Clients have a sixth sense for things that are problematic. Unfortunately, that sense is coupled with a tendency to freeze and avoid talking about the problem. Often times, clients prefer to ignore the problem, or assume that it will solve itself.
Lawyers fancy themselves as problem solvers and good lawyers have a knack for doing just that. Unless the lawyer knows and understands the problem, however, solutions are not easily found. When a client senses a problem, there are three places where clients tend to move quietly and not tell their attorneys what their plans are: tax returns, home sales, and asset transfers and sales. As one might expect, the failure to examine these transactions with an attorney can be harmful, or even fatal, to the financial interests of the client. Let’s take a look:
Tax returns. Joint tax returns make for joint liability. Every year by April 15, private taxpayers must file their income tax returns and tax payments for the previous year. For example, the 2008 tax year closed on December 31. So, tax returns and taxes were due on April 15, 2009. Historically, almost all couples file joint returns because that is what they have done in the past. Also, there are usually tax savings associated with a joint return. For Americans who are paid wages, there are not many options in terms of tax avoidance. Where one or both of the taxpayers are self-employed, however, there is room for mischief. Unfortunately, clients tend to assume that tax fraud is something that affects the other “self employed” guy, and that nothing bad will ever happen to them. As a result, every year clients end up signing joint income tax returns without realizing that if the return “blows up” and is challenged by the IRS, any resulting liability is what attorneys call joint and several. That means if your spouse puts false numbers on the return, the tax law says that, with few exceptions, you agree that your assets can be seized to pay the tax and penalties arising from the matter. The fact that you are separated is not itself and impediment to collection efforts by the IRS. The classic case is Duff v. Duff, 510 Pa. 251 (Pa. Supreme 1986). Although there are ways to try to address this problem, the starting point is to realize that joint returns make for joint legal responsibility. Your oath that the return is accurate extends beyond your own income to that of the spouse with whom you file.
Home Sales. If husband and wife own a home as joint tenants or tenants in common, neither can sell the property without the consent of the other. In order to sell the property, the co-owner must join in the deed to convey a clear title to property. So, when we are asked whether a spouse can sell a house out from under the other, the answer is no, unless the house is held in the name alone of the spouse having title. That’s good news. But, it is fairly common for a separated husband and wife to agree that they want to sell their joint property. They sign the listing agreement together and the broker/agent attempts to sell the property. Let’s say, for example, a couple lists for $400,000 and they receive and offer of $375,000, which they find attractive. Again, the tendency is to not solicit legal advice. So, they agree to take the $375,000 and they sign the agreement of sale tendered by the prospective buyers. This is major because they are now “under agreement.” Although these agreements usually contain conditions allowing for an “out” by the buyer e.g., home inspection, mortgage contingency), they rarely allow the seller to back out. Once the agreement is signed, the sellers are legally bound to convey title at settlement upon tender of the contract price. This is a good thing, right? Yes and no. Without further agreement between the sellers, the title agent will issue the proceeds in a single check that mirrors the title to the property. This means that neither party will have access to the proceeds from the sale unless there is an agreement. If you are planning on using these proceeds to acquire a substitute residence, you may find that you have no access to the funds until you “agree” with your spouse on a distribution or the court otherwise decides your case. Without an agreement, the proceeds will be left in escrow until there is an agreement or court order disposing of the same.
Assets Transfers and Sales. The law seems clear that unless a court order prevents an individual from selling or moving assets from an individual account, each spouse can buy, sell or transfer assets as he or she pleases. We find that clients tend avail themselves of these powers. This is not bad in and of itself. Clients, however, tend to ignore the fact that each time sales and transfers are effected, there is a likelihood that the spouse not in possession of the account will want to “trace” each transaction or transfer in order to insure that no proceeds were skimmed from the transaction. This process requires expensive accounting, which tends to consume time and money, as well as slow down the divorce process.
If you are signing legal documents of any substance while going through a separation or divorce, let your attorney know. If you are signing a document with your spouse from whom you are separated, it is imperative that you understand the legal consequences before you sign. As a rule, assume that you cannot “undo” a document once you have signed it.