A New Take on Divorce and Taxes
With tax season right around the corner many of us have taxes on the brain, and according to a new opinion issued by the S.J.C., so too must the Probate and Family Court Judges in Massachusetts.
The decision issued by the S.J.C on February 8, 2013 holds that a judge must consider the potential tax consequences in writing divorce judgments or considering modifications of those judgments. The decision does not require judges to do their own tax analysis, but instead holds the when a judge is provided with “appropriate evidence” relating to tax consequences that evidence must be considered.
L.J.S. vs. J.E.S.
“Our conclusion that a judge should consider the tax consequences of a judgment when creating or modifying divorce instruments comports with the statutory mandate to consider the parties’ income and liabilities. … Our conclusion should not be taken to mean the judge must minimize tax consequences as a result of those considerations. The judge has ‘considerable discretion’ to make those determinations. …
“… Where, as here, the tax consequences are uncertain, the judge must take that uncertainty into account and consider whether there are alternatives that will accomplish the judge’s purposes but avoid the potential that his decision will trigger adverse and unwanted tax consequences.
“Given our conclusion, a judge, in his or her discretion, should consider the possible application of I.R.C. §71(c)(2), and explore whether the objectives of the judgment can be met in a manner that does not create an uncertainty of potentially unfair tax consequences.”
How this Changes Things
This new law does not change the legal landscape much, but what it does do is bring the issue of taxes treatment and consequences to the forefront of many family law attorneys and judges’ minds. In this case the husband was looking for a modification of the original divorce judgment, but with proper planning some of these tax issues might have been avoided.
As a family law attorney I understand how expensive divorce can be, so I understand why clients are reluctant agree to allow me to hire a C.P.A. to do a tax treatment analysis, but the most recent decision issued by the S.J.C. shows just how important that analysis can be to the litigants and Judges considering your case.
Judges and lawyers are not tax professionals. We do our best, but clients would be best served by hiring a C.P.A to do a tax analysis of any potential settlement agreement or to present evidence to a judge at trial. A tax analysis can also be beneficial in maximizing the income available to a family in the future.
The economic reality for most families going through a divorce is that there are or will be two households living on the same income one household previously subsisted on, and if a family can save some money with creative tax strategies everyone will benefit.