Articles Posted in Financial Issues in Divorce

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Confusion still reigns with respect to the tax treatment of spousal maintenance for Illinois divorce cases. I still see other law firms discussing online spousal maintenance (support) using the old rules.

In Illinois, spousal maintenance (also known in other states as alimony) is generally not tax-deductible for the payor nor taxable income for the recipient. This change came into effect due to the Tax Cuts and Jobs Act (TCJA) of 2017, which significantly altered the tax treatment of spousal support (maintenance)  nationwide.

Under the TCJA, for divorce or separation agreements executed after December 31, 2018, maintenance payments are no longer deductible by the person paying the maintenance and are not considered taxable income for the person receiving it. This change applies to federal taxes and, in most states including Illinois, state taxes follow federal guidelines on this matter.

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A few years ago, I tried a lengthy case in Will County, Illinois that ended up on appeal on a few key issues. One of these issues is that at trial, I put in evidence and argued that the small company owned by the parties should have its retained earnings considered as marital property, insofar as the practice of this husband and wife company had been to distribute the retained earnings out to themselves as dividend income. While the trial judge held that they were part of the valuation of the marital business, the appellate court agreed with my approach, and ordered that the retained earnings be considered a cash asset of the marriage. This ruling was a significant financial win for my client, and my case ended up clarifying an area of Illinois law and was cited nationally on the following principle: retained earnings in a closely held corporation can be found to be a marital asset (outside of the value of the company itself) subject to distribution in the divorce.

Retained earnings in a small corporation refer to the portion of the company’s net income that is not distributed to shareholders as dividends but rather kept within the company for reinvestment in its operations or for other purposes. Essentially, it’s the cumulative amount of profits that the company has retained since its inception, minus any dividends paid out to shareholders. Retained earnings are an important asset class in an Illinois divorce with a closely held company.

Retained earnings can be distributed to the shareholder(s) as a 1099 dividend, and many owners of small companies use retained earnings for this purpose. These dollars can also serve as a source of funding for various activities such as business expansion, research and development, debt reduction, or building up cash reserves. They are an important indicator of a company’s financial health and its ability to reinvest in itself for future growth.

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One aspect of my practice is to deliver high level legal skill to my clients, while at the same time optimizing their outcomes in a cost-effective manner. Divorces don’t need to cost an “arm and a leg.”

Divorce can be emotionally and financially taxing for all parties involved. While the emotional aspect might be harder to mitigate, there are several strategies to save on the cost of divorce:

  1. Mediation: Consider opting for mediation instead of litigation. Mediation involves a neutral third party who assists in facilitating discussions and negotiations between spouses to reach mutually acceptable agreements. It’s often faster, less adversarial, and less expensive than going to court.
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In my practice, much of the emphasis on this blog is placed on complex child custody litigation, and how to manage these difficult issues with child custody litigation.  Yet, in some of my cases along with child custody issues there can be significant financial issues and division of property issues. One issue that sometimes arises is the valuation of a family owned business, or the valuation of a percentage share in a corporation our group of companies.

With certain exceptions  all property acquired during marriage through the time, skill and efforts of either spouse is considered marital property. The disposition of property is governed by Section 503 of the Illinois Marriage and Dissolution of Marriage Act (IMDMA). Under Illinois law, all property acquired by either spouse during a marriage is presumed to be marital property.

A business begun by one spouse after the date of marriage and before physical separation will need to be divided in a dissolution proceeding, and if you and your spouse cannot agree on its value it may need to be evaluated by an expert.  Under the IMDMA the Court can appoint its own expert to advise it about financial issues in a case, but more typically each arty will retain a CPA-level expert to determine values in the business and property interests, and then be available to testify at trial (if necessary) regarding the values that the Court should determine in a marital estate.

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For the decades that I have been practicing Family Law/Divorce/Child Custody, I have always endeavored to deliver good value for the money spent on legal fees. Aside from keeping my hourly rates at a moderate level so that they are affordable for all clients, I also have some pride in the fact that my Firm really works to manage the cases aggressively and at the same time, cost effectively.  With this in mind, I thought I’d post some suggestions on how clients can help keep legal costs down in a contentious divorce:

Here are 7 ways to save on divorce costs:
1.  Try to maintain some measure of BIFF (Brief, Informational, Firm and Friendly) communication with your spouse over children’s issues. Use Our Family Wizard or similar platform. When all communications go through lawyers, the costs go up.
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I can say that most of the calls to my firm involve significant and complex child custody issues, many involving psychological issues or parental alienation concerns. Yet, it is still very important for my practice to focus on financial issues in divorce, as well.  Issues concerning support calculations, and valuation issues of real estate and/or business are an important and essential part of the practice.  I spent a few years, along with my law school training, in MBA school as well. These years of the study of accounting and finance have proven beneficial in the practice of Illinois Divorce Law.
A case I tried some years ago made its way to the Appellate Court in Illinois. The case was ultimately brought to the Illinois Supreme Court, which decided not to address the Third District Appellate Court’s decision in Marriage of Liszka.  I tried the Liszka case before a Will County judge, and it was a barnburner, involving both child custody issues and financial issues including the valuation of a closely held business worth in the millions of dollars.
Part of my approach with the trial court in that case was to ask the Court to not only value the retained earnings in the business as marital property, but as these retained earnings had not been part of the valuation of the business, that the Court should distribute the marital earnings to the parties as a cash distribution of marital property.  The trial court declined to do so. Fortunately, because the case was tried with some expectation that the court might make some mistakes in its judgment of the case, I tried the case with an eye that the decision of the court would be appealed.
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Reading up today on divorce planning, the reminder was made that the summer is often the time that many people postpone thoughts of divorce. The reasons for this are many. Business during the summer with activities takes the attention away from difficult subjects like divorce. For many parents, it’s just enough making sure that the kids are having a good summer, and that summer trips or vacations are being taken before the kids go back to school.

Even if you are already decided that you wish to file for divorce, there are a number of things that you can do to make the eventual decision easier. None of these steps are disruptive, and the you and the children will enjoy the summer without thoughts of disruption or change. Here are a few themes to focus on during the summer:

1. Understand your financial position. It’s important to have access to financial records during the divorce process. It can be helpful to try to assemble as much of this information as is possible, so that when you meet with our office. we can have a general discussion of financial planning in the divorce process. Take a look at in order to review the form that is now universally used in Illinois divorce cases as a guide for the lawyers and judges is assessing the financial condition of the parties.
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One of the pleasures of my practice in managing only Family Law cases (primarily divorce and child custody cases, and post decree problems with financial and child related issues such a modifications to custody or support orders) is the opportunity to meet with some really fine, caring, and interesting people, and help them navigate through their family issues, develop strategies that work, and to offer some effective approaches to their complex issues, based on years of my experience in this work managing complex divorce and post-decree cases successfully.

What are some good questions to ask during an initial consultation?  My approach is to take time in these first meetings, to listen carefully, and to provide solid recommendations that are both effective and potentially game-changing, along with cost effective approaches so that my clients are not affected by high legal costs. Being highly effective, and cost-effective, is a longstanding hallmark of my approach.

What are good questions for a client to ask during an initial consultation with a lawyer? : 

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One aspect in my practice that I have always been proud of is the fact that I have never pushed anyone to file for divorce when I believed that a divorce was not in their best interests.  I have met with some younger married spouses, disillusioned by petty arguments. and disagreements over finances, and I have often referred them first to see a marriage counselor or a financial planner to try and sort out the immediate stressful issue, and to work to preserve the marriage. In other words, a good Family Lawyer makes a good assessments of a family, and counsels clients correctly and carefully.

Today, I write with a good reason to consider starting a divorce as soon as is possible, for couples that need to separate and divorce for appropriate reasons.  The new tax bill recently signed into law has created some tax advantages for some taxpayers, but for couples divorcing the long-established ability to deduct spousal maintenance payments ( also known as alimony in some states) is being ended.  Illinois has a new maintenance statute that is a fixed formula for many divorcing parties, and it has always been the case that even with the new formula the tax advantage of the decuctibility of the payments has helped create settlements that work for both parties. My assumption is that when the legislature created the new maintenance statute, the deductibiity of maintenance was a factor in the way the formula was developed. The formula itself is already a bit heavy handed for the payor spouse (child support numbers tend to be lower, maintenance numbers much higher), and now with the loss of deductibility, new approaches will need to be taken in creating equitable support amounts. The excerpt below is from a financial planner’s article:

“Before new tax bill, alimony payments paid to a former spouse were treated as a tax deduction for the payer and income to the recipient. The payer received an above-the-line deduction, which decreased taxable income dollar-for-dollar by the amount paid. The recipient had to include the alimony payments as income, thereby increasing their taxable income by the amount received. As a result, income was often shifted for a recipient in a lower tax bracket, resulting in lower combined taxes paid.

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My law practice has been distinguished over the years by being a prominent advocate for parents and children, especially when there are complex and difficult clinical issues involved in child custody matters. Having been a member of the American Psychological Association for over 15 years and following the seminars and literature on clinical issues in divorce and custody practice, I have tried to make a difference in this area of law and practice.

Yet, having been in my law school’s joint JD/MBA program, and being a student of accounting and finance, along with membership in divorce financial planning associations, I take a keen interest in the financial and valuation side of divorce practice as well. Occasionally, there are some big wins: the recent case of  In re Marriage of Liszka, 2016 IL App (3d) 150238 – Illinois Courts

is a case that I tried (over many weeks of trial)  that resulted in a very positive appellate decision for my client, along with having the law in Illinois on retained earnings in divorce clarified.  Said the appellate court:

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