“You rush a miracle man, you get rotten miracles.” – from The Princess Bride (1987 Movie)

A recent New York Law Journal article discussed a case that is appearing before the New York State highest court, the Court of Appeals and involves the issue of how Madoff investments impact the divorce and separation process. The task of the Court of Appeals is to decide whether to revisit equitable distribution, where the 50/50 split of assets was predicated on the husband’s retention of funds in a Madoff account. Since the account has turned out to be empty, the husband claims that the division of assets is no longer 50/50 and that it would be equitable for the wife to return part of her share to the husband.

This case provides a prime example of Sometimes it Takes a Careful Village; Alla Roytberg; Law Firm & Mediation Practice of Alla Roytberg, P.C.the potential complexity of family disputes. These disputes may be around a separation or a divorce, a will probate and inheritance rights or a family business. They involve many areas of the law, finance, psychology and tax and are often difficult to untangle in view of decades of interpersonal relationships and loose record keeping between the parties. It is critical for all participants, lawyers or not, to understand and utilize other professionals. Divorce, trust and estates and business law attorneys are usually not capable of analyzing a financial problem completely without the help of a financial or tax expert. They can flag the issues, but it is imperative to get the advice of appropriately trained professionals to ensure the results of a settlement end up being fair and equitable in the long run.

For example:

  • If one of the spouses has filed a bankruptcy at some point, it may affect the other spouse and the way the property should be divided. Bankruptcy counsel is often brought in on cases like this.
  • If the parties own a home and that home is threatened by a foreclosure, they may be considering negotiating a downward modification of a mortgage, or a short sale. If this is the case, they may need to involve an attorney who is experienced in doing short sales to assess their realistic chances of selling it, walking away from the debt and dealing with any tax consequences that may result.

Often, division of property and transfers of property between spouses surrounding separation or divorce, or between family members in general, is replete with possible tax consequences. For example:

  • If a husband buys out his wife’s interest in a home, simply calculating the 50% share of net equity in the home may not be an accurate calculation because a certain number of years later, the person who retains the home may then sell it and incur a capital gains’ tax that would, in hindsight, seriously skew, what was expected to have been a 50/50 split in one direction. This is why it is extremely important to go through a “tax impact” analysis before an agreement is finalized and to bring it to a judge’s attention if there is a trial on equitable distribution.

In addition to tax issues, there are issues concerning life insurance and disability insurance, children’s college plans, health insurance and retirement, which may require the input of other professionals. Dividing assets fairly and equitably is a complex matter with possible unintended consequences. It’s really important to reach out to trained professionals to ensure that the intended result is actually being achieved.

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