Drafting Considerations for Marital Settlement Agreements

Finally, specific provisions concerning time-sharing or visitation should be included in any parenting plan. Specificity, as with all other sections in the agreement, is key in describing time-sharing. For instance, in addition to including exchange times and locations for the regular time-sharing schedule, a parenting plan should also include a detailed holiday schedule as well as the children's summer breaks from school, including whether the parties will be entitled to consecutive weeks for vacations and, if so, whether the parties will be required to exchange itineraries in advance and be permitted to travel out of the country with the minor children.

Real Property

Once upon a time, the most significant asset in any divorce was the marital residence. Now, as a result of the housing market crisis, rather than fighting for the home, parties are fighting over who will bear the burden of accepting title. Faced with short sales, foreclosures, and negative equity (meaning the parties owe more on their mortgage note than the home is worth), attorneys must craft provisions that will address these issues, understanding that these problems will frequently plague the parties for months or even years after the agreement is signed. For instance, if a party is to retain a mortgaged property, and the property's title and mortgage loan are in both parties' names, it is important to contemplate holding an executed deed in escrow until the party retaining the home is able to refinance the prior debt and remove the former spouse from the liability.

If the property is “under water” or the recipient spouse is otherwise unlikely to qualify to refinance the mortgage indebtedness, additional considerations are crucial. Specifically, what will occur if the recipient spouse is unable to refinance the home within the contractually agreed-upon specified time? Will the parties be required to attend mediation, or should the recipient spouse be required to list the property for sale immediately in order to ensure that the former spouse does not remain on the mortgage debt for a lengthy period of time following the divorce? If the latter, it may be advisable to have the parties execute a separate, confidential agreement, which sets forth mutually agreed-upon terms related to the sale of the property, such as the selection of a realtor and list price.

Such an agreement is highly recommended if the parties are going to list the property for sale immediately, rather than have one party retain the property. This confidential agreement, which will be shared only with the parties' attorneys and will not be filed with the court, can help to avoid disputes between the parties, such as claims that a spouse is not accepting reasonable offers or is failing to timely respond to the realtor's requests, thereby circumventing unnecessary litigation. Additional provisions for the settlement agreement under this circumstance include how expenses related to the property will be paid during the pendency of the listing.

One option is to have the parties deposit monies into a separate account created solely for the payment of these expenses, such as the mortgage, taxes, insurance, and necessary maintenance and repairs. Such a provision would describe: 1) where the monies would originate (i.e., will the parties each deposit a set amount from separate accounts or will they withdraw funds from a joint account or even a home equity line of credit?), 2) whether the parties agree to deposit additional monies should the initial contribution become insufficient to meet ongoing needs and, if so, how much each party would be required to deposit into the account; 3) the consequences if monies are improperly withdrawn from the account for unauthorized purposes; and 4) who will be responsible for making the timely payments related to the property (i.e., who will actually write the check to pay the mortgage each month).

In short-sale situations, parties will need to ensure that they receive approval from the banks, not only as to the offer on the home that is less than the amount of the outstanding mortgage loan, but also as to whether the bank will agree to forgive the remaining balance. If the short sale is approved by the bank, there may be possible tax consequences related to “discharge of indebtedness” income. Specifically, the IRS may consider the mortgage loan debt that was forgiven by the bank to be taxable income, which must be reported on one's federal income tax return, unless an exception, such as the one found in the Mortgage Forgiveness Debt Relief Act of 2007 (Relief Act), which only applies to debts forgiven in calendar years 2007 through 2012, apply. An analysis of these possible tax consequences must be conducted and properly addressed in the settlement agreement, including a determination as to whether the parties will file their tax return jointly or separately. If they file jointly and do not qualify under the Relief Act, they will divide the tax liability; if they file separately, either one party will bear all of the tax consequences related to the “discharge of indebtedness” income, or both parties will claim an agreed percentage of it.

In addition to the foregoing possible tax consequences, attorneys must be aware of another tax issue ' state documentary stamp taxes, which are incurred upon the recordation of a deed and vary per state (for instance, in Florida, excepting Miami-Dade County, the documentary stamp tax rate is currently 70 cents per $100). Generally, however, a transfer of a marital residence from one spouse to another pursuant to a divorce is exempt from this tax. Consequently, transferring the property to a party as part of the divorce settlement, rather than selling the home after the divorce to a third party or even the former spouse (for instance, if the other party is unable to refinance and the agreement contemplates a buy-back option for the former spouse still on the mortgage), could save thousands of dollars in documentary stamp taxes. Regardless of when and to whom the property will be transferred, the settlement agreement should provide for how the costs associated with the transfer, including recording fees and documentary stamp taxes, will be paid. A full understanding of how these costs may vary depending upon the particular situation is imperative. A client does not want to be surprised by an expense about which they were uninformed when signing the settlement agreement.

Business Interests

If a party to a divorce owns his or her own business and the parties have made the decision to forgo a formal business valuation, the attorney for the owner-spouse should include a waiver provision in the settlement agreement, which acknowledges that a forensic business valuation for the purpose of the divorce has not been conducted and that the parties waive their right to obtain the valuation. Additionally, as with the real property considerations above, the parties should similarly contemplate what costs may be associated with the transfer of any business interests, for instance, if the parties are joint owners in a business entity and additional attorneys' fees and costs related to the preparation of documents transferring the ownership interest from one spouse to the other will be necessary.

Retirement Accounts

In order to ensure that the transfer of retirement accounts pursuant to a divorce will remain tax free under the Internal Revenue Code, a marital settlement agreement should specifically contemplate and require the parties to work together with all associated professionals to ensure that necessary documentation is to be drafted for any Qualified Domestic Relations Order (QDRO). In order to avoid any disagreement after the signing of the agreement, parties should specify a mutually agreed-upon professional in advance and specify how the fees associated with the preparation of the QDRO will be paid.

Alimony

Aside from the variations of spousal support and inclusion in the settlement agreement concerning the extent and limitations of such support, it is important for an attorney to understand the possible tax implications associated with support, including whether the support will be includable as income to the receiving spouse and deductible for the payor spouse. In drafting settlement agreements, it may be beneficial for an attorney to consult with an expert as to the possible tax consequences and alternatives for each party depending upon the contemplated alimony.

Child Support

Other than the standard provisions concerning amount of child support and method of payment, the most significant addition to any child support provision may be the reasoning behind how those particular terms were reached between the parties. For instance, a statement explaining that the child support set forth in the agreement was above the child support guidelines and, therefore, was intended to be a heightened obligation by one party may affect, at least as to the burden of proof, the ability of said party to later seek a reduction of the contractually agreed-upon support. Conversely, if a party believes that the income of the other has been underreported or is likely to improve in the near future, a provision can be included in the agreement requiring the exchange of financial documentation, such as W-2s, 1099s, and K-1s, each year by a specific date, thereby enabling the receiving party to know when a modification action may be appropriate. Last, parties are encouraged to consider whether and how other expenses related to the minor children will be paid, including, but not limited to, private school tuition, car insurance, cell phone expenses and the like. Similarly, if college funds have been established by the parties, an agreement addressing required contributions by each party to such funds can be set forth in the agreement. The agreement should also address what happens with the account should a minor child not attend college as anticipated.

Confidentiality Provisions

In situations where one or both parties may have a heightened profile, a confidentiality provision is vital. Such provisions, too, are not strictly limited to celebrity clients. For instance, clients who are well-known community or business leaders may need the protection afforded by such a provision, which requires the parties to keep confidential the disclosures associated with their divorce, such as all matters pertaining to the operation of a client's business or the parties' finances. These provisions can even curtail a party's ability to discuss the terms of their agreement or of their divorce generally with third parties, including the press. If necessary, the agreement may set forth penalties and remedies, such as damages and injunctive relief such as damages and injunctive relief, in the event of a breach of confidentiality.

Mediation Requirements

Consider whether it would be beneficial for parties in a particular matter to attend mediation in the event of a breach, disagreement or modification of the agreement. Other alternative dispute resolution methods may also be useful. For instance, if parenting issues are a concern and there is a likelihood the parties will have difficulty abiding by their parenting agreements, such as shared parental decision-making, an agreement can require the parties to attempt to resolve such disputes with a professional, such as a parent coordinator, before seeking court intervention. Such a provision may help the parties to avoid the cost and time associated with litigating such disputes and equip them with the skills necessary to resolve such differences before they become reoccurring.

Conclusion

The foregoing considerations are certainly not exhaustive of the numerous specific provisions required in any given dissolution of marriage case. They are, however, indicative of the types of issues and solutions of which an attorney should be aware when drafting a marital settlement agreement. Careful consideration of all unique issues in any given matter while drafting a settlement agreement will not only resolve all immediate issues, but also avoid complications before they arise and thwart the settlement reached by the parties.

Rebecca Palmer, a member of this newsletter's Board of Editors, leads the Family & Marital Law practice at Orlando, FL's Lowndes, Drosdick, Doster, Kantor & Reed, P.A. Crystal Espinosa Buit is an associate in the same practice.

When drafting marital settlement agreements, there are many considerations to be made as to the myriad provisions contained therein. Often, however, these vital components can be inadvertently overlooked, particularly during the rush of a mediation when parties, and their attorneys, are in a hurry to have an agreement signed before one party changes his or her mind after hours of settlement negotiations. In order to ensure that important provisions are incorporated into every marital settlement agreement, mediated or not, it is advisable to consider the following prior to finalizing any agreement.

Parenting Plan

Whether incorporated into a marital settlement agreement or set forth in a separate agreement, a parenting plan is essential to any divorce in which minor children are involved. Parenting provisions that should be addressed include shared decision-making, and whether only one party will have ultimate decision-making authority on certain major issues affecting the welfare and lifestyle of the minor children. In matters where parties are unlikely to be able to engage effectively in shared parenting, ultimate decision-making authority may save the parties from costly litigation over issues such as where the minor children will attend school and whether a certain course of medical treatment is appropriate. Provisions related to cooperation between the parties, and maintaining and encouraging relationships among the minor children and each parent are also crucial, particularly when one parent is acting in a way that is not in these children's best interests, or is damaging to one party's relationship with them.

Finally, specific provisions concerning time-sharing or visitation should be included in any parenting plan. Specificity, as with all other sections in the agreement, is key in describing time-sharing. For instance, in addition to including exchange times and locations for the regular time-sharing schedule, a parenting plan should also include a detailed holiday schedule as well as the children's summer breaks from school, including whether the parties will be entitled to consecutive weeks for vacations and, if so, whether the parties will be required to exchange itineraries in advance and be permitted to travel out of the country with the minor children.

Real Property

Once upon a time, the most significant asset in any divorce was the marital residence. Now, as a result of the housing market crisis, rather than fighting for the home, parties are fighting over who will bear the burden of accepting title. Faced with short sales, foreclosures, and negative equity (meaning the parties owe more on their mortgage note than the home is worth), attorneys must craft provisions that will address these issues, understanding that these problems will frequently plague the parties for months or even years after the agreement is signed. For instance, if a party is to retain a mortgaged property, and the property's title and mortgage loan are in both parties' names, it is important to contemplate holding an executed deed in escrow until the party retaining the home is able to refinance the prior debt and remove the former spouse from the liability.

If the property is “under water” or the recipient spouse is otherwise unlikely to qualify to refinance the mortgage indebtedness, additional considerations are crucial. Specifically, what will occur if the recipient spouse is unable to refinance the home within the contractually agreed-upon specified time? Will the parties be required to attend mediation, or should the recipient spouse be required to list the property for sale immediately in order to ensure that the former spouse does not remain on the mortgage debt for a lengthy period of time following the divorce? If the latter, it may be advisable to have the parties execute a separate, confidential agreement, which sets forth mutually agreed-upon terms related to the sale of the property, such as the selection of a realtor and list price.

Such an agreement is highly recommended if the parties are going to list the property for sale immediately, rather than have one party retain the property. This confidential agreement, which will be shared only with the parties' attorneys and will not be filed with the court, can help to avoid disputes between the parties, such as claims that a spouse is not accepting reasonable offers or is failing to timely respond to the realtor's requests, thereby circumventing unnecessary litigation. Additional provisions for the settlement agreement under this circumstance include how expenses related to the property will be paid during the pendency of the listing.

One option is to have the parties deposit monies into a separate account created solely for the payment of these expenses, such as the mortgage, taxes, insurance, and necessary maintenance and repairs. Such a provision would describe: 1) where the monies would originate (i.e., will the parties each deposit a set amount from separate accounts or will they withdraw funds from a joint account or even a home equity line of credit?), 2) whether the parties agree to deposit additional monies should the initial contribution become insufficient to meet ongoing needs and, if so, how much each party would be required to deposit into the account; 3) the consequences if monies are improperly withdrawn from the account for unauthorized purposes; and 4) who will be responsible for making the timely payments related to the property (i.e., who will actually write the check to pay the mortgage each month).

In short-sale situations, parties will need to ensure that they receive approval from the banks, not only as to the offer on the home that is less than the amount of the outstanding mortgage loan, but also as to whether the bank will agree to forgive the remaining balance. If the short sale is approved by the bank, there may be possible tax consequences related to “discharge of indebtedness” income. Specifically, the IRS may consider the mortgage loan debt that was forgiven by the bank to be taxable income, which must be reported on one's federal income tax return, unless an exception, such as the one found in the Mortgage Forgiveness Debt Relief Act of 2007 (Relief Act), which only applies to debts forgiven in calendar years 2007 through 2012, apply. An analysis of these possible tax consequences must be conducted and properly addressed in the settlement agreement, including a determination as to whether the parties will file their tax return jointly or separately. If they file jointly and do not qualify under the Relief Act, they will divide the tax liability; if they file separately, either one party will bear all of the tax consequences related to the “discharge of indebtedness” income, or both parties will claim an agreed percentage of it.

In addition to the foregoing possible tax consequences, attorneys must be aware of another tax issue ' state documentary stamp taxes, which are incurred upon the recordation of a deed and vary per state (for instance, in Florida, excepting Miami-Dade County, the documentary stamp tax rate is currently 70 cents per $100). Generally, however, a transfer of a marital residence from one spouse to another pursuant to a divorce is exempt from this tax. Consequently, transferring the property to a party as part of the divorce settlement, rather than selling the home after the divorce to a third party or even the former spouse (for instance, if the other party is unable to refinance and the agreement contemplates a buy-back option for the former spouse still on the mortgage), could save thousands of dollars in documentary stamp taxes. Regardless of when and to whom the property will be transferred, the settlement agreement should provide for how the costs associated with the transfer, including recording fees and documentary stamp taxes, will be paid. A full understanding of how these costs may vary depending upon the particular situation is imperative. A client does not want to be surprised by an expense about which they were uninformed when signing the settlement agreement.

Business Interests

If a party to a divorce owns his or her own business and the parties have made the decision to forgo a formal business valuation, the attorney for the owner-spouse should include a waiver provision in the settlement agreement, which acknowledges that a forensic business valuation for the purpose of the divorce has not been conducted and that the parties waive their right to obtain the valuation. Additionally, as with the real property considerations above, the parties should similarly contemplate what costs may be associated with the transfer of any business interests, for instance, if the parties are joint owners in a business entity and additional attorneys' fees and costs related to the preparation of documents transferring the ownership interest from one spouse to the other will be necessary.

Retirement Accounts

In order to ensure that the transfer of retirement accounts pursuant to a divorce will remain tax free under the Internal Revenue Code, a marital settlement agreement should specifically contemplate and require the parties to work together with all associated professionals to ensure that necessary documentation is to be drafted for any Qualified Domestic Relations Order (QDRO). In order to avoid any disagreement after the signing of the agreement, parties should specify a mutually agreed-upon professional in advance and specify how the fees associated with the preparation of the QDRO will be paid.

Alimony

Aside from the variations of spousal support and inclusion in the settlement agreement concerning the extent and limitations of such support, it is important for an attorney to understand the possible tax implications associated with support, including whether the support will be includable as income to the receiving spouse and deductible for the payor spouse. In drafting settlement agreements, it may be beneficial for an attorney to consult with an expert as to the possible tax consequences and alternatives for each party depending upon the contemplated alimony.

Child Support

Other than the standard provisions concerning amount of child support and method of payment, the most significant addition to any child support provision may be the reasoning behind how those particular terms were reached between the parties. For instance, a statement explaining that the child support set forth in the agreement was above the child support guidelines and, therefore, was intended to be a heightened obligation by one party may affect, at least as to the burden of proof, the ability of said party to later seek a reduction of the contractually agreed-upon support. Conversely, if a party believes that the income of the other has been underreported or is likely to improve in the near future, a provision can be included in the agreement requiring the exchange of financial documentation, such as W-2s, 1099s, and K-1s, each year by a specific date, thereby enabling the receiving party to know when a modification action may be appropriate. Last, parties are encouraged to consider whether and how other expenses related to the minor children will be paid, including, but not limited to, private school tuition, car insurance, cell phone expenses and the like. Similarly, if college funds have been established by the parties, an agreement addressing required contributions by each party to such funds can be set forth in the agreement. The agreement should also address what happens with the account should a minor child not attend college as anticipated.

Confidentiality Provisions

In situations where one or both parties may have a heightened profile, a confidentiality provision is vital. Such provisions, too, are not strictly limited to celebrity clients. For instance, clients who are well-known community or business leaders may need the protection afforded by such a provision, which requires the parties to keep confidential the disclosures associated with their divorce, such as all matters pertaining to the operation of a client's business or the parties' finances. These provisions can even curtail a party's ability to discuss the terms of their agreement or of their divorce generally with third parties, including the press. If necessary, the agreement may set forth penalties and remedies, such as damages and injunctive relief such as damages and injunctive relief, in the event of a breach of confidentiality.

Mediation Requirements

Consider whether it would be beneficial for parties in a particular matter to attend mediation in the event of a breach, disagreement or modification of the agreement. Other alternative dispute resolution methods may also be useful. For instance, if parenting issues are a concern and there is a likelihood the parties will have difficulty abiding by their parenting agreements, such as shared parental decision-making, an agreement can require the parties to attempt to resolve such disputes with a professional, such as a parent coordinator, before seeking court intervention. Such a provision may help the parties to avoid the cost and time associated with litigating such disputes and equip them with the skills necessary to resolve such differences before they become reoccurring.

Conclusion

The foregoing considerations are certainly not exhaustive of the numerous specific provisions required in any given dissolution of marriage case. They are, however, indicative of the types of issues and solutions of which an attorney should be aware when drafting a marital settlement agreement. Careful consideration of all unique issues in any given matter while drafting a settlement agreement will not only resolve all immediate issues, but also avoid complications before they arise and thwart the settlement reached by the parties.

Rebecca Palmer, a member of this newsletter's Board of Editors, leads the Family & Marital Law practice at Orlando, FL's Lowndes, Drosdick, Doster, Kantor & Reed, P.A. Crystal Espinosa Buit is an associate in the same practice.