Divorce, no matter how amicable, involves stress—it signals the end of one phase of life, and the beginning of another.
While nothing can totally remove the anxiety, anger, uncertainty, or fear associated with divorce, those negative emotions may be reduced by a collaborative divorce, said Susan E. Grosh, AJD, an attorney and shareholder with the Lancaster law firm of Blakinger Thomas, chair of their Family Law and Adoption group, and a member of the Collaborative Professionals of Central Pennsylvania.
Collaborative law was the creation of Minnesota attorney Stu Webb in 1990, who was interested in legal mediation as an alternative dispute resolution to divorce. In 2000, collaborative law became a viable option for divorce cases in Pennsylvania.
“While I represent clients in litigated divorces, which is the traditional way of resolving family law issues, I’m also trained in collaborative law and represent clients in that alternative process as well,” Grosh said. “The general concept for collaborative law is that it is a different way to divorce—it is a voluntary dispute-resolution system.”
Voluntary dispute resolution is the foundation upon which the entire concept rests, Grosh said. Both parties need to agree in order to go through the process. Each party is represented by an attorney, as in a litigated divorce.
“Each party needs to have an attorney who is trained in collaborative law, which requires a certain amount of education in mediation and collaborative law training, and not all attorneys are trained in that way,” Grosh said. “No-fault divorce is a law in Pennsylvania that allows parties to sooner or later agree to obtain a divorce.
“Even in collaborative divorce, you have to go through the court system in order to be divorced or proceed after two years of separation. You can’t get divorced without getting a decree from the court.”
At the outset of the process, both parties sign a collaborative participation agreement. To work, it requires that both parties voluntarily disclose information, such as income, assets, debts, etc.
“It’s based on full and fair disclosure; it’s based on not playing games in trying to get information, and not withholding it from the other person so the attorneys and parties have the information they need to make a resolution, which the parties think is appropriate under the circumstances,” Grosh said. “In a no-fault divorce, you can have litigated support, you can have litigated custody, you can have many litigated things—issues involving valuation of assets, etc.
“The concept of a no-fault divorce just tells that you haven’t gone to court to fight over the grounds for the divorce. But if there is no agreement on the resolution of a party’s marital rights (division of marital property, alimony, spousal support, alimony pendent lite, attorney fees, costs, and expenses), they must claim them before a divorce is entered to preserve them and then litigate them to a determination by the court.”
In a collaborative law case, there are joint meetings held with the parties, their attorneys, and perhaps joint experts or consultants to discuss items ranging from spousal support and custody issues to division of property, “without a bloodbath, so to speak,” Grosh said.
If one or both parties refuse to cooperate on resolving various issues, the process can end, and at that time all remaining unresolved issues would be litigated in open court. If that happens, collaborative law attorneys for both parties are prohibited from acting as counsel in litigated court proceedings.
“The premise is that if you’re resolving it yourself, then you are able to design a final agreeable result,” Grosh said. “If you are settling something, you can do this on the basis that no one, such as the court, is telling you how to resolve it. That makes the resolution of these issues stick better and makes more sense for a particular family.”
Another advantage of collaborative divorce is that issues are resolved in a confidential setting, rather than debated publicly in open court, Grosh said.
Ultimately, a collaborative divorce may cost half as much as would a long, drawn-out, contentious divorce. The process generally takes less time, it retains the dignity of both parties, and it gives both parties a voice and control over the outcome.
“If someone is going to play games or try to hide information or assets, the process is going to break down at some point,” Grosh said. “There is a duty and obligation for the information to be disclosed, and if the process does break down, both parties must engage different attorneys to litigate the divorce.”
Donna M. Mullin, JD, CPA, a director in the tax department of Boyer & Ritter LLC, in Camp Hill, said she has been involved in numerous divorce cases. Divorce cases in general and collaborative divorce cases often involve the equitable distribution of assets, property, and debt. It’s a way to resolve financial issues “without starting an all-out war.”
“A lot of times, we’ve gotten involved in divorce cases because they were existing clients,” said Mullin, who also works with financial matters affecting nonprofit organizations. “We have existing knowledge of what their assets are, and we have existing knowledge of their tax situations—it is less expensive to involve the current couple’s CPAs because the background is there and the trust is there.”
Without that cooperation, it becomes impossible for the CPA to represent both parties, Mullin said. In all of the divorce cases in which she has been involved and where Mullin advised both parties, she represented existing clients and it wasn’t a contentious divorce.
When older clients are involved—baby boomers and empty nesters, where custody issues are off the table—the goal is to fairly divide the assets, Mullin said. The parties need to consider the tax implications involved in splitting the assets.
For most older people, the primary assets to be divided are their house and retirement plans. Generally, the cost of divorce is not tax deductible.
“Even property settlements can be contentious,” Mullin said. “When we are talking about spousal support, it has to meet the definition of alimony for federal tax purposes to receive special tax treatment as alimony. It is deductible by the payer and included as income to the recipient.”
There are seven criteria used to determine whether spousal support is considered alimony, she said. The criterion that most often “trips up clients is that alimony has to end at death.”
“When a party promises to give the other party a stream of support over the next 10 years—no matter what the intentions—if it doesn’t effectively end at death, then it’s not considered alimony under federal law,” Mullin said.
“For people considering a collaborative divorce, they definitely should consult a tax professional to make sure it meets the federal definition of alimony (if that is the intent). If it is stated in the agreement that it’s not alimony, the feds will respect this.”
Most people facing divorce do not want to cash out retirement pensions, Mullin said. If pension funds are cashed out, it will be considered as income to the parties involved. If it is not an IRA, and it’s a qualified retirement plan (such as a 401(k) plan), it has to be divided by a “qualified domestic relations order, because of ERISA (Employee Retirement Income Security Act of 1974), in order to be distributed to anyone other than the plan recipient.”
If it involves an IRA, it can be transferred pursuant to a separation or divorce agreement. To be tax free, no one is allowed to touch the money; it has to be a transfer under the IRA transfer rules, Mullin said.
“You have to be careful how you do it,” noted Mullin. “The end result is that you can’t take money out of your IRA and hand it to your spouse to put it in their IRA. It’s often one of the largest assets, and cashing it out is usually a mistake.”
In both federal and Pennsylvania tax law, there is an exclusion from taxation for gain from sale of a qualified residence, Mullin said. For example, if the couple paid $150,000 for their home, but sold it for $300,000, the exclusion threshold is $250,000 if single and $500,000 if married. Most people in Pennsylvania, she said, “are not looking down the throat of a $500,000 gain on their residence.
“In a division of property, the IRS forces you not to recognize gain or loss,” Mullin said. “It’s not elective; it’s required. So if the asset is sold for a loss, you can’t take a loss until you sell it. If it’s a loss and you both want to participate in the tax loss, you should just sell the asset rather than distributing it to one or the other.”
Other typical financial concerns for divorcing couples may involve dividing business assets: stocks, bonds, savings, luxury items, vehicles, etc., Mullin said. The bottom line—Mullin advises anyone going through any divorce that involves assets of any kind to seek out a CPA or other financial expert. )))