Posted on March 15, 2010 by Robert A. Epstein

SHORT SALE FOR CASH? AGGRESSIVE PLAN MAY HELP DIVORCING COUPLES

On April 5th, the struggling housing market will face a new ally in the form of a short sale program being aggressively pushed by the Obama Administration to help millions of home owners escape from mortgage debt by selling their homes for less than the balance of the mortgage while receiving an additional monetary payment to do so.  As the government's attempts to assist homeowners struggling to make their mortgage payments have only slightly helped according to a recent article in the New York Times, the new program will pay $1,500 to the short selling homeowners to "relocate."

The benefits of the plan are hoped to be widespread, as lenders will ideally receive more money than with a foreclosure, the borrowers will experience a softer hit to their credit - including the lender's assurance that they will not later be sued for an unpaid mortgage balance - and fewer homes will be empty on the foreclosure market.  To protect from cases of fraud, lenders will utilize real estate agents, who will determine a home's value and, by correlation, the minimum acceptable sale price.  Adding another layer to this new system, the agent's determined value will not even be shared with the home owner, but the lender is required to accept any offer equal to or higher to such value.  What happens when a home owner has multiple mortgages on a single property, however, remains unclear.

From a family law standpoint, this plan provides the sort of good news that divorcing spouses struggling with what to do with their "under water" marital residence are looking for.  Whether it actually fulfills that glimmer of promise, however, remains unclear.  In the down real estate market, how to equitably distribute the home has proven challenging.  Oftentimes, neither party can afford to continue residing in the marital home, refinancing is unavailable due to the negative equity, neither party wants to face the credit hit of a foreclosure, and there is no money to cover the shortfall debt that might result where the house is sold for a price lower than the outstanding mortgage.

Short sales with a guarantee that the lender will not come after the borrowers such as that in the President's plan are therefore a desirable way out.  Short sales generally tend to be a risky, slow moving process with no guarantees.  With the Obama Administration's new plan to boost the housing market, hopefully such situations will take a turn for the better.

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Posted on March 15, 2010 by Jennifer Weisberg Millner

Show me the Documents

A recent case was filed concerning a woman who entered into a Marital Settlement Agreement with her then husband in which the marital home was not to be sold immediately, but provided for how the proceeds would be distributed when it was. The Husband, however, was in poor health, and the agreement did not provide for the possible event of his death prior to sale of the home. In fact, the husband died prior to the sale of the house, but after the limited divorce that the couple had obtained .  His interest in the house went to his estate rather than to his former wife as she had anticipated. The former wife was then forced to purchase the half interest from the estate in order to retain the home, something that was not anticipated by her, and cost her a significant amount of money.

I am sure that the former wife assumed that the deed to her home contained a right of survivorship in the event of her former husband’s death. Instead,  the property was most likely titled in such a way that the parties owned the property as tenants by the entirety, which means that they owned as husband and wife, and upon the death of one spouse  title of the property would go to other, assuming they were still married. Upon the divorce of parties to a tenancy by the entirety,  however, the title changes to what is known as a tenancy in common, which means that they each had a one half interest in the property which would then go to their beneficiaries upon death unless there is a specified right of survivorship.

 

The moral of this story? Make sure your lawyer has a copy of your deed as well as any other important documents.   If you do not have one, make sure that a title search is conducted on the property.   It is critical that a lawyer understand how property is held between spouses and/or other co-owners. Many times, incorrect assumptions are made about these kinds of issues and the results can be expensive. My motto is, I can never have to much information from my client.

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Posted on February 17, 2010 by Eric S. Solotoff

EQUITABLE DISTRIBUTION OF THE MARITAL HOME - MANY WAYS TO SKIN THE CAT

In September of 2008, I posted a blog entry on The Value of Real Estate - Problems in this Ever Changing Market.  In that post, given the decline in the real estate market, it was posited that retaining the marital home may not be the best financial strategy.  Unfortunately, little has changed in the real estate market since that time to change conclusions of that post.

That said, in many cases, the marital home remains the single largest asset to divide in divorce.  Moreover, with the continuing troubles in the economy, it may represent the only way for either or both of the parties to wind up with liquid funds after the divorce.  Now if the home is going to be sold, or one party is going to buy out the other, then there usually is little dispute other than logistics of sales price, how soon to reduce the price, how to handle repairs until sale, etc. 

The problem arises if one party wants to defer distribution to allow the child(ren) to finish high school, etc.  There is a question of fairness to the other spouse whose equitable distribution is tied up as may be their ability to buy a house of their own both (1) because they don't have the money for a down payment until they get their share of the house or (2) they are still on the mortgage of the marital home.  Further, due to the decline in the real estate market, parties are now also agreeing to defer the distribution for some period of time in hopes that the market will rebound, as opposed to selling now.

There is not a lot to do about the second problem noted above if there is gong to be a deferred distribution.  However, as to the first problem, there are a few ways to handle it. 

Specifically, in the event of a deferred distribution, the parties can take out a home equity line which would be paid to the spouse not residing in the house as an advance against their equitable distribution.  Either that party can be solely responsible for the payments on this loan until the house is sold.  Alternatively, an additional amount an be borrowed to service the loan for which the parties can divide equally or some other equitable way.

In the case of a buyout, perhaps a party cannot get a mortgage to refinance the outstanding balance plus also pay the other party for their share of the equity.  They may wish to offset the share of the equity against other assets.  Some people might find this acceptable but others may still oppose this because while they may be getting more in retirement assets (but these usually should not be dollar for dollar offsets because retirement assets are tax deferred and thus, need to be grossed up), they still may not be getting liquid funds which they desperately need to buy their own home.  In this case, perhaps the buyout of the home can be accomplished by a partial cash out from the home plus an offset of other assets.

Another cautionary note - if the offset is going to be against investment assets, attention should be paid to make sure that embedded capital gains in the investment assets are considered so that the value each party receives is approximately economically equivalent.

In any event, resolution of the issue, while challenging, should not ordinarily be insurmountable.  It just may require some creativity and cooperation.
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Posted on June 15, 2009 by Jennifer Weisberg Millner

Tax Issues can Have Serious Consequences for Settlements

The disposition of the marital home is oftentimes the most pressing financial issue in a divorce case. The current real estate market brings tax issues to the forefront which must be given consideration. When negotiating a settlement, (or preparing for trial) it is important to understand the tax consequences of the disposition of property. Too often, parties simply think they are just going to divide assets at the value that they have today on a statement rather than understanding the tax affected value. One area that has to be carefully considered is the marital home.

As a general rule, when you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes. However, in the 5 years prior to the sale of the house, you need to have lived in the house for at least 24 months in that 5-year period. In other words, the home must have been your principal residence.

 

In a matrimonial action, and in particular, in a long marriage where the parties have owned a house for many years, this rule can have a profound affect on a party who has not been living in the house while the action has been pending. Add to this a real estate market that us sluggish and in which houses are taking years to sell, a settlement that says the parties shall “sell the house and divide the proceeds equally”, can really result in an unequal amount to the parties after taxes if one parties pays a substantial capital gains tax and the other, who has been living in the house pending sale, does not. SO, if you are going to let one parent stay in the house for the next six years until junior finishes high school and the real estate market hopefully bounces back, make sure you have considered the possible tax consequences.

 

Capital gains of course, are not limited to houses. The same concern exists for investments and any other assets that have increased in value. So if Jane is going to get the AT&T stock that was a wedding gift 25 years ago and worth $100,000 today and John is going to get the money market account with $100,000, it’s really not an equal distribution of assets, because Jane is getting an asset that is going to be taxed. 

 

The above examples are meant to stress the importance of understanding the effect that taxes can have on a distribution of assets and the importance of getting sound advise from your attorney and accountant or other tax professional prior to signing any agreement.  

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