The process of getting divorced can be extremely challenging. During this difficult life transition, clients rely on the expertise of their divorce lawyer who will be their guide throughout this process. Most experienced divorce attorneys will advise clients to attempt to resolve their differences with their spouse out of court. Since most divorces are resolved in this way – through a carefully negotiated and drafted marital settlement agreement – clients need to be able to count on their divorce attorney to draft an agreement that not only includes all of the needed provisions and language but also attempts to protect the client from unforeseen contingencies.
A critical set of provisions in high asset divorce settlement agreements relate to the tax ramifications of payments from one spouse to another. Specifically, for some higher-earning spouses, the ability to deduct support payments (typically termed “alimony”) from income could reduce the impact of the payments on the spouse paying alimony by 35 to 50 percent for taxpayers who live in Washington, D.C., Maryland, and Virginia. Given the significant tax savings and reduced “cost” of paying alimony (for example, support payments of $10,000 per month would only cost the spouse paying alimony between $5,000 and $6,500 per month), the tax-deductibility of such payments is often a “bargained for” attribute of a settlement including alimony.
An effective divorce lawyer must ensure that the parties’ agreement, including the taxability of various payments, reflects the parties’ expectations with regard to all aspects of their settlement. But for a Maryland couple, the Iglickis, who were the subject of a recent decision issued by the U.S. Tax Court, that was not the case. In Iglicki v. Commissioner (T.C. Memo 2015-80), contrary to what apparently was the intention of the parties, the Tax Court ruled that the former husband was not entitled to deduct certain support payments from his income that he made pursuant to the provisions of the parties’ marital settlement agreement. Based on this decision, Mr. Iglicki did not receive the tax deductibility for his payments that he had bargained for, likely resulting in significant unforeseen monetary costs to Mr. Iglicki.
Of course, every case is fact specific, and it appears that the particular ruling of the tax court that applied to Mr. and Mrs. Iglicki was not foreseeable. However, a key lesson gleaned from the case is that, when you are divorcing, it is essential to identify and hire a lawyer who is careful, diligent, and experienced – and who will attempt to anticipate and protect against even remote, unknown contingencies by drafting language to include in your marital settlement agreement to protect you against a detrimental outcome. Both the underlying analysis and the careful draftsmanship of the marital settlement agreement are critical skills from which you benefit when you retain an experienced divorce attorney.