal regulation in this area. The Commonwealth has adopted statutes that closely mirror federal law in the area of assignability for state employees. Here, however, a municipality of nearly 100,000 residents decided to pass regulations rolling back spousal assignment provisions. A person who marries an Erie cop in September 2016 could stay married to that person for a generation or more and have no entitlement to their spouse’s pension because of the 2016 Amendment.
The author professes to have almost no knowledge of municipal law. However, municipalities are the creature of state government, and as such, it would seem that the state could enact minimum standards for municipal pensions including provisions permitting assignments of pensions consistent with prevailing state law affecting state employees. As we know, retirement benefits form a substantial portion of public employee compensation. They merit more careful protection than the whim of a city ordinance. Because most municipalities in the Commonwealth have very few full-time pension eligible employees, local solicitors are often encouraged to give short shrift to the preparation and review of local pension documents. Courts should not have to apply equitable principles to decide matters of such value and importance.
Beth Anne and Mark Weber were married and produced two children, one in 1984 and another in 1994. In their 1999 divorce, they formed a Property Settlement Agreement containing provisions that they would share equally the costs of “an appropriate undergraduate college or other post-secondary education for the children.”
In 2007, Beth Anne filed to enforce the Agreement stating that Mark had not paid his share of their son’s tuition at Florida State University. The son also intervened claiming status as a beneficiary of the contract. For whatever reason, Beth Anne entered a nonsuit to her “special relief petition.” Although granted standing the son did not prosecute his claim. Then, anyway.
In 2016, the son filed his own special relief petition seeking payment of half of the $166,000.00 cost of his undergraduate education, which had concluded in 2011. Father filed an answer asserting a four-year statute of limitations under 42 Pa.C.S. 5528(a)(8). Although not in his petition itself, he also asserted that he was also entitled to recover half of the cost of his graduate education to secure a pharmacy degree. The half cost of this endeavor was $98,000.00. At argument on Mark’s defense, the court allowed son to amend his petition to include the graduate degree costs.
Following argument, the trial court in Crawford County denied the third party claim stating that the son’s claim was derivative of Beth Anne’s rights and he lacked standing in the wake of his mother’s election to withdraw her claims. Son appealed and the trial court ruling was reversed in a published Opinion in 2017.
On remand, Father moved for summary judgment based upon the statute of limitations. Although not clear from the Opinion, it appears that Beth Anne joined in her son’s claims at least on brief. Nonetheless, the Trial Court held the statute of limitations applied to the undergraduate degree claims and that the Agreement language did not support the notion that “post-secondary education” included studies undertaken after college. Son again appealed.
The Superior Court relied upon a 1992 case, delCastillo v. delCastillo, 617 A.2d 26 (Pa.Super. 1992) to hold that an agreement to pay for education “beyond the high school level,” did not encompass graduate studies. The Opinion in this case by Judge Mary Murray noted that under contract law, the trial court interprets the contract where there is ambiguity. What made the facts of this case more complex was an inconsistency in son’s factual statements. In his early pleadings, he said he “finished” undergraduate studies and then began a graduate pharmacy program. The facts at trial established that he was never awarded an undergraduate degree, but he was admitted to a pharmacy program in Florida nonetheless. The degree of doctor of pharmacy can be awarded to an undergraduate. The Trial Court found and the Superior Court affirmed the concept that a graduate degree was not within the contemplation of the Agreement formed.
On the statute of limitations issue related to the Florida State undergraduate studies, the Superior Court quotes language from a 2006 case, Crispo v. Crispo, 909 A.2d 308 (Pa. Super. 2006), which implies that contracts to pay debt in property agreements are “continuing” obligations for which the statute of limitations is inapplicable . Id. at 315. It then contrasted Crispo with a more recent case, K.A.R. v. T.G.L. 107 A.3d 770,775 (Pa. Super. 2014) where the court held that failure to enforce a onetime payment due under an agreement was subject to the limitations statute. Crispo appears to have been distinguished because the time for the payment of the debt was not fixed. In the instant case, the Superior Court approved of the Trial Court’s holding that once son ceased his undergraduate studies in 2011, the otherwise continuing obligation was fixed such that the statute of limitations would apply.
We wrote about K.A.R. in a blog published on January 26, 2015. In that discussion we noted that, reconciling fixed from continuing obligations could be a tricky thing, but suggested that litigants should not be permitted to keep claims in the closet indefinitely. The facts in Weber are indeed tricky. We know that son stopped attending undergraduate school at Florida State in 2011. We also know that when he filed for what he first called his graduate degree in 2016 he said he had been in graduate school since 2011. This Opinion draws a line between the undergraduate and graduate educations, although it appears to also acknowledge that a person can complete an undergraduate degree and be awarded a doctor of pharmacy for those endeavors. See Opinion at p. 11. Query whether son could claim a continuing obligation had he taken eight years and $362,000.00 to finish a pharmacy degree of whatever Latin appellation, whether bachelor or doctor of pharmacy?
For the practitioner, this is an area where careful drafting counts. The National Student Clearinghouse Center reported that only 58% of the students who started four-year College in 2012 had earned a degree six years later. Agreements need to regulate if not capitate these investments of after tax income.
As part of National Public Radio’s morning edition report for April 29, 2019, business correspondent Yuki Noguchi reported on a phenomenon we have witnessed, financial infidelity. Ours is an age where credit is available everywhere 24/7. Want to buy a power washer at 3 a.m.? Your friends at Amazon are not only prepared to take the order, they are also happy to discount the product if you will take a Chase Amazon Prime card as part of the transaction. If you watch CNN, an advertisement runs where a sales team realizes that it doesn’t have the financial resources to fill a new customer’s massive order for their product. Instantly, an online banker appears and suggests the needed cash can be available in hours.
According to I Corinthians, we are tempted in the same way that everyone else is tempted. But, God can be trusted not to let us be tempted too much, and he will show us how to escape from temptation. According to the New York Federal Reserve, the temptation appears to be winning as consumer debt grew from 3.25 trillion in 2012 to almost 4.25 trillion in 2017.
What Noguchi was reporting upon was the fact that if you are married, your debt may be increasing without your knowing it. A recent study indicates that within families 25-40% of adults are not being candid with their spouse about the debt they carry. What made the story all the more poignant was that it told the story of a family where this occurred. The husband had incurred some debt to make a career change to become a financial counselor. When he opened his new practice, it did not instantly generate the revenue he expected and consumer credit became a convenient crutch. As one might expect, a person who counsels people about money management would be embarrassed to reveal to his spouse that he was struggling with his own credit issues. Ultimately, he confessed and it appears the couple worked things out, although the wife acknowledged that she was angry about the entire situation.
So suppose you were the “victim” in this situation. Your spouse the “motor head” tells you that a classic car is going to auction. He is certain that if he can buy it for $20,000, he can restore it and sell it for twice that amount. While looking at the three other cars in the driveway you tell him he is crazy and that this investment and related debt service is nowhere in the family budget. But, despite your protests, he independently borrows the money or taps your home equity line of credit to buy the car. He gets his best friend to provide the garage space so you don’t even see the car.
Time goes on and for whatever reason the marriage starts to unravel. Someone files for divorce and when husband provides his disclosures, you see $20,000 of consumer debt you did not know about is now $28,000 because he never made more than the minimum payment and there is $6,000 due to Chase/Amazon on his separate card for the crap he bought trying to fix the car. His friendly neighbor is also saying that he wants $700 for the 10 months the car was “hidden/stored” in his garage while your husband was “restoring” it. The restoration never was completed, so you have a half pulled apart car you did not know about and $35,000 worth of related debt.
The law is going to protect you here, right? Well, maybe but maybe not. Marital debt is any debt incurred by either spouse during the marriage to the date of separation. It doesn’t say “known debt or disclosed debt”. A judge or hearing officer may be sympathetic, especially if it is money spent on a boyfriend or girlfriend. Courts have the discretion to award assets and liabilities in different percentages including “The car debt is all his; the PANDORA Jewelry debt is all hers.” But the law is not firm on this subject. Even less persuasive is the situation Noguchi reported where unknown debt was used to maintain the family lifestyle. In that instance, wife will argue that she would not have taken the Disney vacation or had the house re-carpeted had she known that debt and not husband’s business was not the source of the money underwriting these projects. Many courts take a laissez faire approach. “You both went to Disney and you both walked on the rugs so you both will share the experience of paying for that debt.”
The moral is “Know thy spouse.” If you have doubts, perhaps you should demand an agreement that says neither of you will ask the other to contribute to debt that is not known and acknowledged in writing. You don’t want to be staring at $35,000 in car debt in a divorce proceeding only to listen to your spouse say, “She knew I wanted to get that car and fix it.” The truth is that you did know what he wanted; you just did not know that he did it. A good beginning is to agree every year during tax season to secure your free credit report and share it with your spouse. Reluctance to make that exchange is a sure sign that financial trouble is either underway or about to occur. A failed marriage is a sad but recoverable event. A failed marriage coupled with undisclosed and unmanaged debt burden is not.
To answer a question with a question: “Isn’t the sensible answer ‘No’?” After all, people contemplating divorce are not children. This is an entirely adult decision made by an adult who decided to marry in the first place. The prospective client is the person living the marriage with all of its advantages and disadvantages. No matter how close the friend or family member, that person is not living the marriage.
In the past, my feelings on this subject were mixed and colored by the breadth of friends and family brought to these meetings. In many instances, the guest is more adamant that there needs to be a divorce than the spouse doing the interview. This can be especially true of parents who will often confess during an interview that he or she never liked the marriage or the other spouse in the first place.
Rule #1 is consider carefully who to bring and what motivates you to invite that person. Recently, I had an initial interview with a prospect and a parent where it was clear within the first 20 minutes that while the prospective client had an enormous array of objective reasons to pursue divorce, however, her expressions and language made equally clear that she was not prepared to begin this journey. Truth is clients who do not really believe they are entitled or could be better off by ending a marriage are very poor clients to represent. They don’t believe in the mission even though they can articulate why they are in pursuit of it. If you want to bring a guest, bring one who can help you process your real needs rather than endorse your uncertain mission.
Rule #2 relates to attorney client privilege. What you tell a lawyer alone or in the office with a member of the lawyer’s staff is entirely confidential. It is not to be revealed to anyone else. But, if you bring an outsider to the meeting, the attorney client privilege is lost as it relates to confidences related with an outsider present. Therefore, what you tell me in the presence of a guest is not confidential. It does not mean that the attorney is at liberty to discuss what was said. It does mean that if someone subpoenaed your friend or family member, what you told the lawyer in a meeting with an outsider can be revealed through examination of the guest.
Is this a justification for excluding others from an initial meeting? No. It just means that not all subjects should be on the table. If you know of illegal, fraudulent or even embarrassing conduct on your part or that of your spouse, the meeting with an outsider is not the time to reveal it. I typically tell clients about this by stating that, if there are such facts that need to be discussed, that should be the subject of a subsequent conversation with the lawyer alone. Rarely does this conduct drive the transaction being considered in an initial interview. But it often colors how the case is handled.
If the discussion stopped here, it would appear an attorney interview should be conducted alone. However, experience has taught me that some of the most productive initial interviews I have hosted have been conducted with an objective friend or family member. These folks often see inconsistency or lack of candor in ways that the attorney does not. They know their subject based upon observation of their friend and his or her marriage. Just as important is the fact that there are now a second set of ears to hear and absorb what the lawyer is saying. Just as has been reported in relation to a patient’s ability to absorb what a physician is saying in a medical setting, people are usually nervous and somewhat distracted during an initial interview concerning separation and divorce. Just as with a poor medical diagnosis, it is difficult to remain focused when discussing termination of a relationship built upon expectations it would last a lifetime.
In the end, it can be very helpful to bring someone with you when you are judging whether to terminate a marriage and whether the person doing the interview is “right” for you. But as we have noted, think carefully beforehand, about who you bring and what you say.
At the risk of appearing obsessed, I write a second time about the separation of Jeff and Makenzie Bezos. This time my subject is again borrowed from the Wall Street Journal, but it’s not about the money. Rather, the Journal produced a prominent and adulatory article about the divorce announcement by the couple (actually Jeff) on Twitter. I thought it interesting because anyone who separates from a spouse or long time relationship is left asking; how do I let people know?
In olden days, this was done either by phone or in person. It creates an awkward moment because if you are the person getting the news, you are not certain just how to react. After the “I’m sorry to hear that….” the question becomes how far does the inquiry go? It seems cold to stop with the vague “I hope it works out.” Yet, is the person making the announcement asking for absolution? Therapy? There is no happy answer.
So, I think there is merit to a public announcement and despite my general abhorrence of Twitter, I see benefit in getting the word out. I don’t know whether it requires a “joint” announcement as the Bezos posting suggested. For most of us, separation does not suggest that we need to “calm the market” in Amazon stock. However, the many lawyers and therapists who commented upon the Bezos announcement liked the idea of controlling the message and communicating that the problems either have been or will be handled with civility.
If you read what was posted by Mr. Bezos, it was a bit treacly. In part, it says:
“After a period of loving exploration and trial separation, we have decided to divorce and continue our shared lives as friends.”
Perhaps this was all so amicable, but the news was immediately accompanied by reports that Herr Bezos already has a girlfriend. It also throws shade on the ambiguous phrase “loving exploration.” But, back to the main point… People want to know if you are separating. If they truly care about you, they would like to know things will be civil even if that is merely an aspiration. It is also a good way to signal to your spouse how you want him or her to respond. The beauty of the electronic approach is that it gets the word out and allows friends to control a responsive dialogue on their own terms.
I don’t do Twitter because I have witnessed a thousand prominent people see their public persona crash and burn. They did not think before they wrote. Twitter is best known as a place where people say stupid things. But perhaps Twitter might actually become an instrument of civility rather than a semantic battleground.
What to say? Well it may be ideal to issue a joint announcement. It is rare for couples to be finished with each other at the same time. Usually, one spouse is the catalyst. If that is your situation, keep it simple and avoid what will be perceived as over the top sentimentality.
“I wanted to let friends and family know that (Jeff ) and I are separating. I am hopeful that this process will preserve our dignity and not draw you into a conflict where you will feel the need or desire to take a side. I hope our friends will remain just that although we may no longer be a couple.”
Message sent. Now, when you run into the neighbor in the frozen food aisle, they “know” and can ask either how it’s going or confine the conversation to whether chicken Florentine is good with arugula. The recipients also know that you want to be an adult during the process.
So am I on the road to conversion as a Twitter acolyte? Perhaps. But then there is the recurring fear that if I joined the social media band no one would “follow.”
While writing about high profile divorces is a means of attracting readers, it really leaves most of us feeling “empty” when it comes to how it relates to our ordinary lives. But the announcement this week of the divorce agreement between Jeff and MacKenzie Bezos made the front page of the Wall Street Journal. There is a reason for this. Unlike the split of say P. Diddy and Cassandra Ventura announced in October, the Bezos divorce actually could affect our lives if we own anything besides a token piece of Amazon. Can that be? NBC announced the story Wednesday morning just as markets opened. Stock price then $1,656. It closed the day at $1659. But when markets opened this morning (1/10), they did so at $1,640. We don’t know what causes these variations but the Bezos divorce was front page of today’s major news outlets.
Why would anyone care? Mr. Diddy is estimated to be worth almost a billion dollars. What composes that billion is unknown to us. But Jeff Bezos is worth $150 billion and the far biggest piece of that is 16% of all Amazon stock, about 79,000,000 shares. If $150 billion is an accurate estimate and $130 billion of it is in AMZN stock, a lot of that stock is in play in the divorce process.
This was a long-term marriage (25 years) in an equitable distribution state. The latter phrase means that Mackenzie does not automatically get 50% as she would in a community property state. But, this transaction was most likely not: “you take the house(s) and the cars, I’ll keep my stock.” Lots of ink has been spilled in the Jack Welch and Frank McCourt divorces about what a non-entrepreneur spouse should get. But even if Ms. Bezos took only 30-40% of the marital estate and kept the house and 401(K), she is still going to walk away with a piece of Amazon that would rival those held by Vanguard and Blackrock. Vanguard and Blackrock represent hundreds of thousands of investors. Mackenzie Bezos is a party of one. As one of the tiny pieces of Vanguard, I bought knowing that Bezos was the lead dog and that lead dogs understand the responsibilities of owning 16% of the entire kennel. But all I know about Ms. Bezos is that she is a novelist who married her husband when Amazon was still a book distributor and that today she may have the power to put stock to the market in some ways that could create dangerous volatility for those of us with smaller stakes. If there is a consolation for the small investor, it is that the Bezos’ appear to live in Medina Washington where community property presumptions of 50/50 don’t apply. Then again, the Bezos do have homes in a couple of community property states so their real residence state may be not what we think. A community property state could signal a $75 billion dollar settlement and a larger piece of Amazon.
So what has this to do with mere mortals? The answer is liquidity. We commonly see business entrepreneurs or their spouses in a world where 70-90% of their wealth is enmeshed in a closely held business. They are divorced as commonly as anyone else is but they typically ignore the liquidity crisis which divorce can trigger. Folks like Bezos have some relief from this particular headache. Their stock is public and can be sold. But ask any senior executive in a publicly traded company how much freedom public securities offer them and they will respond: damn little. There are blackout periods when they cannot trade and every time they do, the investor community is combing the SEC records to see who sold and wonder why stock was sold unless the sky was ready to fall.
You don’t have to be a Bezos to have this problem. Every day we insure houses and their contents based upon an unlikely casualty contingency. In so doing we anticipate and hedge against a remote possibility. We do the same with both life and disability insurance policies. But few of us ever look at our own portfolio of assets and ask; what if my spouse announced “Game over.” It is not a pleasant thing to think about. But chances of a house fire are pegged at about 1:3000. The number of divorces in the United States exceed the number of house fires by 2:1.
Most people reading this will dismiss it. “I’m not getting divorced.” Those deniers seem to think that they are the only spouse who could be unhappy in their marriage. So why diversity and attempt to arrange the balance sheet so that illiquid assets are a smaller piece of the portfolio. There is actually a second reason. It is reflected in the Greek tragedy called “Theranos” where a $10 billion dollar valuation in 2015 turned into criminal indictments of management three years later. Enron was $92 a share in 2000 and half that price a year later. GE lost half its market capitalization between June 2017 and the same time this year. It has declined another third since then. So there are many reasons to accept the bromide that there can be too much of a good thing. Even if you are a Bezos and even if you have 200 shares in your retirement plan.
Just before Christmas last year, Congress passed and the President signed a major tax reform package that contained a surprising wrinkle. It abandoned a decades long provision that permitted payors of alimony or spousal support to deduct their payments from income and required recipients to report the payments and pay tax on them.
The effective date of this change was/is December 31, 2018. Orders and Agreements in effect on that date maintain the old tax treatment. Still taxable to payee. Still deductible by payor. But Orders and Agreements formed in 2019 will be tax neutral unless the deal is a modification of a pre-2019 instrument (i.e. Agreement or Order), and it expressly retains the former tax treatment. To address this, Pennsylvania support guidelines needed to adopt amendments to deal with two systems: one where the payments are taxable and one where they are not.
When the Pennsylvania Supreme Court Rules Committee began their review, they observed that every other state approaches child and spousal awards differently. In Pennsylvania we have always calculated child support first and then used that result to calculate spousal and alimony awards. The Rules Committee is recommending that we adopt a different approach. Under proposed rules currently out for comment, we will solve first the issue of spousal support/alimony and then plug the results into a child support calculation. If there is an Order in effect before December 31, 2018 the calculation does not change. If the obligor makes $5,000 a month net and the obligee $2,000, you subtract the lesser number from the greater and start with the $3,000 result. If there will be child support due, the spousal award is 30% of the difference or $900. If no child support is involved the percentage remains 40 and the result is $1,200. Both payments will remain taxable and deductible.
But, if the case involves a new Order or the parties should decide they want an Order to be reflective of the Trump tax reforms, the calculation becomes a little more complex. Here we go; dealing first with a case where child support is not involved:
Obligors net monthly income
Less payments due to other families
Adjusted net income available for support
$1,650 (this is new)
Obligee’s net monthly income
$800 (also new)
Subtract the $800 from the $1,650 and nontaxable support will be $850. This contrasts with $1,200 taxable/deductible under the ancien regime.
Now, on to a case with the same incomes but a child support element:
Obligors net monthly income
Less payments due to other families
Adjusted net income available for support
$1250 (this is new and a lower % than above)
Obligee’s net monthly income
$600 (also new, also lower % than above)
Subtract the $600 from the $1,250 and you get spousal support or alimony of $650.
These results will now become part of the child support calculation. The spousal award will be subtracted from obligor’s income and added to obligee’s.
Net incomes available for support
Spousal support/apl adjustment
Adjusted income available
Combined income for support $7,000
Guideline amount 2 children 1,660
If the obligor has 45% of overnights the support is adjusted with a 15 basis point discount to 47%.
Then we allocate health insurance, private education, and activities (w/o discount) 62% Obligor and 38% Obligee.
These are recommendations to the Supreme Court and they are not yet law. But, given the fact that the federal tax law will change in less than ninety (90) days and something must be done in that period, don’t be surprised to see the proposed regulations adopted at least as a temporary matter.
This was a summer where prenuptials arrived in profusion, and what made it interesting is that just about all of them involved folks who were either beginning or in the middle of their earning careers. Most prenuptials involve couples who already have kids from former marriages and money they want to preserve for those kids. But we also see prenups for young people who have wealth already transmitted from their parents; parents who want that wealth to stay on their child’s side of the column even after a marriage occurs.
When going through this process with young folks or even people who are in their forties, lawyers ask lots of questions that can be uncomfortable. No one ever really asks a couple how they want to live their financial lives together and yet as McKenzie Frankel, a financial planner in Wayne, PA has observed, a lot of relationships would work far better if those questions were addressed. When it comes to how we manage family and money our expectations are often hard baked into our personalities by our own life experiences. Millennials can be especially interesting to work with because many of them are raised to eschew family and money stereotypes (e.g., mothers stay at home and dad’s do the financial stuff).
I read the Money Personality Quiz developed by Frankel and her partner Joslyn Ewart with interest, but I also considered some far more basic questions that young people in love should be asking each other. I also believe that the answers to some of these questions might be worth incorporating into agreements. Permit me to try my hand at my own “personality quiz:”
How important is it to your relationship that you have children, with a “0” reflecting no interest in raising a family and “5” indicating that it was indispensable to agreeing to marriage?
Indicate the optimum number of children you would want to have with your intended spouse.
Indicate the outer limit of the number of children you think you would want to have.
If fertility becomes an issue for either of you, would you be prepared to incur the expense and physical challenges which fertility treatments may involve?
If fertility is an issue, indicate your receptivity to adoption and whether there are limits to how far you were willing to adjust to the alternative options adoption may require.
If you had a child who suffered physical, intellectual or emotional limitations that prevent one of you from being able to work outside the home, how would you decide which of you would make that financial sacrifice and how would that sacrifice be compensated if the marriage were to dissolve?
If your child(ren) had no limitations but you decided that one of you did not want to return to work in order to devote energy to full time parenting, how should that be compensated if the marriage were to dissolve? How should you reduce or limit your lifestyle/expenses once the decision is made and the household income is reduced?
If you both had jobs earning equal amounts of money and one of you was offered employment that would require relocation to another city, how much more compensation would the spouse offered the job have to receive before you would agree to move, especially if no substitute job was immediately available in the new market.
How important is it to you that your child have the benefit of private school when a reasonable public school is available?
Do you see it as your responsibility to provide children with either vocational or academic training after they have completed high school? In a day (today) when a four year public school undergrad degree costs $80,000 and a private school $160,000, what should be your contribution and how do you want to finance the parent portion (e.g., savings or when it comes)?
In a day when the average social security benefit for a retiree is about $17,000 a year and the maximum benefit, if you contribute the maximum ($8,000 per annum) and defer to age 70, is $44,000 a year, what kind of retirement income do you hope to have and when do you intend to start financing that via savings? Can you agree now that a portion of your earnings go into some form of retirement and that you would continue that percentage?
How important is it to you that you own your home rather than rent a dwelling, “0” being of no consequence and “5” being an absolute necessity?
If you earned $30,000 per annum what do you consider a reasonable amount for a monthly auto payment excluding any trade in value (i.e., “0” down)? If your income doubled, would your expectations change and by how much?
Is there a level of income where you would prefer to devote additional energy to non-income producing endeavors like charitable work, creative work or occupations which sometimes pay lots of money but typically are low on the income ladder (e.g., acting, writing etc.)?
Between 1 and 5, rank your future spouse’s financial stability in terms of their approach to money. If your intended could earn $100,000 but would likely spend more than he earned, that’s a low rank. If your spouse would earn $30,000 but be more likely to still have money for savings he/she is more toward a 5.
What is your intended spouse’s current credit rating and what does the credit history look like? Shakespeare said it best: Past is prologue. And it’s a delicate subject, but have tax returns for recent years been filed?
Hobbies and collectibles are often a tell-tale signs of financial distress. Gambling, sports or clothing addictions and “collections” (whether cars, handbags, guns or memorabilia) can often take even solid wage earners over the edge. The latter expense often masquerades as an “investment.” We have worked with clients who have tried this. Very few profit from their efforts and many owe large sums on what they do own.
What’s the child support situation? Don’t be surprised to find out that a prospective mate who otherwise seems an honorable person owes tens of thousands in back support. There can be many explanations for this and some may be more reflective of neglect than malice but it won’t make any difference, when the $10,000 bonus you deposited to the joint bank account for a trip to Orlando is seized to pay his past due support.
Criminal background. This can be a painful look but today Pennsylvania has data online about prior criminal history. It does not include juvenile offenses (which occur before age 18), but any adult bad behavior tends to linger. Make certain you are looking at the right name and verify if possible with a birthdate and/or a social security number. You may be planning a driving honeymoon while your future bride is juggling her second DUI arrest.
So there are two stories here. Know the past of the person you love and talk about the future and how to address it. And while you are discussing the future you may want to think about an agreement that protects you with some promises that could be legally enforceable.
When you marry you usually take on obligations of support for each other. The property you acquire (except by gift) is divisible in divorce. The debt is as well. Most people file joint tax returns which means that any monkey business with the return affects both monkeys even though only one monkey was cooking the books. And except for credit card debt, lots of consumer debt including mortgages are “joint and several.” That’s legalese for “you’re on the hook for the mortgage even though you consistently gave him cash to make the payment.” He just had other priorities.
The author has plenty of real life stories to back up the scary things he just described. What makes the stories tragic is that they were actually avoidable if someone had asked some of the questions before. We have all heard the stories about people online creating an avatar; an identity that does not reflect who they really are. Don’t allow a love-based fantasy to ruin your otherwise stable reality.
It is axiomatic that divorce is an emotional process. Samuel Johnson summed up domestic life best when he wrote, “To be happy at home is the ultimate result of all ambition.”
One of the great challenges of representing clients going through this highly emotional chapter of life is that their focus tends to be on the present. Certainly, there are many daily issues that do merit attention. We live day-to-day. But, when I do an initial interview with a client, two of the questions I try to focus on are: (1) how many years does this client have until their productive (i.e., income producing) life will end, and (2) how is the client suited to prepare for that day?
These issues have become more acute over time. When I began working as a divorce lawyer in the 1980s, some elements of life seemed fixed. Retirement was at age 65. Most clients aged 40-60 either had stable employment or were married to spouses who had stable employment. Stable employment meant mid to long-term employment in a stable industry for a stable business. All of that has changed.
Today I am meeting with people who have not reached 50 who report that they are concerned about whether their employer will still exist another decade or whether they will survive as employees. What has changed so dramatically in the past decade is that it is often the most senior business executives who are talking about such vulnerabilities. Many of these people have very solid retirement assets today, but they have job insecurity. When we explore that issue, these often highly talented people are seeing a future as consultants working spasmodically or experiencing long periods between jobs.
The September 4, 2018 edition of the Wall Street Journal focuses on a subject too often forgotten in the divorce process. How will we prepare for a retirement in an age when we may find ourselves effectively “retired” years before we expected it?
As the Journal article correctly observes, financial needs in retirement have been more the subject of “convention” than actual study. The conventional wisdom is that we will need 70% of our final annual income in retirement. The financial services industry has promoted 80% for reasons that are self-evident. The Journal article by Dan Arierlt and Aline Holzwarth challenges these assumptions and correctly observes that all of us whether going through divorce or not, can actually do the necessary homework ourselves. It can be uncomfortable work, but it is highly necessary work.
Realize first that many of us are being forced to pull down retirement assets long before we expect. That can be caused by unusual life events or even something as simple as being terminated while a loan is outstanding on one’s qualified retirement plan.
The starting point is to look at what retirement mechanisms are out there. Social Security is the most ubiquitous and the same issue of the Journal contains an article debating the merits of taking that benefit at 62 in contrast to normal retirement (roughly 66) or deferring to age 70. Then some of us still have defined benefit plans or annuities, which will begin to provide monthly income for life. Finally, we turn to the defined contribution accounts, whether IRAs, 401k’s or 403B plans. With these accounts, the question revolves around how and when to draw. The goal of that game is to die while still solvent although an increasing number of Americans are dying in significant debt.
The Journal article notes and we have observed that many people launch into retirement having lost their regular salary but acquired an additional 8-10 hours a day on their hands with not much to do. Many of us dream of time to golf or attend the theater. Golf is a $40 a day activity. Broadway is a bad example, but the average ticket is over $100. Still want to see your pro sports team live? Baseball $40 a day. Pro football is Sunday only but $172 for the ticket alone. Most of us do not really consider downsizing things like auto purchases and we now have 365 days a year to visit Florida in winter or friends and family the rest of the year. In short, we have witnessed clients who retired at 65 with $700,000 in retirement who seem to think they can maintain a $6,000 a month lifestyle. They can, so long as they don’t plan to live more than 10 years.
The article encourages people to actually wander into the weeds of these mundane daily costs while acknowledging that things like uncovered medical and long-term care expenses are unknowable given the state of our health care system. But, the article does not pay sufficient attention to what I will call the “core expenses” Will you retire with a mortgage and if so when will it be retired? Can you really afford to live in the home you have grown to love and nurtured with 30-40% of your pre-retirement household income? The answer may be yes but the price may be a golf membership or the annual pilgrimage to the seashore. People don’t like to make these choices but you risk burning through your retirement too quickly unless you assess costs. Keep in mind as well that as you grow older, some things you do yourself like mowing lawns or cleaning windows and gutters will have to be outsourced unless you want to budget for some inpatient rehab when the hip breaks.
The other area not discussed but an area of high vulnerability for retirees is unbudgeted “child needs.” As attorneys, we have seen divorce clients who had large portions of their savings dispersed to subsidize a child’s drug rehabilitation, criminal defense or creation of a new business enterprises, built more upon hope than expectation. Their children have effectively made a once secure retirement far less secure. The parents providing these resources underwrite these or even more frivolous expenses (e.g., family vacations), ignoring the fact that as retirees, they have no ability to replace spent assets.
The electronic version of the article links to an Excel spreadsheet that identifies expenses by categories. Anyone contemplating retirement needs to look at that budget. A similar one can be found on the Pennsylvanian support rules by clicking on Income and Expense Statement.
Retirement is an uneasy subject especially in a world where the vagaries of employment may leave us retired long before we expect. But we need to look carefully at a day when we cannot replace what we consume with additional labor. And, in my world, we also deal with taking a retirement that might comfortably support two people in one household, which becomes stretched beyond normal limits because divorce has now taken a common resource and demanded it support two independent homes. The truth is that we are living a long time; a fact underscored by watching 106-year-old Roberta McCain bury her octogenarian son. Therefore, whether you are enduring a divorce or just thinking about your future, those thoughts need to focus on what you will need in the years ahead and how you will “mind the gap.”