Dividing Assets & Property in a Bucks County, PA Divorce Case – 5 Pitfalls to Avoid
Contrary to what many people may think, extensive court involvement is not required to resolve equitable distribution and alimony issues in divorce or separation cases in Bucks County, PA. In fact, it is possible to address everything without ever stepping foot inside a courtroom. Property settlement agreements (also known as marital settlement agreements) are a great way for parties who are separating or divorcing in Pennsylvania to settle such divorce-related issues amicably and to their mutual satisfaction. Without proper legal counsel, however, these agreements can be just as detrimental as a poorly-prepared court appearance, because they are just as binding as a court order issued by a judge; in fact, they typically become court orders at some point in the process. Following are five of the pitfalls people should avoid when drafting such agreements:
1. The Importance of Specifying a Timeline (Who Pays What, When)
“Husband shall pay a lump sum of $15,000 cash to Wife.” Husband has to pay a lump sum of $15,000 cash to Wife – simple enough, right? Maybe not. When does Husband have to pay the $15,000? When the agreement is signed? Within 10 days? At any point in the future? According to this wording, and absent some catch-all provision elsewhere in the agreement, Husband pays Wife whenever he wants. Timing is not an issue when a party to an agreement is simply keeping an asset or liability in one’s own name, but it is a crucial issue when it comes to transfers of assets or liabilities between parties. Setting up timelines forces parties to act efficiently to satisfy the terms of the agreement, and if a party does not comply with the timeline, then the other party does not have to wait until far into the future to get that to which he/she is entitled and/or seek court intervention to force a timeline that makes sense within the context of the agreement.
2. Division of Assets (Post-Tax and Pre-Tax)
Consider the following simple distribution in a divorce matter in Bucks County: Wife keeps $100,000 from her 401(k) and gets $200,000 from the parties’ joint savings account, totaling $300,000. Husband gets $200,000 from Wife’s 401(k), by way of a tax-free transfer pursuant to a QDRO, and gets $100,000 from the parties’ joint savings account, totaling $300,000. Get more information about tax implications in high-end divorce cases in Bucks County, PA.
Is this a true 50/50 division of assets, or did someone get a better deal? The parties may have thought that they were effectuating an equal division of assets, but Wife got a much better deal than Husband did. Two-thirds of Wife’s share of the marital estate is comprised of funds from the parties’ joint savings account, which are post-tax funds. As the parties have already paid taxes on these funds, they are the equivalent of cash. Two-thirds of Husband’s settlement is comprised of funds from Wife’s 401(k), which constitute pre-tax funds (i.e., Wife contributed money from her paycheck, before paying any income tax). As a result, when each party goes to withdraw his or her share of the 401(k) funds at the appropriate time, he or she will have to pay the corresponding income taxes, and these income taxes will decrease the amount of cash received.
Consequently, Wife will get $200,000 cash and $100,000 minus income taxes, whereas Husband will get $100,000 cash and $200,000 minus income taxes. Furthermore, there is the related issue of liquidity. Nothing prevents either party from withdrawing funds from the savings account. The 401(k) account is a different story. Withdrawals before age 59 1/2 result in a 10% penalty, in addition to the income taxes payable regardless of the individual’s age at the time of withdrawal. There are exceptions to this 10% penalty rule, but the default is that the penalty stands. Therefore, by getting more of her settlement in post-tax, liquid assets, Wife does much better than Husband.
3. Laying Out the Details – Joint Assets/Liabilities
“The parties jointly own the residence located at 123 Newtown Avenue in Doylestown, Pennsylvania. The parties agree that said residence shall be Husband’s sole and separate property. Furthermore, the parties agree that the mortgage shall be Husband’s liability.”
Pursuant to this section of the agreement, Husband gets the residence and responsibility for the mortgage; but what about all of the other logistics? To Husband’s detriment, Wife is not obligated to sign the deed transferring the residence into Husband’s sole name, so technically, her name can stay on the deed indefinitely, thereby preserving her ownership interest. To Wife’s detriment, Husband is not obligated to refinance the mortgage into his sole name, so Wife stays financially liable for the mortgage. While the agreement makes the mortgage Husband’s responsibility, it does not make it his sole responsibility. Therefore, if Husband does not pay, Wife may have a difficult time arguing that she should have no responsibility, especially since her name remains on the deed as a joint owner. Further, the real world (i.e., the mortgage company) certainly would hold Wife liable for Husband’s failure to pay the mortgage, causing damage to her credit rating.
Additionally, the fact that Wife is still on the mortgage may prevent her from qualifying for a mortgage on a new residence or a loan on a new car, because the mortgage debt counts against her debt to income ratio. When parties do not consider the logistics of dividing joint assets and debts, they may remain financially connected long after separating or divorcing.
4. Ensuring Your Property Settlement Agreement Accounts for Contingencies
“Wife shall retain the residence located at 123 New Hope Street in Buckingham. Within 90 days of the execution of this agreement, Wife shall refinance the mortgage on said residence into her sole name. Upon Wife’s successful refinance, Wife shall pay to Husband a lump sum of $45,000, representing his share of the equity.”
Consider the following hypothetical: 20 days after the parties execute the agreement, Wife loses her job and is unable to qualify for the refinance. Because Husband gets his $45,000 upon Wife’s successful refinance and Wife cannot successfully refinance, Husband is in a predicament. Once 90 days pass after the execution of the agreement and Wife still has not refinanced, Wife is in breach of the agreement, but what are Husband’s options? Can he make her sell the property? Can he make her pay him the $45,000 now, even though she has not refinanced and payment is to occur upon the successful refinance? If she decides to sell the house, is he guaranteed to receive the first $45,000?
The property settlement agreement, as written, does not provide any guidance as to any of these questions. Unless the parties reach an agreement, Husband will have to litigate the issue and take the matter to court, a process which is slow and often expensive, and the result may not be what the parties would have intended to happen had they made alternate arrangements in the agreement themselves. By leaving things to chance, the parties leave themselves open to considerable risk should things not go as planned.
5. Failing to Have Legal Counsel – Unknowingly Settling for Less
Husband has a lawyer draw up an agreement for Wife’s signature, and Wife is unrepresented. The agreement essentially states that each party keeps his/her own assets and debts but does not list the specific assets and liabilities and their respective values and balances. Husband managed both parties’ finances throughout the marriage, so Wife does not know what the parties have, but she believes the agreement seems fair and signs it.
What Wife did not know in making her fairness conclusion is that Husband had accumulated twice as much in assets and half as much in debts as she did throughout the course of their marriage. Wife tries to litigate the validity of the agreement later on but is unsuccessful, because the agreement includes a disclosure clause, which states that each party is aware of what comprises the marital estate and waives his or her right to detailed disclosure. Unless both parties truly know about each other’s finances, blindly signing an “everyone keeps one’s own” type of agreement can be an extremely detrimental decision and very possibly one that cannot be remedied later. Do not waive your rights to disclosure, unless you know what you are waiving.
In closing, a property settlement agreement can be a great option for achieving settlement, but these are some of the reasons why it may not pay to print one out from the Internet and fill it in on your own or use a “joint attorney” to draft such an agreement. Rather than receiving the settlement you think you are getting, you may only get a fraction of what you were seeking, and you only get one opportunity to do it the right way. It only makes sense to take full advantage.