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Just and Equitable
(provided by Kevin Zlock, P.C.)
Property Settlement Agreements are a great way for parties who are separating or divorcing to settle property issues amicably and to their mutual satisfaction. Without proper legal representation, however, these agreements can lock people into settlements that are detrimental. Below we discuss 5 of the pitfalls people should avoid when working on such agreements:
"Husband shall pay a lump sum of $5,000 cash to Wife." This phrase obligates Husband to pay a lump sum of $5,000 cash to Wife, but when does Husband have to pay the $5,000? According to this wording, Husband pays Wife whenever he wants. Timing is not an issue when a party to an agreement is simply keeping an asset or liability in one's own name, but it is a crucial issue when it comes to transfers of assets or liabilities between parties. Setting up timelines forces parties to act efficiently to satisfy the terms of the agreement, and if a party does not comply with the timeline, then the other party does not have to wait until far into the future to get that to which he/she is entitled.
2. Post-Tax vs. Pre-Tax Assets
Consider the following simple distribution:
Wife keeps $100,000 from her IRA and gets $200,000 from the parties' joint money market account, totaling $300,000.
Husband gets $200,000 from Wife's IRA and gets $100,000 from the parties' joint money market account, totaling $300,000.
Is this a true 50/50 division of assets, or did someone get a better deal? While this is a seemingly equal division of assets, Wife got a much better deal than Husband did. Two-thirds of Wife's settlement is comprised of monies from the parties' joint money market account, which constitute post-tax monies. As the parties have already paid taxes on these proceeds, these monies are equal to cash. Two-thirds of Husband's settlement is comprised of monies from Wife's IRA, which constitute pre-tax monies. The parties have not paid taxes on these monies, so when they go to withdraw funds from the IRA, they will have to pay taxes on these monies, and these taxes will decrease the amount of cash they receive. Consequently, Wife will get $200,000 cash and $100,000 minus taxes, whereas Husband will get $100,000 cash and $200,000 minus taxes. By getting more of her settlement in post-tax assets, she does much better than Husband.
3. Joint Assets/Liabilities
"The parties jointly own the residence located at 123 Main Street, Philadelphia, Pennsylvania. The parties agree that said residence shall be Husband's sole and separate property. Furthermore, the parties agree that the mortgage shall be Husband's sole and separate liability." Pursuant to this section of the agreement, Husband gets the residence and sole responsibility for the mortgage, but many issues remain open. To Husband's detriment, Wife is not obligated to sign the Deed transferring the residence solely into Husband's name, so technically, her name can stay on the Deed indefinitely.
To Wife's detriment, Husband is not obligated to refinance the mortgage solely into his name, so Wife stays financially liable for the mortgage. While the agreement makes the mortgage Husband's responsibility so he would be liable to Wife for damages should he fail to make the payment, the real world would hold Wife liable for Husband's failure to pay the mortgage, causing damage to her credit rating. Additionally, the fact that Wife is still on the mortgage may prevent her from qualifying for a mortgage on a new residence or a loan on a new car, because the mortgage debt counts against her debt to income ratio. When parties do not consider the logistics of dividing joint assets and debts, they may remain financially connected long after separating or divorcing.
4. Back-Up Plan
"Wife shall retain the residence located at 123 Main Street, Philadelphia, Pennsylvania. Within ninety (90) days of the execution of this agreement, Wife shall refinance the mortgage on said residence solely into her name. Upon Wife's successful refinance, Wife shall pay to Husband a lump sum of $45,000, representing his share of the equity." Forty-five days after the parties execute the agreement, Wife loses her job and is unable to qualify for the refinance. Since Husband gets his $45,000 upon Wife's successful refinance and Wife cannot successfully refinance, Husband is in a predicament. Once ninety days pass after the execution of the agreement and Wife still has not refinanced, Wife is in breach of the agreement, but what are Husband's options? Can he make her sell the house? Can he make her pay him the $45,000 now even though she has not refinanced? If she decides to sell the house, is he guaranteed to receive the first $45,000? The agreement, as written, does not provide any guidance. Unless the parties reach an agreement, Husband will have to litigate the issue and take the matter to Court, a process which is slow and oftentimes expensive, and the result may not be what the parties would have intended to happen had they made alternate arrangements in the agreement themselves. By leaving things to chance, the parties leave themselves open to considerable risk should things not go as planned.
5. Unknowingly Settling for Less
Husband has a lawyer draw up an agreement for Wife's signature, and Wife is unrepresented. The agreement essentially states that each party keeps his/her own assets and debts but does not list the specific assets/liabilities and their respective values/balances. Husband managed both parties' finances throughout the marriage, so Wife does not know what Husband has, but she believes the agreement sounds fair and signs it. What Wife did not know was that Husband had accumulated twice as much in assets and half as much in debts as she did throughout the course of their marriage. Wife tries to litigate the validity of the agreement later on but is unsuccessful, because the agreement includes a disclosure clause, which states that each party waives the rights to full disclosure. Unless both parties truly know about each other's finances, blindly signing an "everyone keeps one's own" type of agreement can be an extremely detrimental decision and very possibly one that cannot be remedied later. Do not waive your rights to disclosure unless you know what you are waiving.
In closing, a Property Settlement Agreement can be a great option for settlement, but these are some of the reasons why it may not pay to print one out from the internet and fill it in on your own. Rather than receiving the settlement you seek, you may only get 25% of what you bargained for.
Information provided by:
Kevin Zlock, P.C.
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