It has been 2+ years in the making, but cooler heads have finally prevailed, and settlement of the divorce is on the horizon. The agreement has been drafted, revised back and forth multiple times between the attorneys and is just about ready for finalization and signing. It is tempting to get the agreement signed as soon as possible because who knows if your spouse will change their mind or, maybe, the Court is breathing down everyone’s neck to either settle or start the upcoming trial in two weeks. But, have the potential pitfalls been adequately vetted? Do you know where those pitfalls may lie? It goes without saying that it would be an unfortunate and stressful scenario to receive a tax bill from the IRS for tens of thousands of dollars that was never contemplated in the divorce agreement.
One simple solution to achieving a restful night of sleep post-divorce is to take full advantage of outside professionals who have relevant expertise in the pitfall areas of the settlement, whether it be corporate transactions, taxation (personal or corporate), real estate, retirement account division or finance, to name a few. The cost of getting this advice, which may be as quick as a phone call or a one-hour consultation, is well worth the price and peace of mind, and may ultimately cost pennies in comparison to the unintended costs that could result from willfully ignoring or being blind to the shortcomings of the language in your agreement.
By way of example, assume a non-titled spouse is to be bought out of the titled spouse’s business, which includes relinquishing and transferring a small minority interest in the business back to the titled spouse. The tax-free distributive award payment will be $500,000. Seems straightforward enough. But what if the corporate transfer documents that are signed at the settlement closing characterize the minority transfer as a sale or redemption of the minority interest? What happens if the titled spouse makes the distributive award payment through the business instead of personally? The non-titled spouse may unwittingly be subjected to capital gains tax on the transfer of the minority interest and a portion of the distributive award may be deemed proceeds of the sale of this interest. Receiving advice from a qualified corporate attorney and/or tax attorney would be invaluable in drafting safeguards into a divorce agreement or the corporate transfer agreement.
Similarly, many divorce agreements equitably distribute interests in defined benefit pension plans. Again, seems simple enough. However, if the attorney is not fully aware of the countless nuances of the particular pension, they may fail to address the various options and elections that are available to the alternative payee (non-titled) spouse which would preclude taking advantage of same after the divorce agreement is signed. It is important to ensure that the agreement properly addresses pre and post-retirement survivor benefits, or whether the benefit will be a shared or a separate benefit for the non-titled spouse. Even if the attorneys are knowledgeable enough to add these provisions, do they know if the language they utilized will be deemed acceptable to the very particular rules of the pension plan (since the rules vary greatly from plan to plan and from financial company to financial company)? This can lead to irreparable consequences for the alternate payee. Retirement and pension benefit professionals are an invaluable resource to help navigate the minefield of pension distribution and in many instances, they will provide the specific terms and provisions to be inserted into the agreement to ensure the best outcome. Again, the cost for this advice is a pittance compared to the potential damage from faulty or missing language in the agreement.
The foregoing are just two of the many pitfall areas that may be present when finalizing a divorce agreement. The same concerns exist when negotiating other marital agreements as well, such as prenuptial agreements. If the intention of entering into a prenuptial agreement is to circumvent future litigation, it may be sensical, for example, to enlist the services of a forensic accountant to assist the attorneys in drafting specific provisions governing how to value a party’s business interest in the event of divorce. This could avoid years of litigation, with dueling forensics, at a cost of tens of thousands of dollars to both parties upon divorce.
It is critical that you have an attorney who can recognize potential trouble in the negotiation and drafting phase of a divorce agreement. From there, if an issue requires non-legal expertise and knowledge to assure the protection of the client, it is best to hire a professional who specializes in the area of concern. For a fraction of the cost, the end result will be peace of mind for both the client and the attorney, which is priceless.