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Just before Christmas last year, Congress passed and the President signed a major tax reform package that contained a surprising wrinkle.  It abandoned a decades long provision that permitted payors of alimony or spousal support to deduct their payments from income and required recipients to report the payments and pay tax on them.

The effective date of this change was/is December 31, 2018.  Orders and Agreements in effect on that date maintain the old tax treatment.  Still taxable to payee.  Still deductible by payor.  But Orders and Agreements formed in 2019 will be tax neutral unless the deal is a modification of a pre-2019 instrument (i.e. Agreement or Order), and it expressly retains the former tax treatment.  To address this, Pennsylvania support guidelines needed to adopt amendments to deal with two systems: one where the payments are taxable and one where they are not.

When the Pennsylvania Supreme Court Rules Committee began their review, they observed that every other state approaches child and spousal awards differently.  In Pennsylvania we have always calculated child support first and then used that result to calculate spousal and alimony awards.  The Rules Committee is recommending that we adopt a different approach.  Under proposed rules currently out for comment, we will solve first the issue of spousal support/alimony and then plug the results into a child support calculation.  If there is an Order in effect before December 31, 2018 the calculation does not change.  If the obligor makes $5,000 a month net and the obligee $2,000, you subtract the lesser number from the greater and start with the $3,000 result.  If there will be child support due, the spousal award is 30% of the difference or $900.  If no child support is involved the percentage remains 40 and the result is $1,200.  Both payments will remain taxable and deductible.

But, if the case involves a new Order or the parties should decide they want an Order to be reflective of the Trump tax reforms, the calculation becomes a little more complex.  Here we go; dealing first with a case where child support is not involved:

Obligors net monthly income $5,000
Less payments due to other families  
Adjusted net income available for support $5,000
x .33 $1,650 (this is new)
Obligee’s net monthly income $2,000
x .40 $800 (also new)
Subtract the $800 from the $1,650 and nontaxable support will be $850.  This contrasts with $1,200 taxable/deductible under the ancien regime.

Now, on to a case with the same incomes but a child support element:

Obligors net monthly income $5,000
Less payments due to other families  
Adjusted net income available for support $5,000
x .25 $1250 (this is new and a lower % than above)
Obligee’s net monthly income $2,000
x .30 $600 (also new, also lower % than above)
Subtract the $600 from the $1,250 and you get spousal support or alimony of $650.

These results will now become part of the child support calculation. The spousal award will be subtracted from obligor’s income and added to obligee’s.

  OBLIGOR OBLIGEE
Net incomes available for support 5,000 2,000
Spousal support/apl adjustment (650) +650
Adjusted income available 4,350 2,650
Combined income for support $7,000    
Relative percentages 62% 38%
Guideline amount 2 children 1,660    
Support 1,029 631
If the obligor has 45% of overnights the support is adjusted with a 15 basis point discount to 47%.
Then we allocate health insurance, private education, and activities (w/o discount)            62% Obligor and 38% Obligee.

These are recommendations to the Supreme Court and they are not yet law.  But, given the fact that the federal tax law will change in less than ninety (90) days and something must be done in that period, don’t be surprised to see the proposed regulations adopted at least as a temporary matter.

Every year, both in April and in October, divorce lawyers face a dilemma.  While April is the official tax deadline, just about everyone knows that “complex” returns are almost never complete when spring rolls around and many filers defer to October.  But, when couples split they often ask for the first time whether they should be filing jointly with their spouse.  This often presents difficult questions for the lawyers because we are not accountants and we are latecomers to the financial history of the marriage.  The easy answer is to say “Never!” in response to the inquiry, but that usually means the marital estate will have additional tax burdens.  It also is often a financial shot across the bow of the primary breadwinner, causing aggravation that can set a decidedly negative tone to the negotiation process.

Inevitably, once the discussion about joint versus separate returns gets underway, one of the parties introduces another term, “innocent spouse.”  For many years, if one spouse was seriously hedging in reporting income or by deducting improper expenses, the spouse who did not produce the income or determine the expenses could claim that they should not be held liable for the taxes, interest and penalties.  This was because he or she did not know and could not reasonably have known about the tax evasion.  It is an area where laypeople seem to think they are expert when they most certainly are not.

On Saturday, the Wall Street Journal reported on the story of Rick Jacobsen.  Rick filed jointly with his wife.  In 2012, the IRS found that Mrs. Jacobsen had embezzled about $500,000.00 from a non-profit where she did accounting.  Most people don’t realize this, but if you steal money, the government classifies it as income and you owe taxes on it.  So the IRS sent the joint filing Jacobsen’s an “assessment” for $100,000.00 in income tax due but unpaid.  Jacobsen contested the assessment contending that he did not know about the “income” and should not be assessed for something his wife did without his knowledge.  Last month the U.S. Tax Court agreed.

How come the IRS did not just get the money from Mrs. J?  You know.  She was in prison and the money had disappeared.  So, Mr. Jacobsen filed his own Form 8857 and claimed he knew nothing about the income or the tax associated with it.  He was underway when a new wrinkle emerged. His now “ex” told the Service he did know about the money taken.  Innocent spouses are not innocent if they either knew about or “profited” from the wrongdoing spouse’s conduct.  Thus, if you are reporting $4,000.00 a month in income and you are making mortgage and car payments of $5,000.00 a month, the term “innocent” may not fit comfortably around your financial neck.  The IRS denied Herr Jacobsen relief and he appealed to the Tax Court, which heard his case in 2017.  By the time the case was heard the tax due had swollen to $150,000.00 with penalties and interest.  His happy news is that the Court decided for him on almost all of the unreported income.

How did he prevail against the government?  First, he showed that he was financially unsophisticated.  His wife was an accountant.  He had an associate’s degree and worked in a cheese factory.  Second, and most important, he could show that the money embezzled did not inure to his benefit nor was it apparent from his wife’s lifestyle.  The couple did gamble a lot, reporting $160,000.00+ in gaming income and corresponding losses in one year. The couple filed electronically and husband said his only involvement in tax preparation was providing his W-2 wage statement to his wife.  Not only did their lifestyle not improve, at one point their utilities were suspended for non-payment.  The Tax Court accepted his testimony that his gaming activity was quite modest and involved only slots.  One can picture the IRS attorney wincing during that testimony.  The Court also did not credit wife’s testimony that her husband knew because it was not supported by any evidence.

Other intangibles are credited with his win as well.  He is a disabled veteran who is no longer married to the offending taxpayer and aside from the issues associated with his joint filing, all other returns he filed showed income properly reported and taxes properly paid.

The Opinion reported as T.C. 2018-115, is worthy of review as the presiding judge marches through the statutory facts and case law to reach her conclusion.  She found that husband was “out” for most of the tax liability arising from 2010, but had to pay tax on a small piece of unreported income in 2011 because he filed a joint return, even after his wife was charged with embezzlement. Note also that the case is decided under precedent from the Seventh Circuit Court of Appeals. Other Circuits may employ other standards or analysis.

Also important to know is the statistical trend.  In 2013 there were roughly 35,000 innocent spouse cases presented for disposition.  Relief was denied in just over 10,000 of those cases and granted in some form or the other in 25,000.  In 2017 the number of requests had fallen to 25,000 and in that year the denial rate soared so that the chance of denial was equal to that of getting relief.  As Sgt. Esterhaus said best, “Let’s be careful out there.” And, beware that the tale of an ill-advised joint return may come with a tail of never ending tax obligations.

Congress has been crowing about tax simplification for years. They had a one-page income tax return in 1913 when the first modern return was published by the IRS.  But even then, a one-page return was a written “sleight of hand” as the first line stated Income and the second said only “Deductions” before calling the result “Net Income”.  The new form published on June 29, 2018 by the IRS does purport to be a post card, but as there are still many thousands of pages of tax law and many more thousands of IRS regulations, don’t get too excited just yet.

The new form is worth taking a look at because last year’s tax reform completely altered the landscape of the personal return we have come to know and loathe.  There is simplicity: Your 2017 return took 43 lines before you reached the magic box “Taxable Income”.  The new form gets you there in 10 lines.  How does that come about?  By moving most of the tax return to a supplemental document called Statement 1.  Statement 1 appears to capture the other 33 lines of the old Form 1040 and Schedule “A” (the itemized deductions) as well.  You will still be able to itemize but most people are not going to profit from that experience because a lot of itemized deductions – e.g., mortgage interest, state and local taxes, miscellaneous deductions and medical expense deductions are either phased out or extremely limited.

Family lawyers do these calculations every day, and while we wait for final word and temporary regulations to be published, what we are doing is taking “Gross income” and subtracting $12,000, 18,000 or $24,000 to arrive at taxable income.  Those amounts vary based on whether you are single/married/separate ($12,000), head of household ($18,000) or married/joint ($24,000).  The tax tables are also new and different, and, as some political groups are advertising, they may mean a tax increase for a fair proportion of “middle Americans”.

The biggest changes:

No more dependency exemptions.  If you have four minor children and took the standard deduction in 2017, you had $36,800 in income before the US started to tax you.  Today, that tax starts to bite at $24,000.  Dependency exemptions exist to determine your tax status (e.g., head of household) but they have no arithmetic meaning (in 2017, you deducted $4,050 for each dependent).

State and local income taxes are now combined with real estate taxes and the deduction is capped at $10,000. This is the change that has our neighbors in New York and New Jersey screaming because they pay significant income and real estate taxes. But, even in low tax Pennsylvania, a person with a $1,000,000 home in suburban Philadelphia commonly pays $16,000 in real estate taxes. That person also typically makes $250,000 a year in income and pays $10,000 in state and local taxes. In 2017 he/she deducted both items and reduced taxable income by $26,000 + any interest payments on the mortgage.  In 2018 the mortgage interest deduction is still there, but $16,000 in “tax” deductions (income and real estate tax deductions) disappeared. Result: $4,000 increase in amount due to the IRS.

Alimony. Make your deal and have it in writing before December 31, 2018 because those deals made in 2019 and beyond do not allow alimony to be deducted. Nor is the payment taxable to the recipient.

Miscellaneous deductions included investment fees and sums paid to attorneys to secure an alimony award; gone.

Casualty and theft losses:  If uninsured, they used to be partially deductible.  Not any more, unless the President declares that your casualty occurred in a disaster area he designates.

The jury appears to still be out on HELOC loans or mortgage interest generally. The conservative advice is that your HELOC needs to be exclusively for improvements to your home for it to be deductible. The mortgage interest on new loans is now capped at $750,000 meaning that if you have a million dollar mortgage you formed after December 15, 2017, one quarter of your interest payment cannot be deducted.

So prepare yourself. Tax reform was sold as tax savings. Some will benefit and some will see their federal taxes on the rise.

Lots of electronic ink has been spilled this week on winners and losers coming out of the Tax Reform Act passed on December 20.  Much of this is fairly speculative but some is simply common sense.

If you are a homeowner, take a look at last year’s bill for real estate taxes, then calculate what the foreseen or unforeseen buyer of your house will pay as a mortgage if he or she finances at 4.0-4.5%.  Realize that, until today, real estate taxes and mortgage interest were entirely deductible subject to “phase out” as adjusted gross income grew higher and higher.  For your purposes, assume no phase out by your imaginary “buyer”.   Now take that number and cap it at $10,000, knowing that this is the maximum you can deduct for real estate taxes and state and local income taxes combined.  If you are looking to buy a home for $1,200,000 in Pennsylvania you have to be earning $250,000 a year and the state and local taxes on that income alone will consume your capped deduction of $10,000 for all forms of tax (again, income and property tax).  So your $15,000 a year in school and municipal taxes is effectively lost as a deduction.  Then we have a new cap on deductions for home mortgages.  That cap is $750,000.  If you put 20% down on your $1,200,000 mansion you will still have a $960,000 mortgage.  Only the interest on $750,000 is deductible.  Thus 22% of your mortgage interest payment will be non-deductible, i.e., paid with after tax income along with your real estate taxes.  If you borrowed at 4.5% your $43,000 in annual deductions for mortgage interest is now capped out at $33,700 and your $15,000 in school/municipal taxes was consumed by your deduction for state and local income taxes.  Surprise!  You have $24,000 in deductions lost to tax reform.  With the new rates this income is effectively taxed at 24% (the old rate was 28%).  The new house is about $500 a month more because of the new tax reform.

The fact is that smart buyers will look at this and conclude that what was once fully deductible is now mostly not.  Will they adjust their offer accordingly? $500 a month is not deal killing in its own right given the numbers we are using, but realize as well that big fancy homes are not selling like they used to because younger buyers have grown up in a world where houses are not appreciating by leaps and bounds.  So if you own a high end house, either in terms of what the mortgage debt will be or the real estate taxes will consume, realize that this tax package is making your house pricier than it was just a day ago.

This last year seemed to be the year for buyers in the $500,000 and lower sellers.  They sold homes quickly and often for premiums.  New home buyers seem scared by big debt and their credit histories often include lots of consumer and student debt.  So they often can’t afford the big house even though they might want to own it.  They also tend towards new construction because they perceive it as less problematic. Sellers may view the buyers as short sighted but they are sellers and not buyers.

Bottom line.  Big, expensive, older homes just took a hit.  They were already on the ropes because they were perceived to be high maintenance.  Now they have the added disadvantage of being more expensive because of the limits on deductions the new tax law provides. As we have said many times, real estate is not the investment we experienced in the 1960s, 1970s, 1980s or 1990s.  This is truly a new day.

As this is written, the House and Senate this week are scheduled to vote upon a conference report of both houses of Congress which will “reform” tax law in a major way for the first time since the Reagan administration.  In order to secure passage, Congress needed to find some revenue enhancements to offset the tax reductions allocated to corporate and estate tax payers.

As we predicted in November, alimony as a tax deduction to the payor and an element of income to the payee, appears to be one of the revenue enhancers Congress decided to keep in the final bill, with one twist.  The House version ended alimony as a deduction for any decree or agreement formed after December 31, 2017.  The Senate version of the reform bill did not change the rules relating to alimony.  Thus, we anxiously awaited what would come out of the conference report published on Friday, December 15, 2017.  The 1000 page report can be found at http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-466.pdf . Make certain you have your tax code with you when you start to read as the conference report is only a description of the amendments without the Code.

We did this.  In a nutshell, the Conference Committee adopted the House version but delayed implementation for one year.  Therefore, if you are negotiating or litigating a divorce case and you conclude your matter by agreement or decree before December 31, 2018 (a year from now), the old alimony rules apply.  But, beginning with tax year 2019, any new decree or agreement providing for alimony will be tax free to the recipient and nondeductible by the payor.  As Steve Hurvitz, current head of the Pennsylvania Bar Association Family Law Section observed when he read the bill; “There will be a lot of deals made in 2018.”

The effect of this and other changes in the Tax Code “on the ground” in Courthouses across the state is going to be seismic.  The current support guidelines have deductibility “baked into” the formula.  So, Congress is ripping up those rules.  Other adjustments to gross income that are used to calculate net income for purposes of support are similarly affected.  Mortgage interest is capped at $750,000; state and local tax deductions (including real estate taxes) are also capped at $10,000 ($5,000 if filing separate).  Personal exemptions disappear.  Home equity loans are no longer deductible.  All miscellaneous deductions (e.g., accounting tax prep fees) are eliminated.

The standard deduction is now:

Individuals:  $24,000 if married joint

Heads of Household:  $18,000

Single and Married Separate filers:  $12,000

Indexing rates and other tax items (dependency exemption ) for inflation has been repealed.  The child tax credit is elevated to $2,000 per qualifying child and would not phase out until $200,000 for non-joint filers and $400,000 for joint filers.

One thing would seem to be clear.  If you have a visit to Domestic Relations or a court proceeding in support scheduled for early next year, none of the algorithms in the support calculating software are going to provide a reliable result.  Perhaps the largest adjustment relates to income paid through a qualified partnership, “S” corporation or sole proprietorship.  Twenty (20%) of that qualified income is deductible.  The practical effect of what is or is not deductible is going to be the subject of IRS created regulations.

Any American with a pulse knows that 2017 was to be the first overhaul of U.S. Tax Law since 1986.  Until this week, what was circulating through Washington was an 18 page executive summary.  That changed yesterday when the House Republican Tax Policy Committee circulated a draft bill that specified exactly what changes were being proposed.

The draft bill summary merits some review because parts of it will affect most of us.  But the divorce bar was shocked to see that among those tax “loopholes” on the chopping block is the alimony deduction.

Going back to the 16th Constitutional Amendment, which allowed a federal income tax, there has almost always been a deduction to the person paying alimony on the basis that the deduction would be a corresponding income item for the person receiving the payment.  This rule has been uniform.  But, it may be changing now.  Yesterday’s draft proposal has a Section 1309.  It repeals the alimony deduction for agreements and orders entered after December 31, 2017.  What could this mean for you?  You can still make your alimony deal now, but if this law passes and goes into effect, alimony after 2017 that comes out of new agreements or new court orders will not have any transferred tax effect.

Why would Congress care?  After all, payor’s deduction from income becomes payee’s reported income.  Revenue neutral right?  Well, not quite.  Most payors are in higher marginal tax brackets, 31%, 35% and 39.6%.  A dollar of alimony costs the payor 69 cents, 65 cents or 60.4 cents, depending on the bracket.  The payees are usually in 15% or 25% brackets, so the government loses revenue because the payee is reporting the same alimony but paying a lower rate than the payor.  The Republicans say this costs the Treasury about $830 million per annum.  Eliminate the deduction and reduce the deficit or at least help pay for other tax cuts.

In real world terms suppose I enter an agreement on December 31, 2017 and agree to pay $50,000 a year in alimony for five years.  If my tax bracket is 35%, it costs me $32,500.  If my ex-spouse is in a 25% bracket, she reports the $50,000 and gets to keep $37,500 after tax.  The government effectively subsidizes $5,000 of revenue it would otherwise get but for the present scheme.  Under the proposed bill if the agreement is signed on January 1, 2018, I have no deduction and my ex has no income to report.  The payee just got a 25% increase in support based upon the same facts.

Further complicating this is the fact that for more than twenty-five years the Pennsylvania support guidelines have “assumed” that spousal support and unallocated orders of spousal and child support are fully deductible.  The tax assumptions are said to be “cooked into” the guideline numbers themselves.  If the current bill passes, there is some uncooking that needs to be done because the assumptions have now been undone.

Why devote all of this energy to what is just a first draft bill?  After all, this will have to go through many iterations and may change or be eliminated.  True enough with one exception.  2018 is an election year.  Republicans in 2016 told the world that this Congress was going to reform health care and revise the tax laws.  So far, nothing has been accomplished and most legislators will not want to be campaigning this time next year on a “look what wasn’t accomplished” platform.  So, this bill has a good chance of moving very fast and a decade’s long tradition of alimony tax law may recede into the mists of time.  Stay tuned.

Since the striking down of the Defense of Marriage Act by the United States Supreme Court, many state courts have been trying to fill in the legal vacuum created between the legality of same-sex marriage and the lack of codified law through legislation.

Though many Courts of Common Pleas have taken on issues, it really requires good appellate decisions to establish precedential authority on an issue. This can take time since it requires the confluence of good facts applied to the right law (or lack thereof) to bring an issue in dispute and litigants prepared to take it to the appellate level. Consequently, it has taken time for cases dealing with nuanced same-sex marriage and other issues to make their way into the appellate system for determination, but with two years removed from the Obergefell case, we are starting to see these cases decided by the Superior and Supreme courts. In fact, just last December we saw the Superior Court reverse a Philadelphia County decision and establish that a civil union will be afforded the same access to the Family Courts as a marriage.

Recently, the issue of whether there can be a valid common law same-sex marriage was addressed by the Superior Court in In Re: Estate of Carter, S., Appeal of: Hunter, M. This is an issue which some county courts have addressed, but no further guidance from the appellate courts.  The Carter case involves the widower of a spouse killed in motorcycle accident.  In an action supported by the families of the couple, Michael Hunter sought exclusion from paying the 15% inheritance tax on the basis that he was Mr. Carter’s spouse and they had a valid common law marriage going back to 1997.  It should be noted that common law marriage was abolished in Pennsylvania is 2005, but common law marriages established prior to that time are valid, while same-sex marriage was not legalized in Pennsylvania until 2014.

The trial court, relying on the illegality of same-sex marriage until 2014 and abolishment of common-law marriage in 2005 held that Mr. Hunter proved neither the basis for a common-law marriage and, if he had, he was precluded from being grandfathered into common-law marriage because of the 2014 effective date of the legality of same-sex marriage.  Essentially, he barred Mr. Hunter’s claim by law and fact.

On appeal, the Superior Court found that the trial court erred and that Hunter and Carter did, in fact, establish a common law marriage. They considered the couple’s 1997 exchange of rings and words of intention to be married, as well their attempt to utilize every available legal means to protect their rights and mutually rely on each other (i.e. serving as medical and financial powers of attorney; being beneficiaries to each other’s policies; having joint financial accounts; owning property together).

More pointedly, the Superior Court held that due to judicial precedent, same-sex couples have the same right to marriage as opposite-sex couples and the court cannot rely on an invalidated provision of the Marriage Law to deny Mr. Carter’s rights through common-law marriage. In other words, once same-sex marriage was legalized in 2014, the courts cannot retroactively bar couples similarly situated as Hunter and Carter from demonstrating a common-law marriage prior to 2005. Same-sex couples should have always had the right to marriage; therefore, you cannot bar a common law marriage claim on the basis that the right was “established” in 2014.

This is not a money management blog but what we increasingly find is that many divorce clients simply “trusted” that their resources would be sufficient to carry them through retirement. The great awakening comes when they discover they are now splitting what looked like a comfortable retirement and that their ability to make up for lost time has been lost amidst the sands of time.

So today, lawyers need to help clients be creative, and based on an article in the March 22 Wall Street Journal, there is reason to take a second look at a device invented a few years ago called the reverse mortgage. When first introduced, they were disparaged as a kind of sleight of hand trick. The number of them issued spiked just after the Great Recession but then eased off as the economy (or at least the stock markets) recovered.

A reverse mortgage is what it sounds like. You have equity in a home that is essentially a trapped asset. A reverse mortgage involves your pledge of that equity to a lender who gives you your own trapped money. The true economist would dismiss this as absurd. If you need cash out of your home, don’t pay anyone fees or anything else to tap it; just sell, downsize and take the cash from the settlement proceeds. That’s why economics is called the dismal science.

The problem with today’s older divorced couples is that they want everything to stay the same. Sure, it’s only you living in the house that once held three or four. But you like it, you like the neighborhood, and besides, moving means dealing with 30 years of accumulated things that you call treasures and your child dismiss as “crap” when they come for Thanksgiving.

I typically advise clients that they should at least consider downsizing. The response is the same. A longing look like I told them they need to put the dog down unless his health improves and either a testy “Maybe next year” or even more challenging “Must I?” In the end, we assess matters and give clients options. No pets have met their demise on my watch but I have told several clients that unless they reduce their housing costs in the near term, they may need to consider a shorter life.

Reverse mortgages can be a way to ease the pain. At their worst, people borrow them to speculate. This is pure foolishness. But the mortgage in reverse can be a very effective tool, especially to cover late life rainy days. The best example is a sustained down market. If you are retired and drawing $4000 a month while getting $2,000 in social security, when the market tumbled, your $4,000 is coming out of a measurable smaller pool. If you had $300,000 in retirement and drew $3,000 a month in January, 2008 you had  100 months of retirement assuming no increase in value and no inflation. Your draw was 1%. By late Fall, your $300,000 was now $150,000 which mean your pool had halved and your draws were 2% a month.  The market quickly shot back up to 11,000 but if the trough had been sustained and you didn’t halve your expenses, you were burning retirement fast.

If you had a line of credit associated with a reverse mortgage, you could have reduced the impact on your portfolio by drawing on your home equity. Then you would have had more on hand to ride the market back to some form of equilibrium even though your home equity would have been reduced. There was a time when home prices could be said to keep pace with the market. But that is not a recent trend. A tract home in the Philadelphia region with 3,000 square feet  sold in July, 2008 for $400,000. Six years later it sold for $420,000 and it today draws estimates for $410-425,000.  Had you known in Fall, 2008, you could have borrowed $100,000 in home equity; stuck it in a Dow index fund and today your $100,000 would be worth $251,000. But, alas, that would require speculation.

But there are good times to draw on home equity. You sit, happily in your crap filled house burning through $3,000 a month of retirement. The roofer tells you “It’s time for me to get $20,000.” That roof can come out of home equity much more readily than an investment portfolio because the house is not really gaining value.

Now for some of the trickier strategies; tricky but solid if done in the right way. You are on a fixed income. You have $300,000 in equity but $200,000 in mortgage debt. The monthly mortgage of $200,000 plus $600 a month in real estate taxes is really crimping your ability to see the grandkids. Why not take a reverse mortgage on the equity to service the real mortgage you owe. This cuts expenses while leaving your investment portfolio intact. Yes, your real estate portfolio is going to decline but that wealth right now is trapped in housing and not really increasing.

Another strategy. We are told that if you delay drawing on Social Security from ordinary retirement to age 70, the monthly benefit payable rises by 7% a year. That’s a pretty solid return and it’s guaranteed unless you conk out along the way. But, you may look at the pension and retirement money you now have and say, I can’t really make it to 70 without tapping my social security. Why not consider a reverse mortgage to fund the “gap” of payments you might otherwise get if you applied early or at normal retirement age.

Your employer lays you off in December 2015. Because you are not a kid it is going to take time to find a job, which means that your 2016 income will be low. Financial planners will suggest that the off-year is a prime time to convert a traditional IRA to a Roth because your income will be low. But you do still have to pay the tax on the conversion. Why not take that out of a reverse mortgage to cover the taxes.

Typically, reverse mortgage payments come without tax because the payment is not income but a reduction in home equity. You are effectively getting your own money. Federal regulations now make it so that a steep decline in home equity such that the amount you took out exceeds the equity does not open the door to liability on your part. So this is now a tool and not a toy. It can be abused but it has options that can make your retirement far more comfortable.

Up until about two years ago, a good portion of questions which came through this blog were questions about common-law marriage. Usually, it was someone asking whether or not they had a common law marriage and if so/if not, what they needed to do to dissolve it or enforce it.

I felt bad for many of those people who described facts in which a long-term relationship abruptly ended or the need to be designated as a spouse to receive medical benefits. Often, their facts simply did not describe the criteria for a common law marriage under Pennsylvania law before it was abolished in 2004. The one critical factor always seemed to be lack of any specific intent to be considered “married” by the parties.

An interesting case out of Bucks County, however, recently applied common law marriage to a same-sex couple even though one of the partners was dead. The Honorable Theodore Fritsch Jr. granted the request of Sabrina Mauer to have her twelve year relationship with Kimberly Underwood declared a common law marriage. Ms. Maurer cited their 2001 New Jersey commitment ceremony as indicia of their intent to be married.

Ms. Mauer brought the Bucks County action after Ms. Underwood passed away in November 2013.  Since then she’s been refused certain spousal benefits and is required to pay inheritance taxes on Underwood’s estate; issues which, ironically, are nearly identical to those raised by Edith Winsor in the seminal same-sex marriage case, United States v. Windsor.

Judge Fritsch found the marriage valid back to the date of their New Jersey commitment ceremony. An article by Gina Passarella of The Legal Intellgencier quotes the Order as stating, “[their] marriage is valid and enforceable, and they are entitled to all rights and privileges of validly licensed, married spouses in all respects under the laws of the commonwealth of Pennsylvania.” Ms. Passarella also identifies that of the several governmental agencies which were put on notice of the action, none appeared to contest the case; the Department of Revenue sought more time to respond before opting not to take a position which, in such cases, is very much a position.

Prior to civil unions, domestic partnerships, and, eventually, marriage, exchanging rings and having a commitment ceremony before friends and family was perhaps the only symbolic way a same-sex couple could celebrate a commitment to each other.  This case proves that what was once a symbol, without any legal import in 2001, can ironically fulfill in 2015 the elusive element of common law marriage by demonstrating a public or cognizable intent of the parties to be married.

Unaddressed in the judge’s order or the article is the consideration of whether or not the timing of the entire relationship factored into the decision. Ms. Mauer’s common law marriage began in 2001 before the 2004 abolition of common law marriage and ended upon Ms. Underwood’s death in November 2013 – four or five months after Windsor essentially legalized same-sex marriage. Any common law marriage must be deemed to have been entered into before January 1, 2005; less certain is whether the relationship had to continue through the Windsor decision to be a valid common law marriage. If Ms. Underwood had passed away in 2012, would it have changed the outcome? Perhaps, it would. It may take other same-sex couples or widow/ers to raise this issue, but Judge Fritsch’s decision undoubtedly opens the door for such questions to be considered.

(Photo credit: 123rf.com; Jens Tandler)

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Aaron Weems is an attorney and editor of the Pennsylvania Family Law Blog. Aaron is a partner in Fox Rothschild’s Blue Bell, Pennsylvania office and practices throughout the greater Philadelphia region. Aaron can be reached at 610-397-7989; aweems@foxrothschild.com, and on Twitter@AaronWeemsAtty.

401(k) retirement plans are commonly divided in divorces by way of a Qualified Domestic Relations Order which prevents the transfer of the funds from the plan participants account to the other spouse from being a taxable event such as it would be if they simply withdrew money from the account. If you participate in a 401(k) plan then you are probably well aware that withdrawing money before you reach retirement age subjects you to a 10% penalty on the amount of money you withdrew and you have to pay income tax on the withdrawal.

For many divorce cases, however, the use of the 401(k) funds is a necessity for one or both of the parties. Recognizing the reality that people needed access to their accumulated retirement funds for legitimate and immediate financial purposes, the IRS created a mechanism for being able to utilize your 401(k) funds without having to pay the taxes or penalty on the withdrawals. A “hardship distribution” is defined by the IRS under Reg. § 1.401(k)-1(d)(3)(i) as an immediate and heavy financial need by the employee or the employee’s spouse or dependent with the withdrawal being a sufficient amount to satisfy the need.

The need to take a “hardship distribution” is not uncommon for many people involved in a divorce. Divorces can cause financial damage to both parties, but particularly the “dependent spouse” who may not have the cash flow or immediate resources to address an urgent financial need. It can also be a tool for the “independent spouse” who transferred a significant portion of their wealth to the other spouse. The award of 401(k) assets (if in the form of an IRA, the analysis changes somewhat) may be the financial resource they need to stabilize and rebuild their financial health. While any financial advisor would advise against using tax deferred money if it all possible, circumstances dictate otherwise at times and knowing this option exists may be helpful.

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Aaron Weems is an attorney and editor of the Pennsylvania Family Law Blog. Aaron is a partner in Fox Rothschild’s Blue Bell, Pennsylvania office and practices throughout the greater Philadelphia region. Aaron can be reached at 610-397-7989; aweems@foxrothschild.com, and on Twitter @AaronWeemsAtty.