Heidi Opinsky talks about divorce settlement agreements, what they are, what should be in them, whether they need to be approved by a court, and enforcement and tax effects.
John Maher: Hi, I’m John Maher. I’m here today with Heidi Opinsky. Heidi is a divorce and child custody lawyer in Connecticut and New York with over 30 years of legal experience in mediation, collaborative law, and litigation. And she represents clients on a full spectrum of family law needs. Today, we are talking about divorce settlement agreements. Welcome, Heidi.
Heidi Opinsky: Good morning.
What Is a Divorce Settlement Agreement?
John: So, Heidi, what is a divorce settlement agreement?
Heidi: That is the main document that affects any party. So if you have an agreement, obviously it’s out of court, otherwise you’d be litigating and having a trial and having a court determine your relief. So the main document that any party and the main objective to any party settling a case would be the settlement agreement. It’s also called a separation agreement, a settlement agreement, a stipulation of settlement. Those are some of the various terms that describe the same document. And that’s the main relief that you want to get to as a client and as counsel in a settlement that’s done amicably without the court.
John: Okay. And if you did end up going to court and going on to trial and you didn’t settle, the ending document that you end up with…
Heidi: Would be a decision, a decision of the court.
John: Okay. So what should be incorporated into a divorce settlement agreement?
Heidi: So, anything that is impacting your life financially, or with regard to children, or with regard to assets and division of assets, and policies of insurance or other types of policies, and assets and liabilities and income. You look at all assets, liabilities, and income then to decide how to divide up the marital estate, how to determine child support or alimony. In New York, they call it maintenance for a spouse. So when you’re deciding those main issues, which is what you need to decide when you’re divorcing someone or separating from someone, that’s what gets stipulated into the divorce settlement agreement, all the terms and provisions that will impact your life going forward.
So, for instance, one of the main issues obviously is spousal support and child support. Then the other issue is division of the marital estate and assets — who ends up with what property. In terms of taxes, who’s going to pay taxes going forward for what year. Because obviously if you get divorced before the end of the year, you can’t file joint tax returns anymore by reason of the taxing authority rules, etc. You’ll then have to file separately. So provisions about filing separately or jointly on prior returns. Or if there’s a tax assessment, who’s going to pay for it, or who’s going to get the refund. That would be dealt with in the tax section in the agreement.
So the main issues, I think, that affect most people is — if you have children — child support, obviously, and if you’re married and your spouse is a working spouse — and most people are two income families these days, but even if you’re only a one income family — you have to decide spousal support. And even if you’re two incomes, one spouse may have dramatically greater income than the other. So you could still get alimony and maintenance, spousal support, even if you’re still working but you’re not earning close to what your spouse earns.
So most agreements have a spousal support, either you’re waving it or you’re not, and how much that will be. And it’s usually paid on a monthly basis rather than a weekly basis. So someone’s not writing a check every week. That could be quite annoying after a while. So it’s usually monthly. You can also get lump sum alimony or maintenance and decide to do that. So alimony, before Trump came into office, was taxable to the recipient spouse and deductible by the non-recipient payer spouse. Nowadays, that was changed; once Trump came into office that rule was changed. So now child support is non-taxable, non-deductible, as well as maintenance and spousal support. That is no longer taxable and deductible.
But we all have agreements that pre-dated Trump coming into office and those changes in the law, so we’re still dealing as lawyers and as clients with some older agreements that still have taxable maintenance and deductibility to that aspect of the provisions in an agreement. And also some states, like Connecticut, had what’s called unallocated alimony and child support. So you could elect by your agreement, in the terms of the agreement, to elect to make it all taxable and deductible, which gives more cash into the pocket of the recipient spouse by doing that. And the reason is that the other payer spouse gets to deduct the amount of unallocated alimony and child support. But that doesn’t exist anymore. The laws may change again and come back into that cycle. Historically, laws change and go back sometimes. And that may happen. But right now, both alimony, maintenance, and child support are non-taxable, non-deductible.
John: You mentioned that you’re dealing with some people who had agreements before Trump came into office and they still have taxable…
Heidi: 2019 was the change.
John: Okay. And can you go back to one of those older agreements and change it and update it so that it becomes untaxable, or nontaxable?
Heidi: You can update them so it doesn’t, but most people want to keep it taxable and deductible. So if we do update and modify, there was some concerns by many practitioners, including myself, when this law just came into being that if you modified it, would that grandfather in the lack of taxes and deductibility. So we had to determine is the government going to honor the prior taxability. And indeed it does. So you can still continue if you modify an older agreement to keep it as taxable and deductible. But excellent question.
Does a Divorce Settlement Agreement Need Court Approval?
John: So, does a divorce settlement agreement need to be approved by a court?
Heidi: Yes. And the magic terms in most states are that the agreement and its terms are incorporated by reference but not merged into the divorce decree. And the reason for that is that when you have it non-merger, the key document remains the agreement and the terms of the agreement. If you merge the document, the main document then becomes the judgment of the court and you can lose all the terminology in the agreement. So you want to always make sure as clients that there’s non-merger.
So the agreement then becomes a document that is enforceable by a court and you can be held in contempt. So that’s the key issue. Lawyers would move to enforce the terms of the agreement and hold another party in contempt for non-compliance. And it’s not merging just to the terminology of the judgment that is also written up separately.
So for instance, in New York, as practitioners, we draft the judgements. In Connecticut, the court just approves the agreement, says it’s incorporated by reference without merger. And that’s it. You just get a one page document saying you’re divorced. Here’s the judgment. So everyone’s guided in Connecticut by the agreement and the terms. Whereas in New York, we draft our own judgements, but we also put language in, obviously, that says it’s incorporated by reference without merger. So God forbid you were a lawyer that didn’t write all the terms into your judgment that were necessary. You’re not going to be hurt by that because we all put in that catch-all paragraph, so to speak. But if you’re uncareful and someone wants to say in the document that there is merger, you could be in trouble because if it’s not written into the judgment, you’re dead. Whatever’s in the judgment controls…
John: And explain that again. What is it that you don’t want to have be merged?
Heidi: You don’t want merger of an agreement into a judgment of dissolution in New York, by example, or other states where they do have merger and non-merger language that impacts an agreement. You don’t ever want to say that there’s merger. Because then you’re left only with the bald-face judgment document of disillusion or divorce, and you lose the impact of the terminology in the agreement.
How Is a Divorce Settlement Enforced?
John: Okay. So how is the divorce settlement enforced after it takes place?
Heidi: So, it’s enforced by making a motion. It’s done on motion. And you make a motion to the court for enforcement. You set forth the terminology and the agreement that you’re seeking to enforce and you’re claiming there’s lack of compliance. And then the court will hear the motion and make a decision. And usually it includes legal fees and costs, in most cases, because there’s lack of compliance. And when there’s a default and lack of compliance, you can ask for reasonable legal fees. And most statutes in most states will allow that and permit that, as well as enforcing the terms of the agreement that you want enforcement for lack of compliance by the defaulting spouse.
John: Okay. So if your spouse — after the divorce settlement agreement is done — if your ex-spouse isn’t complying with the agreement that you made, then that’s what you have to do, is you have to make a motion…
Heidi: In court. Yes.
John: But you’re able to claim your legal fees as part of what you’re asking for in return.
Heidi: Yes, that’s correct. They determine what that is because it’s usually reasonable. And of course, think about it. Reasonable is subjective. It’s a subjective term. So the court then determines what it deems reasonable legal fees. So it’s not necessarily that you’ll get dollar for dollar back.
Tax Effects of a Divorce Settlement Agreement
John: You mentioned the tax rules changing with Trump and all that. Are there any other tax effects of a divorce settlement that people should be aware of?
Heidi: Yes. So property settlements are non-taxable under the Internal Revenue Code. So if you’re splitting a property or transferring property incident to the divorce, that’s not going to be a taxable transfer. However, there’s what’s called qualified domestic relations orders. So that deals with qualified plans, like a 401(k) or other type of qualified pensions and plans. And those are usually non-taxable on the transfer. So you get what’s called a qualified domestic relations order. It usually comes into being after the agreement and the judgment is granted by the court.
You have a pension attorney or your own attorney prepares what’s called a qualified domestic relations order, which permits segregating and dividing up a qualified plan that one spouse may have to equally divided, or usually it’s equally divided, but it could be a different percentage. It could be 20%, 50%, or some other percentage, or a number, $20,000, $30,000, $40,000 from the qualified plan will be submitted to another qualified plan that has to be set up by the recipient spouse. And that money gets moved. There’s no tax on the transfer. However, when you take it out, usually after 55 and a half, you can start possibly getting non-taxability on it. And that depends on the type of plan and what’s permitted by the plan. But usually what happens is you do get taxed when you take the money out, by the QDRO [Qualified Domestic Relations Order].
Other Aspects of Divorce Settlement Agreements
John: Any final thoughts, Heidi, on divorce settlement agreements?
Heidi: Yes, so you definitely want to put in a parenting plan or a visitation plan. You definitely want to put in who’s the custodial parent, whether it’s a primary custodial parent or a shared custody arrangement. Because that also triggers child support because the noncustodial parent pays the custodial parent child support and that’s non-taxable, non-deductible. So that certainly has to go into any settlement when you deal with children.
You want to consider, obviously, tax impacts if you are getting divorced during the tax year. You’re not going to be able to file jointly going forward. So a lot of parties will, and a lot of attorneys will rush into court before the end of the year, because they don’t want to share the taxes with their spouse anymore. So that will prevent that from happening.
John: Even if you did the divorce, like say right in the middle of or end of December or something like that, you would still have separate taxes for that year?
Heidi: Correct. It applies for the whole year. So in addition, you may have tax assessments that creep up afterwards, the government’s a little slow, doesn’t necessarily decide what it’s going to do with your tax situation that year. It could creep up and you could get an assessment 2, 3, 4 years down the road. And then, so you always want to put in the agreement who’s going to be responsible for that tax assessment. Usually the terminology is if it’s income that is earned by that party or taxed, or overstated deductions by that party, that party’s going to be responsible for the tax on their income or overstated deductions that are disallowed. And you usually want to put language in to that effect, or as a spouse you could get hit on the joint return, being jointly and severally liable for the full amount. So that’s critical language you want to put in.
Obviously, if you are paying support, the recipient spouse is going to want a life insurance policy to secure the support in the event that someone predeceases prematurely and they lose the stream of income that they were anticipating by support. So at least the life insurance policy will cover it. It’s not always dollar for dollar, but it could be reasonably close to dollar for dollar of all the aspects of the payer spouse responsibility under the agreement. You want to then get thinking about college. College can be $80,000 a year, a hundred thousand, some of these colleges — they keep creeping up — and so you want to make sure that the life insurance will cover college payments as well as the stream of support that you would get over the duration of the term of support, and you’re not going to get hurt if someone dies and then you have no more child support coming in or spousal support.
John: And so, given that there’s all of that information that you really want to have in the divorce settlement agreement, it must be very important to make sure that you have a good divorce attorney on your side who can help you draft that up and make sure that you’re getting everything that’s due to you.
Heidi: Yes. And that’s important because everyone these days hears the different models that impact a divorce, like collaborative, mediation, or the adversary model, which is you’re going to court. But you could still have two lawyers that are friendly advocates. They don’t necessarily have to sign on to a collaborative situation or a mediation.
What I find is in particular something that someone should seek to avoid is there’s no real certifications for mediation out there. So there’s a lot of psychological experts, or psychologists, or licensed social workers that think that they can write a divorce settlement agreement. They absolutely have no idea what they’re writing. And they’re out there and people go to them and they think they’re cheaper so they don’t go to the lawyer.
And they go to the social worker and the social worker thinks, “Oh, I can write an agreement up for this party.” And some of the more damaging, dangerous agreements that I’ve seen are those written by people that should not be writing divorce settlement agreements. Number one, they don’t know what is supposed to be discovered. So if they’re meeting with both parties and they’re mediating an agreement, they could just say, “Oh, is this okay? Or is that okay?” And everyone says, “Yes.” Well, obviously the money spouse who is in control of all the assets is going to try to control this.
John: Right. They’re going to hide the fact that they have all these other assets that the party doesn’t even know about or something like that.
Heidi: Exactly. And if the social worker or the mediator is a non-lawyer mediator, they won’t know what they’re supposed to look for in terms of discovery or discuss openly and transparently with both parties. So you end up with a rather shocking settlement that’s not fair or equitable. And I’ve seen that happen many times. Luckily, you’re supposed to advise the parties, “you should bring this to a lawyer to review”, review counsel. And that’s when it gets discovered that, “I don’t think you want to enter into this agreement”. But sometimes parties don’t do that. They just think, “Okay, it’s okay. I’m happy. I’m divorced. I have an agreement. I can get it ordered by the court. I don’t need to go to anyone else.” And they do, but they don’t.
John: And they’re not thinking about all of those issues that you just mentioned. Like what if my spouse dies and do they have insurance? And am I entitled to that insurance if they die? And all of those things that you just mentioned, they probably don’t even think about.
Heidi: The most important issue when you go to a mediator or a collaborative attorney, obviously, that concept is you’re going to do a friendly divorce. It’s not always possible. And you don’t usually discover that until you’re well into the process. And if the mediator or the collaborative attorney, and that could be a non-attorney mediator, as I said, it could be a social worker, it could be a psychologist, it could be a psychiatrist, if they are not doing the right discovery transparently for both sides, you’re not going to have a fair and equitable agreement. Because it’s all based on disclosure and transparency. And if the controlling spouse, who’s the moneyed spouse, controls the dialogue at the mediation or collaboration and you don’t get the right discovery, you’re not going to know whether it’s fair or equitable. So you’re going to settle on something that’s more likely than not, not fair, not equitable.
John: All right. Well, that’s really good information and good advice, Heidi. Thanks again for speaking with me today.
Heidi: Thank you.
John: And for more information, you can visit Heidi’s website at ctnydivorcelawyer.com. Or call the law offices of Heidi E. Opinsky, LLC at 203-653-3542.