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New Jersey divorce article
SIGNIFICANT
CLAUSES FOR MATRIMONIAL SETTLEMENT AGREEMENTS (By David M. Wildstein, Esq. & Charles F. Vuotto, Jr., Esq.) 2005 There
are many diverse clauses that should be included in any Matrimonial Settlement
Agreement (hereinafter “MSA”). The
determination of these clauses is fact and issue sensitive.
However, it has become apparent that certain important provisions are
often omitted, even when specifically called for by statute, rule or case law.
This article will address what the authors believe to be the most
important clauses (or grouping of clauses), under the major categories of any
MSA. Obviously, all of these
clauses may not be applicable in every case.
However, a quick review of this list before finalizing an agreement will
be helpful. INDEX TO CLAUSES I.
CUSTODY 1.
Designation of Primary and Secondary Caregiver Under Pascale. 2.
Automatic Change of Custody to Non-Custodial Parent in Event of Death of
Custodial Parent. 3.
Parental Access to Medical and Educational Information. II.
CHILD
SUPPORT 4.
Notice Provisions Regarding Child Support Pursuant to Rules of Court or
Statute. 5.
Attachment of Child Support Guidelines Worksheet and Statement Explaining
Deviation from Guidelines. 6.
Bi-annual cost of living increase and tri-annual review of Child Support. 7.
Termination of all Child Support Obligations Upon Death of Obligor. 8.
Allocation of Child Dependency Deductions. III.
INSURANCE
(LIFE AND HEALTH) 9.
Requirement that Health Care Insurance Company Make Payments Directly To
The Health Care Provider Pursuant to N.J.S.A.
2A:34-28 and use of a Qualified Medical Child Support Order (QMCSO). 10.
Life Insurance to Secure Child Support, Alimony and/or pay-outs of
Equitable Distribution. IV.
ALIMONY 11.
Alimony Basic Assumptions (i.e., present income of parties, marital
lifestyle, ability to meet lifestyle with financial settlement) Crews language. 12.
Alimony Waiver with Anti-Lepis/Anti-Crews
language. 13.
Taxability of Alimony (Meeting Requirements of I.R.C. §71(b)(1)(D)) and
the case of Gonzales v. Commissioner, 1999 WL 778531 (U.S. Tax Ct.), 78
T.C.M. (CCH) 527, T.C.M. (R.I.A.) 99, 332, 1999 RIA T.C. Memo 1999-332). Re-characterization of pendente
lite support payments as taxable. 14.
Reassessment of Rights & Obligations of Parties in Event of Change of
Tax Laws. 15.
Obligation of Obligee to Notify Obligor of remarriage or Other
Substantial Change in Circumstances. 16.
Retirement of Obligor. V.
EQUITABLE
DISTRIBUTION 17.
Security for pay-outs of Equitable Distribution (Letters of Credit, Stock
Pledge Agreement). Use of a
partnership as collateral. 18.
Refinancing joint liens to remove transferring party as obligor. 19.
Indemnification of Non-Owning Spouse for Business Liabilities &
Resignation of Non-Owning Spouse as Officer of Business. VI.
STOCK
OPTIONS & RESTRICTED STOCK 20.
Callahan Trust for Stock
Options & Restricted Stock. VII.
PENSIONS 21.
QDRO Language to Meet Requirements of Tax Reform Act of 1984. VIII.
TAX
RETURNS 22.
Filing of Tax Returns & Indemnification for Previously Filed Joint
Returns 23.
Allocation of Mortgage Interest and Real Estate Tax Deductions. IX.
BANKRUPTCY 24.
Bankruptcy Clause (Non-Dischargeability of obligation and
Characterization of Certain Obligations as “in the nature of Alimony and Child
Support”). X.
ALTERNATE
DISPUTE RESOLUTION 25.
Arbitration. 26.
Mediation (Custody & Economic). XI. CONFIDENTIALITY OF AGREEMENT PRACTICE POINTERS
I. CUSTODY 1.
Designation of Primary and Secondary Caregiver Under Pascale. 2.
Automatic Change of Custody to Non-Custodial Parent in Event of
Death of Custodial Parent. Although
N.J.S.A 9:2-5 does not provide for an automatic transfer of physical custody to
a non-custodial parent in the event of the death of a custodial parent, it is
advisable to include a specific provision in the MSA regarding this.
A sample clause follows: In the event of either party's death, the
surviving party shall immediately have sole and exclusive custody of any
children born of the marriage under the age of majority and any children shall
physically reside with the surviving party.
The surviving party specifically agrees to maintain the children’s
relationships with the grandparents and relatives related to the deceased party. 3.
Parental Access to Medical and Educational Information. Each
party (especially the non-custodial parent) should be assured of receiving
and/or having reasonable access to critical medical and educational information
of his/her children. Sample clauses
follow: Health
Related Information & Records Each
parent shall have the right to communicate with any physician, therapist or
other professional who may examine, treat or submit any reports concerning the
children. Each parent shall be
entitled to complete information from any such health care provider or mental
health care professional attending to the children for any reason whatsoever and
shall be provided with copies of any reports (whether oral or written) given by
the professional to a parent within 24 hours of receipt. Where it is not the practice of the physician to supply these
reports (oral or written) directly to both parents, the parent receiving any
relevant information shall send a copy of any and all reports or communicate an
oral report to the other within twenty four (24) hours of receipt of same. Education Information & Records Each
party shall be entitled to complete information from any teacher, tutor or
school giving instructions to the children.
Each parent shall get copies of all reports from any school which the
children may attend and for all events for which parents are invited to
participate. Either party receiving
any notices of school schedule, teacher notes or report cards with respect to
any child shall have an affirmative obligation to supply the other parent with a
copy within 24 hours of receipt. Any
verbal communications discussed with only one parent must be conveyed to the
other parent. (For example:
If a teacher tells one parent that a child is not doing well in school,
and there is no written document evidencing this, then that parent is
affirmatively obligated to tell the other parent within 24 hours of receipt.)
All schools which the children attend shall have each parent’s address and
telephone number, and both such addresses shall be shown as official addresses
for purposes of school records. The schools shall be notified of the custodial arrangement
between the parties, to wit: joint legal and physical custody. or The
provisions above may be combined in a simpler clause as follows: Both parties shall have full access to any
and all educational and/or medical records (e.g., report cards and doctor’s
reports) or information relating to the children. Both
parties shall have the right to obtain this information directly from the
educational institution or medical care provider.
Both parties are entitled to attend any and all parent/teacher
conferences, school functions and/or extracurricular activities. II. CHILD SUPPORT4.
Notice Provisions Regarding Child Support
Pursuant to Rules of Court and Statute. There are various child support provisions that are either statutory or provided by Court Rule. These clauses should be included in all MSA’s that contain provisions for the payment of child support or alternatively attached to the MSA as an exhibit. The following are examples Income
Withholding. In accordance with N.J.S.A. 2A:17-56-7, et seq.,
the child support provisions of a court order are subject to income withholding
on its effective date and constitute a judgment. The income withholding is effective upon commissions,
earnings, salaries, wages, and other current or future income of the payor.
Any payment of child support shall be fully enforceable and entitled to
full faith and credit and shall be a judgment by operation of law on the due
date. Also see R.5:7-5. Interest
Charge. Notice is hereby given pursuant to the New Jersey Rules of Court that
all support payments shall be made through the probation department of the
county in which the obligor resides and shall be subject to a late interest
charge at the rate prescribed by Rule 4:42-11 unless the court, for good cause
shown, otherwise orders. Also see
R.5:7-5(g). Child
Support Judgment. Any
payment or installment for child support is a judgment by operation of law on or
after the date it is due (N.J.S.A. 2A:17-56.23a).
The judgment has the effect of a lien against the obligor’s real or
personal property. This may adversely affect the obligor’s ability to obtain
credit or transfer real property. No
Retroactive Modification. No payment or installment of this order for child support, or those
portions that are allocated for child support, can be retroactively modified
downward by the court, except for the period during which the party seeking
relief has a pending application for modification in compliance with N.J.S.A.
2A:17-56.23a. Child
Support Arrearage. Pursuant to N.J.S.A. 2a:17-56.22, child support arrearages shall
be reported to Consumer Credit Reporting agencies as a debt owed by the obligor.
Child support arrearages shall be reported to the Internal Revenue
Service and the State of New Jersey, Division of
Taxation, for off-set against
any income tax refund/homestead rebate due to the obligor. Suspension of a State of New Jersey License. If
arrears equal or exceed six months of support or Court Ordered health care is
not provided in six months or a warrant is outstanding for payors arrest and
remains outstanding, the obligor’s license may be revoked pursuant to
R.5:7-5(e). 5.
Attachment of Child Support Guidelines Worksheet and Clause
Explaining Deviation from Guidelines. R.5:6A
requires that every order or judgment for the payment of child support have
annexed thereto a Child Support Guidelines Worksheet and a statement explaining
and deviation from the guidelines, if such is the case.
A sample clause follows: The
parties have attached the support guidelines worksheet as Exhibit ____.
The parties acknowledge that the Husband is paying less support than the
amount set forth in the worksheet because: a.
Wife by this agreement, is receiving a disproportionate amount of the
assets (Wife 65%; Husband 35%); b.
Husband is paying a disproportionate amount of the extracurricular
activities and private schooling of the children; c.
Wife’s alimony has been increased to create favorable tax treatment. 6.
Bi-annual cost of living increase and tri-annual review
of Child Support. A
proposed clause can be added as follows: Basic child support and/or the addition of a health insurance provision
shall be subject to a bi-annual cost of living increase pursuant to R.5:6B
(premised upon the change in the Cost of Living Index in the New York/New Jersey
Metropolitan Area) and tri-annual review, pursuant to the Child Support
Guidelines and related statutory and court rule procedures.
In addition, such support may be adjusted by the court, as appropriate,
upon application. 7.
Termination of Child Support Upon Death of Obligor. Pursuant
to Kiken v. Kiken, 149 N.J. 441 (1997), college obligations survive the
payors death unless the agreement provides otherwise.
All
obligations of
a party related to a child shall terminate upon the occurrence of the earliest
event: A.
That child’s emancipation (as defined below); B.
The child’s death; C.
The death of the payor;
D. The transfer of full physical custody to the husband 8.
Allocation of Child Dependency Deductions. The
parties can agree in their MSA to the allocation of the child dependency
deduction. What is important is
that the custodial parent be required to execute Form 8332 (Release of Claim to
Exemption For Child of Divorced or Separated Parents), if the non-custodial
parent is going to have the right to take the deduction in any future year.
A sample clause follows: The Husband shall
be permitted to take the dependency deduction for both children until they are
emancipated. This entitlement shall
begin in 1999 and continue until their respective emancipations.
The Wife specifically releases her claim to the exemption in accordance
with 26 U.S.C. §152(e)(2). The
Wife shall execute Form 8332 (Release of Claim to Exemption For Child of
Divorced or Separated Parents) or an equivalent document to effectuate the terms
of this provision. The Wife shall execute the release for all future years (see
Temp. Reg. §1.152-4T(a), (Q-4)). The
Husband shall attach the release form to his returns on which the exemptions are
being claimed in accordance with 26 U.S.C. §152(e)(2)(B).
If Federal or State law precludes the husband from declaring a child or
children as a dependent, the husband shall notify the wife by January 15th
of each year and the wife shall declare the child or children as dependents. III. INSURANCE9.
Requirement That Health Care Insurance Company Make Payments
Directly To The Health Care Provider Pursuant To N.J.S.A. 2A:34-28b And The Use Of a Qualified Medical Child Support
Order (QMCSO) . N.J.S.A.
2A:34-28b requires that if the non-custodial parent is required to provide
health care insurance, the payment of benefits for any covered services under
the insurance shall be paid directly to the health care provider.
The statute also mandates that every child support order issued or
agreement entered after March 21, 1993, provide notice of the right of the
custodial parent to have health insurance benefits paid directly to the health
care provider. Sample clause
follows: Pursuant to N.J.S.A. 2A:34-23b, the payment of benefits for any
uncovered services through the Husband’s medical insurance as required herein,
shall be made directly to the health care provider. This
provision shall serve as NOTICE to any such insurance carrier who shall be
required to comply herewith. or Husband will sign any and all documentation required of his medical
insurance provider to allow Wife the ability to deal directly with the insurance
company, including, the right to file all claims on behalf of the Child and
collect reimbursement payments. In
the event the insurance company refuses to accept direct claims forwarded by
Wife, Husband’s attorney will prepare a QMSCO to effectuate this right. Another
provision relates to the use of a medical child support orders (i.e.,
QMCSO). A qualified medical child
support order is defined as any judgment, decree, or order (including
a settlement agreement incorporated into a Judgment of Divorce or an order issued by an administrative process) that does
one of the following: 1.
Provides for child support related to health benefits with respect to an
employee’s child or requires health coverage of a child in an
employer-sponsored health plan or under an individual policy of health insurance
as ordered under a state domestic relations law or 2.
Enforces a state medical support law enacted under Section 1908 of
the Social Security Act (SSA) (which requires states, as a condition of
receiving federal assistance for Medicaid, to enact and enforce laws providing
for medical support orders with respect to a group health plan. In
other words, it creates or recognizes the existence of an alternate recipient’s
(usually a child) right to receive benefits that a participant or beneficiary is
eligible to receive under a group health plan and require that the insurer send
notice to the alternate recipient (child) to designate a representative (the
custodial parent) to receive copies of all notices with regard to the coverage
provided under the QMSCO.
(ERISA § 609(A)(5)(B)(iii). Pursuant
to the Omnibus Budget Reconciliation Act of 1993 (OBRA ’93) as amended by the
Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA
’96) and the Balanced Budget Act of 1997 (BBA ’97), a state-ordered medical
child support order (MCSO) is not necessarily a qualified
medical child support order (QMCSO). Thus,
before a plan can honor an order, it must
meet the requirements for a QMCSO just as a Domestic Relations Order must meet
certain statutory requirements in order to be qualified as a QDRO. A QMSCO shall be entered by the parties directing that the Husband (or
Wife) shall provide health insurance for the benefit of the minor children.
As required by statute, the Order shall provide the name and last know
mailing address for the participant/Husband and the name; the address of each
alternate recipient (the children) covered by the order; a description of the
coverage that is to be provided by the plan to each alternate recipient or the
manner by which coverage should be determined; the period for which the order
applies (until each child’s 22nd birth date); and a statement that
the order does not require the plan to provide any type of form of benefit, or
any option, not otherwise provided under the plan. 10.
Life Insurance to Secure Child Support, Alimony and/or pay-outs
of Equitable Distribution Life
insurance provides a level of financial security to the dependent spouse and
children in the event of the untimely demise of the payor spouse.
When addressing insurance to secure support, appropriate trust provisions
should be considered. Be mindful that if the insured is also the owner of the
policy, the proceeds of insurance, upon death, will be included in the insured’s
estate. Life
Insurance for Children The
Husband shall maintain an initial amount of $600,000 on his life
and may obtain and pay for life insurance on the Wife’s life
naming the unemancipated children of the marriage as equal beneficiaries
thereon. Each policy shall be owned
by an appropriate Life Insurance Trust. The
other spouse shall be named as the Trustee of the Life Insurance Trust on behalf
of the minor beneficiaries. Husband’s
counsel shall prepare the Trust documents and submit them to Wife’s counsel
for approval. The Trust shall
provide that the trustee may utilize the corpus and interest for the health,
education and welfare of the emancipated children.
The Husband may meet his obligation under the provisions hereof by life
insurance provided through an employer. The
Husband shall pay the premiums for the life insurance policies directly to the
Trustee of each trust for payment of premiums to the insurance provider.
If the Husband defaults on said insurance obligation, his estate shall be
liable for the amount of insurance that should have been provided. Life
Insurance for Wife The
Husband shall maintain an initial amount of $700,000 in life insurance net of
estate taxes for the benefit of the Wife for as long as he has an obligation to
pay alimony. The death benefit
amount shall be reduced to $400,000 after the Wife’s Rehabilitative Alimony
ends on September 1, 2004. Upon
request from the Wife, the Husband shall provide proof to the Wife each year on
April 15th that all premiums are paid on the life insurance policy
provided for the Wife and that no liens or encumbrances have been placed upon
the insurance. Further, the Husband
shall endorse the life insurance policy so that the Wife may obtain this
information directly from the carrier and shall provide proof to the Wife of the
endorsement no later than April 15, 2002. The Husband shall
promptly submit to any physical examinations and promptly execute appropriate
applications as required to obtain said insurance. The Husband shall provide to
the Wife a copy of any applications submitted by him to obtain said life
insurance. At Wife’s election, she may obtain additional life insurance on
Husband’s life, at her cost. If
Wife so elects, Husband shall submit to any physical examinations and execute
appropriate applications in support of same. The
Husband shall provide to the Wife a copy of any applications submitted by him to
obtain said life insurance. or Both the insurance to secure child support and alimony shall be
established by decreasing term policies. At
Husband’s cost, the death benefit level shall be re-examined every two years
(commencing on the second year anniversary of the full execution of this
Agreement) to reflect the amount of the secured obligation outstanding at that
juncture.
This re-examination shall take into account all child support
obligations. The first reduction
assessment shall occur on September 1, 2004 to coincide with the end of Alimony.
Insurance
can also be used to secure future payments of Equitable Distribution.
These clauses should be similar to the foregoing, but reduce or terminate
upon the payment of said property pay-out. IV.
ALIMONY
11. It is incumbent upon family
law practitioners and the Court to provide. where appropriate, details as to the
underlying assumptions upon which the support structure has been agreed upon or
ordered. These assumptions will be
relevant to post-judgment applications. Such
a provision may be addressed in two separate provisions, as follows: Income
Upon Which Alimony Was Based
The
Alimony provided for herein was premised upon the Husband’s earned income of
$400,000 per year and the Wife’s current earned income of approximately $5,000
per year. The Wife’s income
is expected to be $35,500 per year as a full time elementary school teacher
commencing September 1, 2004. Crews
Provisions Both parties’ acknowledge that the property division
and support structure provided herein allows each party to maintain a lifestyle,
now and in the future, commensurate with the “standard of living” enjoyed
during the marriage, including the fact that Rehabilitative Alimony will
terminate on September 1, 2004.
or The
parties acknowledge that the money the Husband is required to pay hereunder and
the equitable distribution to be made by the Husband to the Wife as specified
herein will provide (along with utilization of her own earning capacity) the
Wife with a fair, suitable and proper sum for her support and maintenance; this
support is commensurate with the financial means and social position of the
parties and it will enable the Wife to maintain herself at the marital lifestyle
thus satisfying the standards set forth in Crews v. Crews. or Agreement
on Standard of Living The
parties represent that they have been advised by their attorneys of the decision
in Crews v. Crews, 164 N.J. 11 (2000). Wife represents that the standard of living that she
enjoyed during the marriage is reflected in her most recently filed case
information statement and that the amount of alimony provided for in this
Agreement, coupled with her ability to earn, will not enable her to
maintain a reasonably comparable standard of living.
Wife acknowledges that she has accepted the amount of alimony provided
herein based upon the Husband's actual income or current ability to pay and not
based upon receipt of any other consideration. The
Husband disagrees and represents that the amount of alimony, in connection with
everything else paid under this Agreement, coupled with Wife's ability to earn,
will enable Wife to enjoy a standard of living that is reasonably comparable to
the standard of living she enjoyed during the marriage. The
parties agree to settle their pending matrimonial matter notwithstanding the
fact that they are in disagreement over this issue. The parties acknowledge that
in the future it may be necessary for them to participate in a plenary hearing
in which one issue may be determining the marital standard of living, in the
event that a motion is made by either party regarding support. Both parties
acknowledge that they have been advised by counsel that it may be difficult or
impossible to establish their respective positions concerning the marital
lifestyle at a future hearing due to the passage of time, the unavailability of
witnesses and/or records, and other circumstances that may arise. The parties
acknowledge that they have been advised by their attorneys of their right to
have a hearing at this time with regard to the issue of determining the marital
lifestyle, and have elected to voluntarily waive that right in furtherance of
their desire to resolve this matter expeditiously and without incurring
additional counsel fees and costs. The
parties also acknowledge that they have not agreed upon the proper method for
determining and defining the marital standard of living. In particular, the
parties have not agreed whether a determination as to marital lifestyles should
include an examination of the budget for any particular year during the
marriage, as opposed to an examination of a compilation of years or some other
methodology. The parties agree to forego resolution of this issue, and expressly
reserve same for a future plenary hearing, should that become necessary. or CREWS RESERVATION FOR CHANGED CIRCUMSTANCES Wife
agrees the overall settlement, including payment of child support, allows her to
enjoy a standard of living comparable to the marital life style. If, however,
the child support terminates, is modified downward, or inflation adversely
affects the value of the support Wife receives, then Wife would no longer be
able to enjoy a standard comparable to the marital lifestyle. 12.
Alimony Waiver with Anti-Lepis/Anti Crews language
(Consideration). It is critical that the MSA clearly provide
for what the parties intend or contemplate will occur in the future.
Various sample clauses follow:
Alimony
Waiver
Both parties hereby waive, now and forever, any and all claims for alimony, maintenance or any other form of spousal support. The Husband’s waiver of alimony shall be co-extensive with the Wife’s waiver of alimony as otherwise set forth herein. The parties have, with full knowledge of their present circumstances and with consideration of all future circumstances, bargained for the alimony waiver provision herein, which was an essential element of this Agreement, and acknowledge that they are bound by this Agreement and by the transactions set forth herein. The parties further acknowledge that this provision contemplated existing case law and any foreseeable modifications in that case law or changes in their circumstances. The parties acknowledge that a major dispute prior to settlement was the parties’ conflicting views on the Husband’s obligation to pay alimony Consideration
For Waiver
In
consideration of the terms and provisions of the Agreement, the parties each,
now and in the future, irrevocably waive all claims of spousal support inclusive
of alimony, against the other. Specifically,
the Wife waives any rights she may have under the Lepis decision to later
argue that subsequent changes in circumstances render this agreement either
unfair or inequitable. Each party
has been advised of the Lepis changed circumstance standard.
It is the specific intention of the parties to introduce concepts of
collateral estopple into this agreement to prevent the Wife from seeking
modification of the alimony waiver without which the Husband would not have
agreed to obligate himself to make the economic compromises set forth in this
agreement. Anti-Lepis/Crews
Clause & Contemplated Circumstances
Both
parties’ acknowledge that the property division and support structure provided
herein allows each party to maintain a lifestyle, now and in the future,
commensurate with the “standard of living” enjoyed during the marriage.
The
parties further acknowledges that their respective alimony waivers shall not,
under any circumstances, be modifiable and that the Husband has altered his
position on certain economic issues (including equitable distribution) in
reliance upon the Wife’s representations regarding her alimony waiver.
The Wife further warrants and represents that she acknowledges that but
for this promise, the Husband would not have altered his position and that
notwithstanding any language contained in Lepis v. Lepis, the alimony
termination shall be non-modifiable and that this provision is irrevocable even
if any of the circumstances referenced herein occur.
Further, both parties’ waiver of alimony, maintenance or other form of
spousal support, shall be
non-modifiable under any and all circumstances, whether contemplated or not.
The parties agree that they
contemplate the following possible changes of circumstances to either party,
which they agree is not an exhaustive list, which may occur:
(1) the loss of employment or the inability to secure employment by
either party; (2) an increase or decrease in the income or the value of assets
of either party, no matter how dramatic, and no matter what its nature, cause,
scope or duration including major changes in the stock market; (3) the
subsequent acquisition of assets by either party, including the accumulation of
earned and unearned income, awards and judgments of courts, inheritances and/or
gifts; (4) the subsequent loss or dissipation of assets due to market
conditions, imprudent investing catastrophic event, spending or any other cause;
(5) any increase or decrease in the cost of living, no matter how severe; (6)
the decline in the medical or mental condition of either party; (7) the
increased or decreased needs of either party; (8) disease or accident causing a
disability that would prevent employment or increased medical bills and health
care; (9) any other event foreseeable or not, contemplated or not; or (10) the
increase or decrease in the value of any stock including but not limited
to_______________ Corporation; (11) the failure of either party to maintain the
standard of living that existed during the marriage.
This anti-Lepis/anti-Crews clause is an essential aspect of this Agreement. This language can still be applied by minor modifications even if there is
a provision for Limited Duration or Term Alimony. 13.
Taxability of Alimony (Meeting Requirements of I.R.C. §71(b)(1)(D))
and the case of Gonzales v. Commissioner, 1999 WL 778531 (U.S. Tax Ct.), 78
T.C.M. (CCH) 527, T.C.M. (R.I.A.) 99, 332, 1999 RIA T.C. Memo 1999-332).
Also, Re-characterization of pendente
lite support payments as taxable. The
are very specific requirements that must be met by MSA’s if the parties expect
the intended tax treatment of Alimony to occur. It is particularly important, both in pendente lite and final orders to provide that alimony will
terminate upom the death of the payee. The
taxability of payments from one spouse to the other is governed by §71 of the
Internal Revenue Code (“IRC”), although other sections of the IRC, such as
215 (which allows for the deduction to the paying spouse) are applicable in
divorce actions. According to
§71(b)(1), payments from one spouse to the other are alimony if: 1.
The payment is in cash; 2.
The payment is made pursuant to a written divorce or separation
instrument; 3.
The instrument does not designate such payment as not being alimony for
tax purposes; 4.
After the divorce is final, the paying and receiving former spouses may
not be members of the same household; 5.
The obligation to make the payment does not survive the receiving
spouses’ death; 6.
Payments to third parties made on behalf of the receiving spouse must be
evidenced by a writing. A
sample clause follows: Taxability
of Alimony Permanent
Alimony to be paid by the Husband to the Wife shall be fully taxable to the Wife
and included as taxable income on her Federal, State and local income tax
returns. Said Permanent Alimony
shall be fully deductible by the Husband on his Federal, State and local income
tax returns. This Agreement shall
be deemed as complying with the Internal Revenue Code (I.R.C. §71(b)(1)(D)) and
the case of Gonzales v. Commissioner, 1999 WL 778531 (U.S. Tax Ct.), 78
T.C.M. (CCH) 527, T.C.M. (R.I.A.) 99, 332, 1999 RIA T.C. Memo 1999-332),
requirements for purposes of securing the aforementioned tax treatment. Taxability
of Pendente Lite Alimony Paid to Date
If the parties can
agree to file joint income tax returns for the year 2002, there is no need to
characterize the support paid to date as taxable alimony.
However, in the event said joint tax returns are not filed for 2002, then
the payments made to date to the Wife must be characterized as taxable support.
The parties acknowledged that the Husband has paid to the Wife the sum of
$38,247 as support in the year 2002. The
parties agree that this amount shall be characterized as “Alimony” and shall
be included as taxable income on the Wife’s Federal, State and local income
tax returns for the year 2002 if not jointly filed with the Husband.
Consequently, the Husband shall be entitled to deduct said amount of
alimony on his Federal, State and local income tax returns for the year 2002. 14.
Reassessment of Rights & Obligations of Parties in Event of
Change of Tax Laws. If tax laws change, it should be clear that a modification may be
required. A sample clause follows: The
parties acknowledge that the intended tax treatment of this Permanent Alimony is
an essential part of this Agreement. Should
there be any change in the Internal Revenue Code or other tax laws which affect
the intended taxability of this Permanent Alimony, said occurrence shall
constitute a substantial change in circumstances justifying a modification of
the amount of said Alimony. 15.
Obligation of Obligee or Obligor to Notify The Other Party of a
Substantial Change in Circumstances. It
is important to impose upon a supported spouse the affirmative obligation to
advise the supporting spouse of his/her remarriage, cohabitation or other
substantial change in circumstances. Further,
alimony should terminate upon the payees remarriage, whether void or voidable.
The agreement can also provide that both parties have an affirmative
obligation to advise the other of a change in their financial circumstances.
Sample clauses follow: If
either party receives inheritance or gifts in excess of $100,000 or earned or
unearned income which exceeds 20% of the earned and unearned income that existed
at the time of their MSA, he/she shall notify the other party in writing within
60 days of their changed circumstances. The
Wife shall have an affirmative obligation to advise the Husband of her
remarriage whether void or voidable within twenty days of the event. 16.
Retirement of Obligor. If
the payee spouse with not agree that retirement automatically terminates the
alimony obligation, there are other alternatives. A sample clause follows: The parties agree
that the Husband’s involuntary retirement from ABC, Corp. shall constitute a
prima facie change in circumstances for purposes of Husband’s application to
terminate or modify his alimony obligation.
The parties acknowledge that had they remained an intact family, the
Husband was likely to leave the work force at age 60.
This is one of many factors that the parties (or Court of competent
jurisdiction) shall consider. The
parties specifically agree that they, or any court, shall consider all income
and assets from all sources, including but not limited to previously distributed
assets in reviewing their respective financial circumstances in the event of a
changed circumstance application. The
parties acknowledge that the Husband must retire from ABC, Corp. at age 60 and
may retire with full benefits at age 58. Voluntary retirement prior to age 60, unless for health
reasons which reasonably impair his ability to perform his job duties and
responsibilities, shall not be considered such changed circumstances.
This provision in no way constitutes a waiver of the Wife’s right to
contest any action by the Husband for a reduction or termination of alimony.
In the event of said application, the parties shall exchange the
following data prior to said application: Income
tax returns for the prior three (3) years and asset summaries accompanied by the
appropriate verifying data. If
either party has remarried, he/she need only submit redacted financial
disclosure to eliminate the disclosure of the new spouse’s financial
information. V.
EQUITABLE DISTRIBUTION
17. Security for pay-outs in Equitable Distribution (Letters of
Credit, Stock Pledge Agreement, Use of Partnership as Collateral). In
addition to life insurance provisions and mortgages against real property to
secure Equitable Distribution, there are other security provisions that should
be included in an agreement if there are provisions for the future payment of
Equitable Distribution. Obtaining
security for an Equitable Distribution pay-out avoids malpractice claims and
protects the creditor spouses interest in the event of a bankruptcy proceeding
brought by the debtor spouse to discharge the Equitable Distribution pay-out.
The following are sample clauses: SECURITY
IN PARTNERSHIP
To secure that the
payments and obligations of the Husband provided in this Agreement are paid by
the Husband and received by the Wife, the Husband shall maintain sufficient life
insurance (see Article 7.1) and provide a collateral assignment of his
partnership interest in ABC, CORP.,, XYZ, Corp.,, and 123, Corp.,.
These collateral assignments annexed hereto as Exhibit ___ shall be in
recordable form and executed in the form attached.
The Husband acknowledges and represents that all partners will sign this
form. The collateral assignment for ABC, CORP., Realty and Monmouth
Ocean shall continue until such time as all the obligations in this Agreement
have been paid. The collateral
assignments for ABC, CORP.,, XYZ, Corp.,, and 123, Corp., shall expressly
provide that there shall be an assignment of the Husband’s income or
distributions as additional security. SECURITY
IN STOCK OF HUSBAND’S BUSINESS To secure that the
payments and obligations of the Husband provided in this Agreement are paid, in
addition to Article 13.1 security, the Wife shall have a security interest in
the Husband’s share of Hollywood’s stock for a period of five (5) years.
As additional security the Husband shall pledge and assign his shares of
stock in Hollywood to the Wife. In
the event of his default she shall be entitled to his distribution, income
and/or dividends paid as a result of the Husband’s ownership of Hollywood
shares. In the event of a sale of
the Husband’s shares of Hollywood’s, even if he is not in default, the Wife
shall receive the first $500,000.00 in net after tax proceeds regardless of
whether these proceeds are paid at closing or periodically over time.
Before a default can be declared the Husband shall be provided with
thirty (30) days written notice as provided for in Art. 3.5.
This gross proceeds of sale shall be paid to Larry Lawyer, Esq. pending
determination of the amount of tax due on the sale. The Husband shall be obligated to provide written notice by
certified mail to the Wife of any proposed sale. The notice shall be mailed to the Wife no later than seven
(7) days after execution of a contract. The
Wife shall have an equitable lien on the Husband’s shares of stock and the
Husband shall be enjoined and restrained from encumbering his stock or selling
this stock without paying off this security except for transfers provided for in
this Agreement to the children. This
security interest, however, shall be subject to the following conditions: a.
In
the event the Husband sells, transfers, assigns or gifts all or any portion of
his Hollywood’s shares to any child, the shares shall be transferred subject
to the security interest and further subject to the five(5) year limitation
provided herein (see Art. 13.2(b)). The
Husband shall have an absolute right to sell, transfer, assign or gift to the
children without the Wife’s consent, all or any portion of his shares,
however, the Wife shall be notified of the transfer and shall execute any
documents required by the Husband’s attorney to effectuate a transfer of
ownership to the children subject to her security interest. b.
Any
restriction on the Hollywood’s stock shall irrevocably terminate five (5)
years from the effective date of this Agreement. At the expiration
of five (5) years when the security provided by the Hollywood’s stock is
terminated, then and in that event, if the Husband is still indebted to the Wife
under this Agreement, the Husband may provide substitute security to the Wife to
assure his performance of his obligations under the is Agreement to the extent
of 150% of the amount due. By way
of example, if the Husband remains indebted to the Wife in the amount of
$100,000.00 at the expiration of the five year period then, and in that event,
he shall be required to deliver to the Wife, in a form satisfactory to her,
security having a value of $150,000.00. Upon satisfaction
of the Husband’s obligations under this Agreement, any security provided
either by the Husband or the children to assure his obligations shall be
cancelled and discharged of record, and the Wife shall sign any document request
by the Husband’s attorney evidencing this cancellation and discharge. The Agreement
shall only be effective upon execution by all of the children of the underlying
security agreements. In the event there
is an inconsistency between this Property Settlement Agreement and the annexed
security agreements, the Property Settlement Agreement shall control. At any time
subsequent to the execution of this Agreement, the Husband shall have the right
to obtain a release of any lien or encumbrance against any property granted the
Wife under this Agreement provided he supplies evidence that the then existing
or additional security proposed has a value of 150% of the amount due.
The word “value” as used herein shall
mean property (real or personal) which if liquidated pursuant to the
security instrument referenced in this Agreement, would yield to the Wife 150%
of the then balance due. If they are unable to agree, the parties shall participate in
binding arbitration. Carry
Counselor, Esq. shall be selected as the arbitrator. LETTERS OF CREDIT Letters
of credit are the easiest and best way to secure future obligations.
The following is a sample clause: The
Husband shall secure the Wife’s interest in the unpaid balance of ________
plus interest of ____% (calculated between the date of the full execution of
this Agreement and ___________) by way of a Clean Irrevocable Stand-by Letter of
Credit, hereafter “LOC”, providing for payment immediately on presentment in
the amount of $__________, attached hereto as Exhibit ___.
Said LOC shall be retained by __________ in escrow released to Wife on
________, or thereafter, if the aforementioned sum is not paid in full.
If, for any reason, all amounts due to the Wife are not then paid, she
may record this Agreement as a Judgment against the Husband in favor for the
amount of the unpaid balance provided the Letter of Credit was presented and was
unpaid. In the event that the
Husband does not pau all sums due on or before ________, he shall pay a $______
per diem penalty to the Wife until all sums due are paid in full, plus reimburse
her for any and all reasonable attorney’s fees and other related costs
incurred by her in collecting all sums due.
If the Husband makes full payment by _________, the “LOC” shall be
deemed null and void and returned to the Husband forthwith. 18.
Refinancing joint liens to remove transferring party as
obligor. Provided the Wife
is qualified to obtain a mortgage, the Wife, at her expense, will refinance the
mortgage held with regard to the former marital residence within three years
hereof. If the Husband wishes to
have his name removed from the mortgage earlier than three years, the Wife must
agree to the new interest rate provided it is less or the same as the existing
rate and Husband shall pay for the cost of refinancing.
During the period that the Husband continues to be listed as an obligor
on the mortgage related to the former marital residence, the Wife shall not only
timely pay all mortgage related obligations and immediately notify Husband of
any failure to do so, but she shall also maintain the premises in good
condition. 19.
Indemnification of Non-Owning Spouse for Business Liabilities
& Resignation of Non-Owning Spouse as Officer of Business. If
the parties are co-owners or business, appropriate provisions should be included
in the MSA, to wit: The
parties acknowledge that the Wife-Husband are
owners of all outstanding stock of XYZ, Corp.., a New Jersey Corporation,
operating a retail coffee establishment doing business as a franchise know as
“JJ’s Sports Shop” in the **** Mall on ***.
(Hereinafter the “Company”) The
franchise was acquired for $500,000. The
Husband disclaims any ownership in the company and any rights incident to or
arising from the Franchise Agreement. The
Husband shall immediately tender his stock and resign from the Board of
Directors and resign as V.P. of the corporation.
Wife shall indemnify and hold Husband harmless for any past or future
liabilities of the business including leases and Franchise agreement. In
consideration of the terms and provisions of this Agreement, the Husband hereby
waives and shall convey (as requested by the Wife) any and all interest(s) that
he may have in the aforementioned “Business Interest”, including, but not
limited to, all rights under the franchise agreement, good will, accounts
receivable, inventory, equipment, leasehold rights, all cash on hand or held in
bank and investment accounts (including the ********* Investment Account
#***********), fixtures or any other aspect of economic value owned by the
business. In implementing and
agreeing upon the overall distributive plan the parties have not agreed upon nor
utilized a specific value for JJ’s Sports Shop or the Husband’s distributive
interest therein. Nonetheless, they
reaffirm the overall agreement reflected herein which they consider fair,
appropriate and equitable notwithstanding their inability to agree upon a
specific value for distribution concerning this Business Interest. Transfer
of Interest.
The transfer of the Husband’s interest shall occur simultaneous with
the full execution of this Agreement and shall be considered the “Transfer
Date” for purposes hereof. The
Husband shall fully cooperate with the Wife in executing any documents necessary
to memorialize and finalize his transfer of all right, title and interest in the
Business Interest to the Wife in accordance with the foregoing provisions.
(Hereinafter the “Transfer Documents”).
Counsel for the Wife shall prepare any required Transfer Documents. VI. STOCK OPTIONS & RESTRICTED STOCK20.
Callahan Trust
for Stock Options & Restricted Stock. The Deferred
Distribution Method is the most commonly implemented method for distributing
options and restricted stock. Moreover,
this method was utilized in one of the earliest New Jersey cases dealing with
stock options incident to divorce. See Callahan v. Callahan, 142
N.J. Super. 325, 328 (Ch. Div. 1976). The Callahan court ruled that
options acquired during a marriage were subject to equitable distribution even
though (1) the options were potentially terminable; (2) the husband had to make
an expenditure to exercise the options; and (3) the options were subject to
various SEC regulations.[1]
See id. at 327-29. In
so holding, the court impressed a constructive trust on the husband, in favor of
the wife, for a portion of the options. See
id. at 329. The court
reasoned that imposition of a constructive trust would result in the most
equitable outcome to the parties without creating undue financial and business
liabilities. See id.
It should be noted that all of the options were granted during the course
of the marriage. See id. at 327.
Although not specifically stated, however, it appears that some or all of
the options were not fully vested because they were subject to divestiture under
certain circumstances. See id.
at 330. This may be why the wife
was awarded only 25% of the options at their maturation.
(See section below regarding determining distributive shares.) There
are many provisions that must be considered when devising “trust” like
language to be included in an MSA. An
example of some of these clauses follows. Other
provisions may be needed depending upon the exact nature and content of the
Stock Option or Restricted Stock Plan involved.
The following is a sample provision: The
parties acknowledge that the Husband has received various awards of stock
options, restricted stock and portfolio grants through his employment with ABC,
Corp.. The following is a summary
of the outstanding stock options, restricted stock and portfolio grants awarded
to Husband as of July 2001, which are subject to Equitable Distribution:
The
above chart delineates each option grant based on the respective vesting dates.
The above chart does not include the 13,825 stock options awarded to the
Husband in February 2002. Since the
awards received by the Husband in a certain year are for work performed both in
the preceding years and work to be performed in all subsequent
years up until the applicable vesting periods,
the Complaint for Divorce in this matter was filed on May 23, 2001, it is
hereby agreed that 17.5% of the
13,825 options awarded in January
2002 shall also be included in the group of unvested options to be distributed
incident to this Agreement. This
would add 2,419 stock options from
the February 2002 award to the pool of unvested stock options in which the Wife
shall receive. Husband also received restricted stock awards (RSA) as a result of
his employment with ABC, Corp.. A
summary of his outstanding RSA’s as of July 10, 2001 (none were awarded in
2002) is as follows:
The RSA’s held by Husband begin to vest in 2004 and are not fully
vested until 2006. At the time of
each vesting date , the then fair market value of the shares will be taxed to
Husband as ordinary income. At that
time, the Wife shall be entitled to receive 25% of the vested RSA’s upon
tendering to the Husband the total tax due on her share of the then vesting
RSA’s at the agreed upon rate of 44%. Thereafter,
the Husband shall transfer title to the Wife’s share of the RSA’s within ten
(10) days of his receipt of same. Additionally, as part of his income, and as part an employment
retention device, the Husband received Portfolio Grants. A target incentive is awarded annually. The Husband represents that the value of the ultimate award
increases or decreases based on the Husband’s performance over a three or four
year period. In addition, the
ultimate payout is strictly conditioned upon ABC, Corp.’ financial performance
and total shareholder return as compared to the Standard and Poor’s 500
Index over a three or four year performance period, depending on the year of
grant. The target incentive listed
below is the initial value of the award at the time of grant.
The payments have historically been made in cash and the ultimate
award has been larger than the target incentive. Based on the payouts received by Husband including the 2002
grant that has been set and shall be paid in September, 2002,
the average pay-out was 2.52
times the target incentive.
The vesting period of the portfolio grant had historically been
three years. The PG’s
awarded in 1999 will pay $55,000. Beginning
in 1999, the vesting period was increased to four years and a supplemental award
was received in 1999 to compensate for the additional vesting year.
This will effectively provide a bonus to Husband in 2003. The
above chart does not include a Portfolio Grant received by the Husband in
February 2002 with a target value of $30,786.
Since the awards received by the Husband in a certain year are for work
performed in the preceding year together with performance over the subsequent
year vesting period and the Complaint for Divorce in this matter was filed on
May 23, 2001, it is hereby agreed that 17.5% of the ultimate pay-out of the
Portfolio Grant awarded in February 2002 shall also be included in the
group of Portfolio Grants to be distributed incident to this Agreement. For
example, the Wife’s share of the PG to be paid in September 2002 (i.e.,
$55,000) shall be paid as follows: $55,000 times Wife’s share (25%) equals
$13,750. This figure shall then be
reduced by the agreed upon marginal tax rate of 44% ($6,050), resulting in a net
payment to the Wife of $7,700. All of
the aforementioned stock options, restricted stock and portfolio grants awarded
to Husband as stated above shall be distributed in accordance with the
“Callahan Trust” provisions that follow.
The Parties acknowledge that neither party shall have rights with respect
to the grants of stock options and restricted stock and portfolio grants that
were paid out or inured to the benefit of either party subsequent to the date of
the filing of the complaint for divorce as referred to above. The
parties agree that the Wife is hereby granted an equitable and constructive
interest in the aforementioned stock options, restricted stock and portfolio
grants granted to Husband by ABC, Corp., as noted above.
As part of this Agreement, subject to the ABC, Corp. policy procedures
and restrictions in place, Wife is entitled to fifty percent (50%) of the vested
stock options. Further, the Wife is
entitled to 25% of the unvested Stock Options, Restricted Stock (“RSA’s”)
and Portfolio Grants awarded prior to the Complaint for Divorce.
For the stock options and Portfolio Grant awarded in 2002, the Wife is
entitled to 17.5%. As to the stock options, the Wife is entitled to direct
Husband to exercise on her behalf a total of fifty percent (50%) of the vested
stock options, and twenty-five percent (25%) of the unvested stock options
(except for those awarded in 2002, in which the Wife’s share is 17.5%),
culminating in a total of 7,552 vested options and
18,681 unvested options
from the total of 93,978 stock
options and 1,500 RSA’s which represents 25% of the 6,000 RSA’s, as set
forth above and subject to policies, procedures and limitations of ABC, Corp.
which are in full force and effect at the time of the request of the exercise by
either party.. These options,
PG’s and RSA’s vest across various dates, as noted in the above chart.
Husband shall hold the options, PG’s and RSA’s allocated for Wife as
a fiduciary and in constructive trust for her, subject to the following
provisions as well as the policies, procedures and limitations of ABC, Corp.
governing the stock option plan. As
to the restricted stock and portfolio grants, the Wife shall receive her share
of these benefits immediately upon Husband’s receipt of his share subject to
deduction of 44% for applicable Federal, State and local taxes. For
example, Husband shall hold in constructive trust the 3,801 of the 7,602 options
awarded on February 23, 1998, through and including their vesting date of
February 23, 2001, until their expiration date of February 22, 2008.
The Husband shall act as a fiduciary to the Wife with respect to these
options and shall not act in any manner contrary to his duties therein.
However, voluntary or involuntary termination of employment for any
reason shall not be construed as a breach of his fiduciary obligations pursuant
to the terms of this paragraph. Husband
shall hold in constructive trust for the Wife the following portions of the
options, both vested and non-vested, until she so directs him to exercise these
options. The Wife has sole and
complete control over the exercise of the stock options allotted to her (as
limited by the provisions of the stock option plan, and/or ABC, Corp. policies,
practices and procedures in effect at that time.
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