Does Your Settlement Agreement Address Contingencies?
Lots of people separate and divorce without complex assets. The typical case involves a home with equity; cars and other personal property; retirement plans; and (hopefully) some investment accounts. Most of those assets can be readily valued. And in smaller cases the fight over whether the distribution should be 50/50 or 60/40 can often be consumed by the cost of the fight. So, more couples are opting for mediation or doing their own distribution on the kitchen table and looking for on-line resources to help “write it up.”
Seems like a plan, right? Let’s assume a dual income couple in good health and relatively equal earnings decides on a 50/50 split. Only one party can keep the house so there will have to be a cash payment and that suggests a refinance of the home. Cash may also be necessary to true-up the cars and other personal property. Then, there is a risk that if the right procedures aren’t followed, any retirement asset transfers will trigger a tax bill at ordinary rates + 10% penalty.
We recently spoke with a colleague whose client had mediated a settlement. The resulting property settlement agreement was quite direct. Husband kept the house but was paying a significant amount of cash. Then there was a retirement rollover to balance the two portfolios. Easy enough…..until it wasn’t.
Like many estates, there wasn’t enough money for husband to pay wife the cash due to keep the house. So, a refinance was clearly required. Unfortunately, husband had retired. That usually means no commercial lender is going to find him creditworthy. No one had thought about that. In deals like, the right to keep a house is often the lynchpin of the agreement. Yet here, we have money due and nowhere to finance the payment. It might be possible for the husband to draw from his share of retirement and use those funds to pay wife the cash due. If retired, he is probably old enough to draw without penalty but now he is taking out a lump sum that he hoped would continue to be invested and increase in value and it will probably be taxed at 22-24% based on today’s marginal tax rates.
The trouble in this case is that husband is doing nothing. The date the payment was due was not specified. Under general contract principles, where no time is specified the money is due immediately. But nothing is happening. Wife can file to enforce the agreement. The problem the court faces is that the agreement doesn’t speak to the issue. The Divorce Code provides a remedy under Section 3502(e). It can order husband to sell the property and that is likely to happen unless other sources are discovered to pay. But a judge is going to be asking: “Why wasn’t this addressed in the agreement?” And the absence of that detail can slow the process down.
What was needed. Clear language stating:
- When the lump sum payment was due.
- If refinance was necessary, how long husband had to secure that.
- If payment was not made or refinance under way “on time” when and how would the property be listed for sale. “How” would need to incorporate the price at which the property would be listed and might even address price reductions at reasonable intervals. That can get tedious. But realize that most people who negotiated to keep a house are not anxious to sell.
Yes, the devil lives in the details and all too often people know that details can get “icky” and blow up a divorce settlement. But this why you want any agreement to be reviewed by a lawyer who understands these transactions, including a little bit about re-fi lending practices. Wherever there is a payout, there needs to be attention paid to guarantees and/or triggers in the event of default. We like to think that all people enter into contracts ready and able to comply. History has taught us that is not always the case.
Another common “hole” of discontent relates to families that have funds in UTMA/UGMA or 529 college savings accounts. The throw away phrase found in many agreements just says the funds will be used for the child. To be clear an UTMA account is a different animal than a 529 plan. Unfortunately, the common element of both plans is that only one adult can be registered as the owner. And people who find out that their kid has no money for college because the custodial parent spent the funds on sports camps or frivolities don’t respond well when they learn of it. On this topic the 529 is a safer bet because non-qualifying distributions are taxable. But, unlike the UTMA account, the deposits held in the 529s are clearly the sole property of the person who established the account.
These are issues that shouldn’t require attention but they do. Ask any spouse owed money on a re-fi that didn’t get over the financing fence or any child who has an admission letter to college but no funds to pay.