If another recession is looming in 2019, it could greatly affect decision making during a divorce.
It has been nearly a decade since the Great Recession. Since then, the U.S. economy has rebounded and then some. Unemployment is at record low levels, and people were finally starting to breathe easier about their financial circumstances.
But economists will tell you that recessions are cyclical and follow periods of strong growth, like the one we have recently enjoyed. It is likely another recession looms ahead. It could be mild or it could be more serious.
During the last recession, so many couples came to my office making decisions about their divorce to try and avoid financial hardships. Divorces during a recession can be different. Here are some thoughts based on my experiences.
Financial Strains Make Decisions for Divorce During a Recession More Difficult
Unemployment puts a tremendous strain on any marriage. Often it was the catalyst or the “final straw” and divorce was the result. Divorce itself is financial straining. Add a recession to the mix, and the circumstances were catastrophic for everyone.
First, homes and other real estate had lost value. It meant in many cases couple had negative equity – they owed more than their real estate was worth. Sometimes people could afford a buy out allowing them to keep the house if credit was available. But in the last recession, banks became stingy about lending. People simply could not get loans to refinance the house.
So there were many couples who made the decision to defer sales—meaning they co-owned their real estate until a later time. Divorcing couples might even choose to live together in the family home even after legally divorcing, because there was no other option without losing money on the sale.
If a couple couldn’t make any of these options work. the alternative was to sell the home in a bad market. When this was the last resort, there were many short sales.
Others suffered from foreclosures on their property. Often bankruptcy wasn’t far behind.
Kids Take A Financial Hit
Couples would disenroll their kids from private schools, or take them out of expensive extracurricular programs like sports or music to save costs.
Health insurance was a big deal. If a spouse lost work and lost health insurance coverage from their former employer, couples might end up bearing the cost on their own, putting strain on their family. Sometimes a spouse in the role of full-time parent was counting on healthcare coverage from the working spouse. But after a divorce during a recession, they would face being cut off.
People who divorced prior to the recession suddenly found themselves unable to pay their monthly support payments, and would fall behind. The ex-spouse and the kids suffered from losing the income. Tensions would flare and fights over money would affect co-parenting relationships.
Gray Divorce Offers Unique Financial Issues
Divorcing close to your retirement date introduces new considerations, especially in tough economic times.
For divorcing couples close to retirement, which started being referred to as “grey divorces,” their retirement accounts including IRAs and 401(k)s tanked right before they had to count on them for income. This is hard enough when married, but when a couple splits up in their 60s or 70s, the financial hit is devastating. There wasn’t enough time to recover before retiring.
It’s hard to determine whether divorce rates increased or decreased during the last recession. One theory is that financial strains on marriages caused more couples to divorce. But it’s also possible some people chose not to divorce during a recession because they just couldn’t afford it.
Impact of Impending Recession on Your Divorce
It’s my belief recession is inevitable, and not too far off. For couples contemplating divorce during tough financial times, economic decisions will affect many aspects of their lives during a divorce.
Divorce is hard enough on a family. Divorce affected by a financial recession is even worse. If divorce during a recession becomes inevitable, people can lessen the financial burden by pursuing mediation and other no-court options. These options give people the opportunity to divorce for less money. They also allows couples to find creative solutions when dividing financial assets, figuring out ways to pay for their children’s education, or preserving retirement funds.
The idea of the “Gavron Warning” came from the case In Re Marriage of Gavron, (1988) 203 Cal.App.3d 705, 250 Cal.Rptr. 148. In this case, the parties separated in 1976 after a 25 year marriage. Subsequently, the court ordered the husband to pay $1,100 per month of alimony. He did so until 1981, when he asked the court to reduce support to $550 and then terminate entirely after one year. This initial request was denied.
However, the husband tried again in 1986. This time the court ordered that support would continue for five months and then terminate. The wife appealed and reversed the trial court’s order. The appellate court held that because the wife was not warned in prior orders to become self-sufficient, she could not be penalized years later because the court did not tell her to make efforts. In essence, as the court argued, the failure to focus her on the expectation to become self-sufficient meant that the court could not cut her support now.
Because of this case, the courts will frequently issue a warning to the supported spouse. Here is an example of a Gavron Warning:
“NOTICE: It is the goal of this state that each party will make reasonable good faith efforts to become self-supporting as provided for in Family Code section 4320. The failure to make reasonable good faith efforts may be one of the factors considered by the court as a basis for modifying or terminating spousal or partner support.”
Supporting Spouses will want the Gavron Warning included
So, the lesson for support payers is to make sure that the court includes such language in the spousal support order. If it is not, it may be harder to reduce income later if the supported spouse refuses to make good faith efforts to become self-sufficient. When I am representing a support payer, I always ask the judge for a Gavron Warning and I almost always include it in written stipulations. I will also sometimes simply file and serve a written Gavron Warning to the supported party myself at the beginning of the case so that there is no question that the supported party has been warned.
The supported spouse will likely rather not have the Gavron Warning included, but it is hard to oppose it
When I am representing a supported spouse, naturally I will not bring the Gavron Warning up. However, if opposing counsel wants it in an order, there is no legal basis to resist it. The moral for the supported spouse is not to count on the alimony as a permanent means of support.
I frequently refer the supported spouse for vocational counseling to assist with re-entering a career. I get as much alimony as I can, but encourage the prudence of planning for self-reliance. After all, no one knows for sure what the future holds. Not only could the support payer try to reduce alimony, it could simply terminate by means of death. Any changed circumstance such as unemployment or disability could force a reduction or termination in support too. The best advice is to use the support as a life preserver to stay afloat in the short run, but take steps immediately to be ready for when the support may no longer be available.
The general rule is that divorce is a personal expense and is not deductible as a business expense. United States v. Gilmore (Gilmore I) (1963) 372 U.S. 39. So the short and easy answer is, “No.”
However, don’t despair. There are still some ways you can get a break from some of those fees.
Here are some exceptions to the general rule:
Fees to obtain alimony or taxable pension distribution.
If you are a spousal support or alimony recipient, you can deduct those fees relating to obtaining taxable spousal support or a taxable pensions distribution. (See I.R.C. 212(1); Treas Reg. 1.262-1(b)(7); Wild v. Commr. (1964) 42 T.C. 706. So, those fees that you spend with your attorney to get spousal support from your ex can usually be deducted. Don’t forget, the fees for getting your share of a pension distribution may also be deductible.
Tax planning or advice.
The costs of tax planning or advice are deductible. I.R.C. 212(3). We family lawyers tend to shy away from giving anyone tax advice because we are, for the most part, not tax attorneys or CPAs. There are plenty of sites such as can be found at https://www.taxrise.com/free-tax-consultation/ that offer you a free tax consultation if needed. However, there can be certain occasions as you are planning your divorce or legal separation that your attorney is able to give you some tax advice. (For example, tax advice about dependency exemptions, deductibility of spousal support payments, post-divorce real estate transfers, etc.) When that happens, the associated fees can be deductible.
Capitalize.
Even if the fees for your divorce lawyer aren’t deductible, expenses can often be capitalized. Serianni v. Commissioner (11 Cir 1985) 765 F.2d 1051, 1985 CFLR 2892. Talk to your CPA about how this can be done.
Below the line.
Now these aren’t the greatest of deductions because they are below the line. But every little bit helps… right?
Talk to your lawyer early!
If you are interested in deducting some of your legal fees on your taxes, it is important that you have a conversation with your family law attorney early so that (s)he knows to keep track of your fees and what portions may be deductible. Typically, your attorney can give you a letter at the end of the year indicating what portion of your fees was, for example, associated with the collection of alimony. Usually, this so-called “allocation letter” sent by the attorney to the client will suffice as sufficient proof of the deduction to satisfy the IRS. Goldaper v. Commissioner (1977) T.C. Memo. 1977-343, 36 T.C.M. 1381, 1979 AFLTR 1110. However, if your attorney doesn’t know that you will want to claim this deduction, you will put him in the difficult and awkward position of trying to recreate his records. It’s better that he knows from the outset so that (s)he can keep better track.
As with every tax question, it’s a really good idea to talk it over with your CPA. The rules can be complex and there are limitations. However, with a little diligence, you may save some money at tax time.
Kate and William have no prenup! I don’t know how things work in Britain, but according to California law, any assets currently owned by William or later to be inherited would be his separate property and not subject to division in the event of a divorce anyway. Perhaps William simply doesn’t need it. Of course, alimony is a whole other story. Read the Article at HuffingtonPost
