New Hampshire Family Law Blog : New Hampshire Divorce Lawyer & Attorney : Crusco Law Firm : Family Law, Custody, Child Support : Manchester, New Hampshire, Massachusetts

In November, I authored an article on same-sex marriages in the New Hampshire Bar News geared towards helping practioners understand unique issues in same-sex divorces. I reprint here the full article:

Practicing family law in one of the six states that recognizes same-sex marriage requires an understanding of the unique challenges that same-sex couples face in a divorce. Usually, a divorce provides a mechanism to dissolve the legal relationship, divide property and establish parental rights and responsibilities. Although same-sex couples can dissolve their marriage in New Hampshire, reaching a fair and reasonable property division or establishing parental rights and responsibilities is much more difficult.

Marriage & Divorce

New Hampshire practitioners have limited precedent to guide them on several thorny issues that are distinctive to same-sex couples. Ironically, one of the few cases involving same-sex relationships, which is still good law, is now inconsistent with the state’s recognition of same-sex marriage. In the Matter of Blanchflower held that adultery does not include homosexual relationships. The court based its decision on the definition in New Hampshire of adultery, which excludes all non-coital sex acts, no matter the gender of the persons engaging in the act. Thus, although other fault grounds may be pursued, adultery is off the table for same-sex divorcing couples. The Blanchflower Court noted that it was not the function of the judiciary to extend past legislation to provide for present needs.

A common dispute in same-sex divorce is the calculation of the length of the marriage. In cases where the parties’ cohabitated long term prior to the marriage, one party may attempt to tack on the cohabitation to increase the length of the marriage and impact alimony and property division. This argument stems from the claim that had the parties been able to marry, they would have. Without New Hampshire precedent, the court may look to Massachusetts for guidance, where the Massachusetts Supreme Judicial Court has held that marriage benefits apply prospectively to the legalization of same-sex marriage. In addition to the cohabitation argument, the question also remains whether domestic partnerships, like those in California or New Jersey, might be similar enough to a marriage to tack on and create a long-term marriage.

Alimony

The IRS identifies alimony as payments made between spouses or former spouses pursuant to a divorce or separation agreement. Typically, alimony is deductible to the payor and includable as income to the payee for federal income tax purposes. However, the Defense of Marriage Act prohibits the federal recognition of same-sex marriages, and in turn precludes the IRS from recognizing a same-sex spouse as such. Although the IRS has not provided specific guidance on the issue, it seems clear that alimony payments are not tax deductible to the payor and may incur a gift tax liability. The IRS might alternatively consider the payments compensation for past services, with income tax, self-employment tax and possible withholding obligations. Either treatment will incur tax consequences that could be financially devastating to the family.

Property Division

In "traditional" divorces, opposite-sex couples rarely invokes tax consequences during the division of their marital assets. Such property transfers meet specific IRS exemption rules. Same-sex couples on the other hand can be saddled with a large tax liability as a result of property division.

The Defense of Marriage Act disqualifies same-sex spouses from the tax exemptions for property transfers made pursuant to a divorce decree. Instead, same-sex couples incur a gift tax liability for most transfers made between the spouses or former spouses in excess of $13,000. For example, if one spouse transfers $30,000 to the other spouse for property settlement, $17,000 would be taxable. In addition to gift tax, same-sex couples must be aware of capital gains tax when the home is transferred from joint ownership to one spouse.

A specific part of property division is the ability of a spouse to transfer property to a spouse or former spouse by qualified domestic relations order (QDRO) pursuant to the federal Employment Retirement Income Security Act (ERISA), a portion of a retirement plan or tax sheltered annuity. The tax treatment of such transfers depends on the word "spouse." In other words, in order to qualify for the tax-free transfer benefits, the relationship must be recognized by the IRS as a marriage. Under the Defense of Marriage Act, which defines marriage as between a man and a woman, a QDRO is not a vehicle available to same-sex couples to transfer retirement assets tax-free. Instead, same-sex couples must pay taxes and early withdrawal penalties on transfers made to the other spouse, regardless of whether it is deposited into the other spouses’s retirement account.

Parental Rights & Responsibilities

New Hampshire follows the legal principal that a child born into a marriage is presumed to be the legal child of both spouses. This presumption of legitimacy may be attacked however, and if successful could drastically affect the non-biological parent’s right to seek parenting rights and responsibilities, including residential responsibilities. Although the step-parent statute might be a useful tool in this circumstance, the parenting rights accessed through this avenue could look much different than the rights of a legal parent. Co-parent adoption is the safest way to establish protected parenting rights for each spouse.

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A few years ago when the real estate market was booming, divorcing spouses had little issue refinancing with cash out to buy out the other or selling the marital home and dividing a tidy profit. Times have changed, and today, the issue is often what to do with a sinking ship. The Union Leader has published several articles lately about short sales and foreclosures, and the differences between the two.

First, there is a distinction between a homeowner being short and a short sale. A homeowner is short when he owes more on his mortgage to the bank than a sale can procure. A lender must agree to the sale of a property at a price that is less than what is owed. A short sale occurs when the closing of the property has happened.

A foreclosure, on the other hand, is the process where the bank takes your home when you have not been able to keep up with the mortgage payments. Foreclosure has a dramatic and lasting effect on credit scores, dropping scores by as much as 300 points.

If you are in the process of divorce, and your home has little to no equity, there are certain issues that you and your attorney need to keep in mind. If both spouses are borrowers for the mortgage, how will one spouse refinance to remove the other spouses name from the mortgage? Lenders are reasonably cautious about lending over 80% of the value of a home. If the home cannot be refinanced, and will be placed on the market for sale, what will happen if the home is short? Will the spouses need to come up with the money at the time of the sale, or will they negotiate a short sale with the lender? A carefully drafted proposed order or agreement will make sure that you are protected in the event of each possibility.

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During a divorce, the tax consquences of a settlement often take a backseat to heated issues such as parenting rights and asset division. However, tax consquences can have a very big impact on the outcome of a case and are an important factor to consider.  Attorney Jason C. Brown of Brown Law Offices, P.A. posted an informative piece on his Minnesota Divorce and Family Law Blog with tax tips for divorcing couples. Attorney Brown suggested the following issues to consider during a divorce:

1. Child Support. Child support is not income to the recipient and is not deductible for the payer. Keep this in mind if your spouse is seeking alimony. Child support payments that they receive are not taxable and, as a result, increase their net income each month dollar for dollar. As a result, the "need" of your spouse will be diminished and you may be able to argue that their imputed gross income exceeds their gross pay coupled with untaxed child support.
2. Alimony. Alimony is income to the recipient and is deductible for the payer. High income earners can reduce their taxable income by paying alimony. If your spouse's tax bracket is low, the government winds up picking up the tab for a good share of the alimony obligation.
3. Sale of Homestead. The sale of the marital homestead usually does not involve a taxable event. Capital gains (up to $500,000) from the sale of your marital homestead are not taxable if you've lived there for two of the last five years. Nor is a transfer of title to the residence, allowing your spouse to keep some or all of the equity. Many couples opt to forego alimony payments in, instead, pay a disproportionate property settlement to their spouse. In other words, they "buy off" alimony by giving a larger share of home sale proceeds, or equity, to their spouse. The result? No tax implications for either. Ideal for alimony recipients in a high tax bracket.
4. Filing Status. The status of your marriage on December 31 of the relevant year determines whether you file as single or married. If you are divorced by that date, you file as single for the entire year. If your case appears to be coming to a close near the end of the year, best to speak with a tax preparer about the consequence of holding up at bit or expediting matters. We find that courts are usually willing to facilitate bringing matters to a close by the end of the year if tax implications in doing so are substantial.
5. Dependents. While the law provides that the custodial parent is entitled to claim the relevant dependency exemptions, most couples agree to share them. Offering a non-custodial parent the right to claim the dependency exemption under the condition that their child support is current at the end of the relevant tax year provides them with incentive to keep current with payments.
6. Child Care Credit. Custodial parents who incur work-related child care costs can deduct up to 30% of the cost. It is for that reason that the child support guidelines usually require a custodial parent to assume responsibility for a greater share of daycare expense.
7. Liabilities and Refunds. Taxes owed, or refunds received, are usually treated as "marital" and are, therefore, split equally among the parties. In the heat of the moment, some spouses will intercept a tax refund and cash it without the other's knowledge. All funds must be accounted for and it is likely that if they do so their share of the final property settlement will be reduced proportionately. Because income is "marital," a tax liability is a shared responsibility.
8. Attorney Fees. Any fees paid to a lawyer for tax advice are deductible. Ask your attorney for to break out all billable time devoted to tax issues and you can save big.

A good family law attorney will point out these and other issues to consider during your divorce. It is also important to discuss your divorce and the tax consquences of any settlement with a knowledgeable accountant.

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As foreclosures are on the rise, many homeowners are seeking alternatives to protect their credit and move on. One such alternative is a "short sale." A short sale is when the costs of selling the home (i.e. realtor's commission, transfer taxes) and the mortgage payoffs are greater than the proceeds received from the sale. The seller must then either bring funds to the closing to complete the transaction, or work out a deal with their lender to accept less than the amount due on the mortgage.

A recent posting from Barbara Strapp Nielsen on the New Jersey Law Blog titled Short Sales When Loans Exceed the Value of a Home provides insight and analysis on this topic. Attorney Nielsen writes:

Unless a homeowner is able to pay off all of the mortgages which are secured by his property, the homeowner will not be able to convey good title to a buyer.  If the homeowner is unable to obtain a sales price which enables him to pay off all loans and closing costs, and he does not have the funds to make up the difference, then he may want to try to obtain approval from his current lender(s) to accept an amount less than the full amount due on its mortgage.  For a lender, this may be acceptable to obtain repayment of a substantial amount of its loan and to avoid the costs and delay of foreclosing on the loan.  This will generally mean that the Seller will not receive any funds from the sale of his home.

In order to obtain such approval from a lender - which may or may not be granted - the homeowner needs to contact his lender(s) to determine what information they will need to make their decision.  This usually includes a financial statement of the homeowner, copy of a contract of sale, appraisal, and other pertinent documents.  Generally, a lender will not consider approving a short sale without a clear economic hardship on the part of the homeowner and an existing default or pending foreclosure.

Until recently, forgiveness of a debt under these circumstances, could trigger a taxable event according to the IRS.  This means that if a lender forgave a part of the mortgage debt by accepting a reduced amount in full satisfaction of the loan, then the amount forgiven could be deemed taxable income to the homeowner.  This was so even though the homeowner received nothing from the sale.  However, in December 2007 Congress passed the Mortgage Forgiveness Debt Relief Act of 2007.  This Act amends the Internal Revenue Code to exclude from gross income amounts attributed to a discharge of indebtedness incurred to acquire a homeowner’s principle residence.  The amount of the debt forgiveness can be up to $2.0 million.  Thus, a homeowner is now able to sell his home for less than what is owed on it without incurring an additional tax liability.   This exemption for forgiven debt, however, is only temporary and expires within three years.

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Reports of the housing crunch are all over the Internet, the newspapers and the television. Here in New Hampshire, foreclosures are on the rise. In 2007, banks foreclosed upon 2,000 New Hampshire property owners, and foreclosures are expected to reach 3,000 for 2008. As of the 2007 fourth quarter, 18,000 New Hampshire loans had past due payments.

What can you expect if you are in the process of divorce and one of the thousands of New Hampshire property owners experiencing trouble making your mortgage payments? The court has jurisdiction under NH RSA 458:16,I (h) to order the sale of the home only if the party residing in home does not have sufficient financial resources to pay the debts and obligations of the property in a timely manner. These debts and obligations include the mortgage payments, taxes, insurance and ordinary maintenance of the home. However, the continuing decline in the housing market can spell trouble for divorcing couples who are trying to stay afloat even when the parties agree to list the home for sale or the court orders the home to be placed on the market. According to the New Hampshire Association of Realtors, home sales in Hillsborough County New Hampshire have dropped 26.8% and the median home price has dropped 7.8%. Although these numbers have not seen as drastic a drop as the national numbers, divorcing couples in New Hampshire need to be prepared to sell at lower prices after a longer stay on the market.

For more information about the current New Hampshire housing market, Laura Knoy recently hosted a program on NH Public Radio that can be found here.

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