Tax Reform Bill Puts Alimony Deductibility on the Chopping BlockNovember 3, 2017
Hidden deep within the proposed Republican tax bill entitled the “Tax Cuts and Jobs Act” (Sec. 1309, Pages 122-126) published yesterday is a scarcely publicized provision that eliminates the long-standing tax deductibility of alimony payments. While this prospective provision will impact agreements/judgments entered after January 1, 2018, the provision, if adopted, amounts to a significant paradigm shift in the way that alimony payments have been treated by both the payor and payee. Those individuals currently in negotiations and practitioners should be aware of this possible legal landscape change. If adopted, it is unknown how this would impact alimony and child support calculations going forward. To view the entire bill, please click on the attached hyperlink: https://waysandmeansforms.house.gov/uploadedfiles/bill_text.pdf
Palimony Statute Ruled Constitutional Comes as no SurpriseAugust 3, 2016
A recent Chancery Division case upheld New Jersey’s new palimony statute as constitutional. The fact that the court upheld the palimony law as constitutional was not surprising, but it did confirm the shift away from the prior case of Devaney v. L’Esperance which held cohabitation was not necessary for a palimony claim and reinforced the requirement that palimony agreements be in writing. The case also criticized the Plaintiff for her frivolous claims and may serve as support for awarding sanctions in future cases where a plaintiff attempts to utilize creative arguments to circumvent the palimony statute.
The Plaintiff in the Chancery Division case of Lee v. Kim brought a suit against her ex-boyfriend and the Attorney General of New Jersey alleging a palimony claim and that the new palimony statute violated her rights to equal protection, privacy, and due process under the Constitution. Ms. Lee filed her suit after the conclusion of a two year relationship with Dr. Kim. Since the parties began dating after the enactment of the palimony statute, Ms. Lee’s claim for palimony was subject to the requirements of the statute; that the agreement be in writing and that the parties to the agreement be represented by counsel. However, Ms. Lee and Dr. Kim never entered into a written agreement. Therefore, Ms. Lee’s complaint for palimony was based solely on alleged oral promises made by Dr. Kim. The court denied each of Ms. Lee’s constitutional arguments and ultimately dismissed her complaint with prejudice.
The Lee v. Kim decision reflects the trend in family courts to limit protracted litigation and make valuable court time available for other cases. Today, with the shortage of judges in many of the family courts, access to a judge to determine issues such as palimony is limited. The court in the Lee matter dismissed Ms. Lee’s case on the papers without oral argument. The decision also sharply criticized Ms. Lee for wasting time and money with her frivolous palimony litigation. Many judges are reluctant to critique a lawyer’s creative litigation decision, so the opinion in Lee makes clear that courts are unwilling to indulge cases such as this and stands as a warning to other plaintiffs and attorneys.
Are Trial Court’s Prohibited From Suspending Alimony Upon Cohabitation?May 3, 2016
Matrimonial settlement agreement alimony termination clauses are one of the most highly negotiated provisions in a divorce proceeding. Often, the parties negotiate a provision that provides for the “termination” of alimony when the supported spouse cohabitates with an unrelated adult. In consideration cohabitation “termination” post-judgment applications, many trial courts enter awards which “suspend” alimony obligations during the period of cohabitation. This type of suspension order was often without prejudice which would permit the previously supported spouse to seek the reinstatement of alimony if/when the cohabitation ended.
On May 3, 2016, the Supreme Court of New Jersey in Quinn v. Quinn declared that such a suspension remedy may be impermissible. In that case, the Court analyzed a marital settlement agreement which included an express provision that terminated alimony upon cohabitation. After finding that the agreement was entered by fully informed parties represented by independent counsel and without any evidence of overreaching fraud or coercion, the Court reversed the trial court’s equitable remedy of suspending alimony and ruled as a matter of law that the trial court was required to apply the remedy of termination as fashioned by the parties in their marital settlement agreement.
In so doing, the Supreme Court has now instructed all trial courts to enforce the express language of the property settlement agreement when there is no ambiguity in the provision. Simply, the court ruled that if the language is clear and unambiguous, the trial court must enforce the agreement as written unless doing so would lead to an absurd result. In so doing, the court found in Quinn that the parties agreed to the circumstances that would terminate the alimony obligation by contract, to wit: cohabitation = termination.
From a practical matter, this ruling will have a significant impact in the way that cohabitation clauses and property settlements are negotiated, drafted and presented to trial courts on a going forward basis. In representing your clients, such a provision should receive close scrutiny before being included in a marital settlement agreement.
Sometimes Honesty is Still the Best PolicyApril 15, 2016
In the recently published decision of Taormina-Bisbing v. Bisbing, the Appellate Division examined the effect of a non-relocation agreement on a subsequent request by one parent to relocate to another state.
The case involved a relocation application, which is what a primary custodial parent files when he or she want to move out of state with the children. These cases are generally governed by a case called Baures v. Lewis, 167 N.J. 91 (2001). Under Baures, the moving party must first show there is a good faith reason for the move. Then, they must demonstrate the move will not be “inimical” to the child’s interests. There are 12 factors a court must assess in conducting a Baures analysis, but overall it’s a relatively easy standard to meet. A non-custodial parent seeking to relocate with the children is subject to a different standard. Because he/she is essentially asking the court for a change in custody, the request is determined by conducting a “best interest of the child” analysis. This is a much more difficult standard.
The parties in Bisbing separated in August of 2013. A few months later, the Wife began a long-distance relationship with man residing in Utah who had children from a previous marriage. The parties eventually entered into a Marital Settlement Agreement (“MSA”) in March 2014 and were divorced in April 2014. In their MSA, they agreed the Wife would have primary residential custody of the parties’ 8-year old twin girls on the condition that she would not relocate out of state. She also agreed to give the Husband “broad reasonable and liberal parenting time”.
One month after the divorce, the Wife informed the Husband she was quitting her job to become a stay-at-home mom (which she did). About eight months later, she called the Husband and told him she was marrying her significant other from Utah and asked for his consent to relocate with the children. The Husband refused and the Wife filed a motion. Without conducting a plenary hearing – which is usually required in relocation cases – the trial court found in favor of the Wife and allowed her to move to Utah. The Husband appealed. The Appellate Division reversed and remanded the case back to the trial court with a roadmap for a plenary hearing.
First, the trial court must determine whether the Wife negotiated the MSA in bad faith. In other words, the court must first decide whether the Wife knew of her plans to move to Utah when she was negotiating the MSA. If the Wife knew, she essentially manipulated the situation to obtain residential custody so her removal application would be subject to the more favorable (Baures) standard. Under such circumstances, the Court instructed, the Husband would have to be restored to the position he was in before the Final Judgment of Divorce. The trial court would then apply the best interest standard and make a new determination on the issue of custody. This would force the Wife to prove it would be in the children’s best interest to stay with her and move to Utah.
If, however, it is found that she did not negotiate in bad faith, the trial court should next consider whether the Wife proved a substantial unanticipated change in circumstances warranting avoidance of the agreed-upon non-relocation provision in the MSA. This would trigger a Baures analysis, which would require the Wife to show only that moving with the children is not inimical to the children’s interest.
The Bisbing decision does not necessarily clarify an ambiguous issue or create a new test or standard to be applied in relocation cases. However, the Appellate Division did openly acknowledge a somewhat harsh reality of the laws of this State: once a parent obtains primary residential custody, it’s much easier for him or her to obtain an Order permitting an out-of-state relocation (since the burden would be placed on the parent who wants to stay in New Jersey to show that removal/relocation is against the children’s interests). Matrimonial practitioners should take time to explain this to clients and ask more questions regarding future plans when negotiating settlement agreements. Moreover, although it’s still not entirely clear where to draw the line, this case seems to suggest that a party who knows or strongly suspects circumstances are likely to change soon after an agreement is signed, may later be accused of “negotiating in bad faith”. Therefore, it is important for a party to disclose any intentions he or she may have of moving out of state, marrying, etc., prior to signing an agreement, as these major events typically constitute a change in circumstances warranting a modification of custody/parenting time, alimony/child support, or even equitable distribution.
How Will Retirement Affect Your Award of Alimony? Well, That All Depends...April 1, 2016
As previously reported, in the Fall of 2014 Governor Christie signed into law an alimony reform bill that substantially amended several provisions of the existing alimony statute, N.J.S.A. 2A:34-23. Among other changes to the law, there is now a rebuttable presumption that alimony terminates once an obligor spouse reaches full retirement age, i.e., 66 years old. N.J.S.A. 2A:34-23(j)(1). This means that in cases where a payor spouse retires and wishes to terminate alimony, the burden is on the recipient spouse to demonstrate that alimony should continue. Previously, it was the payor spouse’s burden to show a change in circumstances warranting a modification or termination of alimony. The statute also expressly provides that the amended law does not apply retroactively. In other words, the law applies only to alimony awards in divorces entered after the effective date of the new statute – September 10, 2014. Unfortunately, this language caused controversy and confusion among matrimonial practitioners, who argued over whether the rebuttal presumption of subsection (j)(1) applied to all matters – including those filed before the statute was amended. A recent reported decision addresses this precise issue.
In Landers v. Landers, the Appellate Division was asked to clarify the application of the newly-enacted amendments in cases where an obligor retires and seeks a termination of alimony. In the Landers case, the parties were divorced in 1991 – long before the alimony reform bill was passed. Defendant-husband was required under the Judgment of Divorce to pay alimony to his ex-spouse, which he faithfully paid for over 20 years. After retiring, the husband filed a motion to terminate alimony. The recipient-wife opposed the application and filed a cross-motion seeking continuation of alimony.
Ruling in favor of the husband, the trial court terminated alimony, finding the wife had failed to overcome the presumption under N.J.S.A. 2A:34-23(j)(1) that alimony terminates when a payor attains full retirement age. The wife appealed, arguing the recent statutory amendments did not affect the terms of their divorce judgment, which was entered before the effective date of the amended statute. The Appellate Division agreed, finding “the particular language used in subsection (j)(3) clarifies the Legislature’s intent to apply (j)(1) only to orders entered after the amendments’ effective date.” In reversing, the Court held:
Unlike other amended provisions of N.J.S.A. 2A:34–23, subsection (j) distinguishes alimony orders executed prior to the amendment’s effective date and those executed afterwards. See N.J.S.A. 2A:34–23(j)(1), (3). Therefore, this unambiguous legislative directive governs a court’s examination of alimony modification requests arising when an obligor retires, depending on the original date alimony is awarded. [. . .]
In sum, the Appellate Division found that based on the date of the parties’ Judgment of Divorce, the trial judge improperly followed the statutory provisions of N.J.S.A. 2A:34–23(j)(1), which incorrectly placed the burden of proof on the recipient-wife, rather than the husband, and also omitted the necessary analysis of important applicable factors.
The Landers decision provides important guidance to trial courts when examining requests to modify alimony in cases of retirement; the analysis all depends on the date alimony was originally awarded. Section (j)(1) applies in cases where alimony was awarded after September 2014. This section establishes a rebuttable presumption that alimony will terminate upon the obligor spouse reaching full retirement age, and places the burden on the recipient spouse to demonstrate why alimony should instead continue. Alimony orders that predate the 2014 amendments are governed by Section (j)(3), which contains a different standard and places the burden on the payor spouse to demonstrate that modification or termination of alimony is appropriate.
Does a Change in Minimum Wage Equate to a Change in Circumstances?February 9, 2016
There has been a movement throughout the country to raise minimum wage and New Jersey joined the discussion on February 3, 2016 when Assembly Speaker Vincent Prieto and Assemblyman John Wisniewski announced their plan to introduce a bill seeking to raise the state’s minimum wage to $15 per hour. If passed, an increase to minimum wage could have significant effects on alimony and child support calculations across the state.
In calculating child support and alimony, judges are given the discretion to impute income when either parent is voluntarily underemployed or unemployed. In these cases, the court can look at the individual’s salary history, estimate his or her earning ability based on the New Jersey Department of Labor Statistics, or impute an amount equal to full time employment at minimum wage. In the 2015 version of the New Jersey Court Rules, minimum wage was set at $8.25 per hour for 40 hours per week or $17,160 per year. If the minimum wage is raised to $15 per hour, the annual wage will rise to $31,200, almost double the previous imputation.
While the bill would affect future alimony and child support calculations, it also raises the question as to whether it would trigger a change in circumstance argument for previous support awards that were based on the old minimum wage. Recipients of support based on imputation may have an argument to return to court and impute the payor’s income at $31,200 in order to receive an increase in their alimony or child support. Although speculation suggests that the bill is unlikely to pass, any raise in minimum wage can affect support calculations based on imputed income and should be considered when calculating awards.
Gnall v. GnallAugust 11, 2015
Recently the New Jersey Supreme Court issued the opinion, Gnall v. Gnall, deciding whether a fifteen year marriage constitutes a marriage of long duration thus requiring permanent alimony. Family law practitioners were waiting for the outcome of Gnall to determine whether the recent amendments to the alimony statute would apply to pending cases filed prior to the amendment. Under the amendment to New Jersey’s alimony statute, permanent alimony was completely removed from our lexicon. Rather, under the law, trial courts are permitted to award open durational alimony for those marriages that last longer than 20 years (or in the case of exceptional circumstances in marriages that are shorter).
While the decision could have opined as to the application of the new alimony statute to pending cases (as discussed in prior blogs), the Supreme Court dismissed this issue in a footnote by simply stating that the new alimony law was not applicable to Gnall. By demoting this issue to a footnote, the Court failed to guide attorneys as to why the amendment is not applicable to the Gnall case. Thereafter, the Court dedicated its decision to analyzing and establishing the standard that lower courts should adopt when determining whether to award permanent alimony over limited duration alimony. In light of the new alimony statute, this decision was seemingly obsolete before it was issued.
So what do we learn from Gnall? The Supreme Court made it clear that the length of the marriage factor contained in the prior alimony law cannot be improperly weighed over the other factors when deciding to award limited duration alimony over permanent alimony. Perhaps the Court is subtly providing practitioners with guidance for an argument when addressing future awards of alimony including whether exceptional circumstances exist in cases where the marriage lasted less than 20 years. While the Court explicitly rejected bright line rules, it will be interesting to see whether the Gnall decision will prove useful for future cases under the amendment or if courts will defer to the statute when analyzing the length of the marriage and the award of open durational alimony.
Alimony Amendment Signed by GovernorSeptember 22, 2014
New Jersey has joined states across the county and amended its alimony statute with Governor Christie signing the bill into law on September 10, 2014. New Jersey's amendment is part of a growing trend to modify alimony laws to reflect changes in how families and marriages operate. As more families consist of two working parents as opposed to one parent staying home to raise the children, laws are also changing with the times. States are moving away from the concept of permanent alimony and recognizing the need to cease or modify alimony upon retirement. Some sates, such as Massachusetts, have modified their alimony laws to create a more formulaic approach to the alimony calculation by focusing on the length of the marriage and the income of the parties. New Jersey's amendment fell short from making such a strict modification.
The current amendment went into effect immediately. However, if you currently have an alimony order in place, the new amendments will generally have little or no impact on you. However for anyone who has an alimony award decided after these new laws go into effect the amendments will apply. The changes represent a compromise between the alimony reform movement and the need for some flexibility in determining alimony awards. For example, the amendment eliminates the term "permanent alimony" replacing it with "open durational alimony" which now can only be utilized in marriages lasting 20 years, unless there are exceptional circumstances. This particular modification while on its face appears to present an opportunity to limit the duration of alimony awards for long term marriages; it is likely to lead to litigation over the meaning of open duration and whether exceptional circumstances should apply. Since the statutory amendments have yet to be tested in courts, law will certainly develop further defining these terms. On the other hand there may be a significant impact on alimony awards going forward for older couples. The amendment creates a presumption that alimony will terminate upon the payor reaching retirement age, which at present depending on when you were born, is 67 years of age. This new retirement provision should streamline the process of terminating or modifying alimony that previously required costly motions or even hearings. The presumption can be challenged in court and again could lead to litigation over whether there are circumstances present to overcome the presumption. Importantly, the amendment simplifies the process of terminating or modifying alimony when the payor becomes unemployed or when the payee beings cohabitating with another individual. Under prior case law, both proceedings placed significant burdens on the party seeking the modification to cease or decrease alimony. Although untested, the new law strives to create and efficient standard, assisting judges on otherwise complex and fact specific issues. Current, Brach Eichler's family law department is representing a number of clients and cases where these issues will be at the forefront of negotiations, mediations and trials. Certainly, we will gain first-hand expertise and insight into this reform and how it will impact our clients.
How New Alimony Statute will Effect Millennials and Generation XSeptember 19, 2014
The alimony reform movement aligns with the changes in family dynamics in Millennials and Generation X. Couples are entering marriage later in life after completing secondary education and beginning their careers. The new alimony laws reflect these changes and recognize that upon divorce, the spouses are not necessarily on unequal ground with regard to earning capabilities. The notion that one partner requires support for life is becoming antiquated in generations where women outnumber men and colleges and universities. That being said, some new laws contain a formulaic approach to the alimony calculation, which removes a courts ability to analyze the unique circumstances of each family to determine fair and equitable awards. The extent to which the new law will affect future alimony awards is unknown, but they will certainly require skilled counsel to assist clients in understanding the changes and how they might be applicable to their particular case. The new law has implications for younger adults that are marrying and may now require planning at the outset with the use of premarital agreements and other mechanisms to ensure ongoing support in the event of divorce. Brach Eichler's family law department stands poised to assist anyone dealing with a matrimonial controversy or is planning to marry and can assist with questions and concerns involving how these sweeping new changes may affect them.
How to Protect Assets with New Alimony StatuteSeptember 16, 2014
With the growing trend to modify alimony laws, partners who live in a marriage where the other party earns substantially more may need greater protection through prenuptial agreements. There is no longer a guarantee that the supported spouse will be supported for life, and upon divorce they may be surprised to learn just how short in duration their alimony may be. While a prenuptial agreement provides some protection, at the end of the marriage the supported spouse may need to consider relief such as a higher share of equitable distribution, a portion of the retirement accounts, and rehabilitative alimony to cover education and job training. This may put greater importance on seeking rehabilitative alimony for the supported spouse. Rehabilitative alimony is awarded based upon a plan in which the payee shows the scope of rehabilitation, the steps to be taken, and the time frame, including a period of employment during which rehabilitation will occur. The payee may also seek reimbursement alimony, which may be awarded under circumstances in which one party supported the other through an advanced education. Although the amendments appear to have made it easier for the payor spouse to retire and stop or modify his or her alimony payment, the payor must also consider protecting assets to ensure their stability upon retirement. With the reform there will be new challenges for divorcing couples depending on whether they are the paying spouse of the supported spouse. The extent to which the new law will affect future alimony awards is unknown, but they will certainly require skilled counsel to assist clients in understanding the changes and how they might be applicable to their particular case. Brach Eichler's family law department stands poised to assist anyone dealing with a matrimonial controversy or is planning to marry and can assist with questions and concerns involving how these sweeping changes may affect them.
New Alimony Statute SummarySeptember 11, 2014
On September 10th, Governor Christie signed a bill into law that has made significant changes on how alimony is awarded in New Jersey. The amendment follows a growing trend across the country to modify alimony laws to reflect changes in how families and marriages operate. Although the amendment made considerable changes to the prior law, of most importance is the removal of permanent alimony as an option for courts and makes modifications to the requirements for decreasing or terminating alimony upon retirement, job loss, or when a former spouse cohabitates with another adult. The following is a quick summary of the important changes:
The statute removes the term "permanent alimony" replacing it with "open durational alimony." Although this modification does not make any changes to the actual duration of a current alimony award, the alimony statute now includes provisions that alimony will not last longer than the duration of the marriage in marriages that lasted twenty years or less. For longer term marriages over 20 years, Court's still have discretion to decide the duration of the alimony.
Unlike prior case law, the statute includes a presumption that the payor's obligation to pay alimony will terminate upon reaching retirement age as defined under the Social Security Act, currently 67, if the payor was born after 1959. This provision lifts a significant burden that previously required costly motions and hearings.
The statute now includes standards for modifying or terminating alimony upon unemployment. The amendment breaks down the standard for those who are self-employed and not self-employed.
Lastly, there is now a standard for terminating alimony when the supported spouse begins cohabitating. Similar to retirement and unemployment, this modification simplifies a process that was previously overly burdensome.
Unfortunately, the amendments do not affect existing alimony orders or awards, but will certainly affect pending cases and cases filed in the future. Brach Eichler's family law department stands poised to assist anyone dealing with a matrimonial controversy and can assist with questions and concerns involving these sweeping new changes.
Compromise Bill Amending New Jersey’s Alimony Laws Proceeds to GovernorJuly 1, 2014
In an update to our earlier blog posts tracking the efforts underway in the New Jersey State Legislature seeking to amend New Jersey’s alimony laws, the New Jersey Legislature approved a combined compromised Bill that will modify New Jersey’s existing alimony statute imposing limits for alimony awards and modified the factors to be considered by the Court when awarding alimony.
The amended bill eliminates the phrase “permanent alimony,” from New Jersey’s statutes and establishes the term “open durational alimony.” The amended bill likewise establishes durational limits on alimony for any marriage of less than 20 years in length. For these marriages, barring exceptional circumstances, the length of any alimony award shall not exceed the length of the marriage.
Under the amended bill submitted to the Governor’s office, the Court must now consider the impact of both parties’ need for separate residences and the ability for both parties to maintain a standard of living reasonably comparable to the standard of living established in the marriage, “with neither party having a greater entitlement to that standard of living than the other.”
The amended bill likewise enumerates specific grounds for the modification and termination of alimony when the obligor retires, loses a job or otherwise faces a reduction in earnings, or when the obligee enters into a cohabitation relationship with a third party. Under the substitute legislation, there would now be a rebuttable presumption that alimony shall terminate upon the obligor reaching full retirement age, as defined by the federal Social Security Act. Furthermore, when a non-self employed obligor is terminated from his employment, the amended bill provides the Court with the power to modify an award of alimony, directing the Court to consider the circumstances surround obligor’s loss of employment and its impact upon both parties to the marriage.
Finally, the amended bill provides the Court with the power to suspend or terminate alimony if the payee cohabitates with another person. To establish a finding of cohabitation, the amended bill directs the Court to consider factors, such as (1) the frequency of contact between the oblige and the third party, (2) whether the obligee’s finances have become intertwined with that third party and shares responsibility for living expenses and chores and (3) the recognition of the relationship in the couple’s social and family circle. Notably, the fact that the supported spouse does not live together with another person is not, in itself, grounds to find that cohabitation does not exist.
The amended bill, which passed both the State Assembly and the State Senate, now heads to the Governor’s desk for signature. Stay tuned for further developments.
New Jersey Supreme Court Hears Argument on Palimony ClaimMay 5, 2014
Today, the New Jersey Supreme Court held oral argument in Maeker v. Ross, the test case for the 2010 amendments to the Statute of Frauds governing "palimony", which is a form of support arising out of contractual obligations between adults who were never married. Originating over thirty years ago in Kozlowski, palimony has been recognized in New Jersey. However, since that time, palimony has received significant criticism especially after the Supreme Court recently held that cohabitation was not essential for a palimony claim.
In response to this palimony backlash, the New Jersey legislature amended the Statute of Frauds to state that any agreement to support an individual in a non-marital relationship must be in writing and both parties must have independent legal advice in order for the agreement to be enforceable. N.J.S.A. 25:1-5(h). The Amendment was adopted on January 18, 2010, but it did not make clear if it would apply retroactively to oral agreements made prior to that date.
Maeker is the first case to test this issue before the New Jersey Supreme Court. In Maeker, the parties allegedly entered into an oral agreement whereby one party promised to support the other for life. The oral agreement was entered into prior to January 18, 2010 but was allegedly breached after the Amendment was adopted in July 2011.
Although we will have to wait for a final decision, the arguments and inquiries from the Court suggested a prospective application, meaning parties with oral agreements originating prior to 2010 may still have recognizable palimony claims. The Court expressed concern regarding the Amendment's usefulness if it can be circumscribed by equitable remedies such as partial performance, but also expressed reservation about applying the law retroactively and the potential constitutional ramifications of invalidating oral agreements created prior to the Amendment. The final decision may be months away, but individuals currently living under oral agreements may face risk if they are currently operating under an oral agreement or if they did not retain counsel to draft the agreement.
Agreement Provision Linking Spousal Support Payment to Children's Education Invalidates Alimony DeductionApril 17, 2014
April 14th is a tough day for most Americans as we rush to complete our taxes, but it was especially difficult for Allen H. Johnson because the Tax Court ruled that his alimony payments were not deductable because under the Tax Code they constitute child support.
Like most divorced spouses who pay alimony to their ex-partner, Mr. Johnson deducted his alimony payments on his tax return and his ex-wife included the payments as gross income on hers. Under the Tax Code, a payment is alimony if made in cash and:
- The payment is received by a spouse under a divorce or separation instrument;
- The divorce or separation instrument does not state that the payment is neither includible in gross income nor allowable as a deduction;
- The payor and payee spouses are not members of the same household when the payment is made; and
- The payment obligation terminates at the death of the payee spouse and there is no liability to make either a cash or a property payment as a substitute for the payment after the death of the payee spouse.
Johnson v. Comm'r, T.C. Memo. 2014-67.
Mr. Johnson's separation agreement with his ex-wife complied with the Tax Code requirements for alimony, except it failed to take into account the definition of child support under the Code. Under I.R.C. § 71(c)(2) support subject to "contingencies involving [a] child" are considered child support. The spousal support for Mr. Johnson's ex-wife would terminate upon the occurrence of several events, one being their youngest child's graduation from high school. This contingency qualified all spousal support as child support under the tax code despite the fact that Mr. Johnson was paying separate child support. The Tax Court held that the intent of the parties does not apply, only the specific requirements of section 71.
Many settlement agreements include language detailing when alimony will terminate, and often the termination date centers around events involving the children. Although the parties may intend the date to be used merely as a reference, or are factoring in the payee's ability to return to work after the children reach a certain age, the IRS will not take these factors into account for tax purposes. It is important that parties understand the tax implications of their settlement agreements because the consequences can have far reaching effects.
Alimony Reform - Where is Alimony Going in New JerseyNovember 22, 2013
The state of permanent alimony in New Jersey is currently in flux with arguments on both sides regarding alimony reform.
After a push by private citizens to abolish permanent alimony, a bill was introduced, A3909, seeking to eliminate permanent alimony for marriages lasting 20 years of less and effectively eliminating all permanent alimony by creating a presumption that support will terminate upon the payor attaining the age of 65. The bill also proposes tiers of support, for example, if the marriage lasted 5 years or less "the term of alimony shall not be greater than one-half the number of months of the marriage.
Then, in a decision made this summer, the Appellate Court ruled that a 15 year marriage was long term, thus justifying an award of permanent alimony. In Gnall v. Gnall, the lower court awarded limited duration alimony to the ex-wife, focusing on the fact that the marriage lasted 15 years and the parties were 42 years old upon date of trial. The Appellate Court reversed, finding that "a fifteen-year marriage is not short term." While at first glance the decision seems to preclude the award of limited duration alimony for marriages lasting 15 years or longer, the court's decision was fact sensitive, placing weight on the inability to the ex-wife to independently achieve the same standard of living as enjoyed during the marriage.
The Gnall decision has not been analyzed in a subsequent published decision so it is unclear if it has created a hard line rule, or more of a guide for future cases, but it further fuels discussions surrounding alimony reform in New Jersey and the debate of those in favor of permanent alimony or its limitation.
We will continue to monitor the developments and supply updates in future posts.
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