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Unmasking Today's Divorce Taxation Problems Part 1

Former I.R.C. § 71 (prospectively repealed) 1. Text:

(b) Alimony or separate maintenance payments defined. –For purposes of this section –

(1) In general. -The term "alimony or separate maintenance payment" means any payment in cash if -

(A) such payment is received by (or on behalf of) a spouse under a divorce or separation instrument,

(B) the divorce or separation instrument does not designate such payment as a payment which is not includible in gross income under this section and not allowable as a deduction under section 215,

(C) in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made, and

(D) there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.

....

(c) Payments to support children. –

(1) In general. –Subsection (a) shall not apply to that part of any payment which the terms of the divorce or separation instrument fix (in terms of an amount of money or a part of the payment) as a sum which is payable for the support of children of the payor spouse.

(2) Treatment of certain reductions related to contingencies involving child. –For purposes of paragraph (1), if any amount specified in the instrument will be reduced –

(A) on the happening of a contingency specified in the instrument relating to a child (such as attaining a specified age, marrying, dying, leaving school, or a similar contingency), or

(B) at a time which can clearly be associated with a contingency of a kind specified in subparagraph (A),

an amount equal to the amount of such reduction will be treated as an amount fixed as payable for the support of children of the payor spouse.

Former I.R.C. § 71(b)(1), (c).

2. Statutory Changes

As has been widely reported, Congress has repealed I.R.C. §§ 71 and 215, thereby eliminating the federal tax reduction for alimony. In addition, Congress has repealed former I.R.C. § 61(a)(8), which expressly defined alimony as taxable income.

In tax years governed by the new law, alimony will be taxable income to the payor, and will not be taxable income to the payee.

The effective date of the change is as follows:

(c) EFFECTIVE DATE. –The amendments made by this section shall apply to –

(1) any divorce or separation instrument (as defined in section 71(b)(2) of the Internal Revenue Code of 1986 as in effect before the date of the enactment of this Act) executed after December 31, 2018, and

(2) any divorce or separation instrument (as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.

Pub. L. No. 115-97, § 11051, 131 Stat. 2054.

Thus, the new law will apply to all divorce or separation instruments executed after December 31, 2018. Divorce or separation instruments executed before December 31, 2018 will continue to be governed by former law, so alimony under those instruments will still be income to the payee and generate a tax deduction for the payor. Since many instruments will continue to be governed by prior law, the alimony deduction has not been repealed all at once but, rather, will die out slowly over a period of many years.

As an exception, if an instrument executed before December 31, 2018 is modified after December 31, 2018, the new law applies if the modification expressly so provides. Id. If an instrument governed by former law is modified, and the modification is silent or states an intention to apply former law, former law will continue to apply.

It is highly likely that a line of cases will eventually construe the statutory language quoted above. But there were no such decisions in the coverage period for this outline; the courts are still resolving disputes over pre-2019 tax returns.

3. Siegel v. Comm'r, T.C. Memo. 2019‑11, 2019 WL 643186 (2019)

(a) Facts: Husband and wife were divorced in New York. The final decree ordered the husband to pay to the wife spousal maintenance of $10,110 per month. The husband failed to pay, and the wife filed enforcement proceedings. The court found the husband in contempt and threatened to imprison him unless he paid $225,000 to the wife.

The husband paid the sum required and then deducted it as alimony on his 2012 tax return. The IRS assessed a deficiency on the basis that the $225,000 was not alimony, and the husband appealed to the Tax Court.

(b) Issue: Was the husband entitled to an alimony deduction?

(c) Answer to Issue: Yes.

(d) Summary of Rationale: "Lump‑sum payments of alimony or child support arrearages generally retain their character as alimony or child support for Federal tax purposes." 2019 WL 643186, at *8.

A payment is alimony for federal tax purposes only if it terminates upon the payee's death. I.R.C. § 71(b)(1)(D). The IRS argued that the $225,000 could not be alimony because the obligation to make the payment would not terminate if the wife died. It relied particularly upon Iglicki v. Commissioner, T.C. Memo. 2015-80, 2015 WL 1886010 (2015), which was discussed and criticized in the 2015 version of this outline. Iglicki held that a judgment for arrears was not alimony under federal tax law because it did not terminate upon the wife's death.

But the judgment for arrears in Iglicki was a money judgment. The Siegel court held that the obligation to pay the $225,000 was not a money judgment. Rather, it was a condition in a contempt judgment. Iglicki was therefore distinguishable, and the obligation to pay $225,000 was alimony.

Observations:

  1. Siegel held that Iglicki applies only where the arrears obligation was a money judgment, but the issue is whether the obligation terminates upon the payee's death, not whether the obligation is a money judgment. It is unclear why the presence of a money judgment should be the key point.
  2. "Having decided that the 2012 order was not a money judgment... we need not consider Iglicki." Siegel, 2019 WL 643186, at *8. Siegel therefore stopped short of criticizing Iglicki directly. But the court certainly showed zero interest in expanding Iglicki beyond its very specific facts.
  3. As the 2015 version of this outline noted, if Iglicki is correct, then the entry of the judgment for arrears converted the obligation at issue from alimony to not-alimony. It seems odd that the time of payment should cause such a fundamental change in the nature of the obligation.
  4. Moreover, the issue is whether the original support obligation ceased upon the payee's death. If so, the obligation is alimony. When alimony is paid late, the court knows that the payee did not die, and, therefore, the obligation to pay arrears does not terminate upon deathCbecause death did not happen. But the obligation would have terminated upon death if death had happened. The fact that the original underlying support obligation was terminable upon death should make any judgment for arrears alimony for federal tax purposes. Siegel reached the right result; Iglicki did not.
  5. Nevertheless, the IRS seems determined to try to take the position that judgments for alimony arrears are not alimony because they do not terminate upon the payee's death. As long as the IRS continues to take this position, there will continue to be an unfortunate element of risk to taking an alimony deduction based upon any post-due payment.
4. Faust v. Comm'r, T.C. Memo. 2019‑105, 2019 WL 3938725 (2019)

(a) Facts: Husband and wife were divorced in Virginia. The wife was a victim of spousal abuse during the marriage. She was Hispanic; English was not her first language.

A divorce settlement agreement, incorporated into the divorce decree, required the husband to pay to the wife $2,270 per month in spousal support. The husband made the payments. The wife's tax return, which was prepared by a low-income taxpayer return preparation service, did not report the payments as income.

The IRS assessed a deficiency and an accuracy-related penalty, and the wife appealed to the Tax Court.

(b) Issues: (1) Were the payments alimony, and (2) was the wife liable for an accuracy-related penalty?

(c) Answer to Issues: (1) Yes, and (2) no.

(d) Summary of Rationale: The divorce decree and settlement agreement were certainly divorce or separation instruments. They did not expressly designate the support payments as not includible in gross income. The husband and wife did not live together after the divorce. "Unless otherwise provided by stipulation or contract, spousal support and maintenance shall terminate upon the death of either party or remarriage of the spouse receiving support." Va. Code Ann. § 20-109(D). The settlement did not provide otherwise. The payments were therefore alimony.

The wife's failure to report alimony as income was a clear mistake. But English was not her first language, she had been abused during the marriage, and her return was prepared by persons claiming knowledge in preparation of tax returns for low income persons.

The accuracy-related penalty is not imposed if the taxpayer acted in good faith.

Taking all of the facts and circumstances together, the Court believes that petitioner made honest and reasonable efforts to determine her 2015 Federal income tax liability and that the underpayment resulted from an honest misunderstanding of law that is reasonable in the light of her limited English proficiency, education, history of abuse at the hands of her ex‑husband, and the multitude of complicated facts and unusual circumstances surrounding this particular case.

2019 WL 3938725 at *7.

Observation: It is mildly remarkable that a service specializing in preparing tax returns for low-income people did not know that alimony was taxable income. This had been the law for many years before 2019.

I.R.C. § 212 1. Text

In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year –

(1) for the production or collection of income;

(2) for the management, conservation, or maintenance of property held for the production of income; or

(3) in connection with the determination, collection, or refund of any tax.

I.R.C. § 212.

2. Sholes v. Comm'r, T.C. Memo. 2018‑203, 2018 WL 6629571 (2018)

(a) Facts: Husband and wife were engaged in divorce proceedings in Arizona. The wife alleged that real property named Oasis was held in the name of the husband's parents but was actually community property. She joined the parents as parties to the action. The court ultimately held that Oasis was 50% community property and 50% the property of the parents.

On their tax return, the parents claimed a business expense deduction for their attorney's fees in the divorce case. The IRS disallowed the deduction and assessed a deficiency. The husband's mother (his father had passed away) appealed to the Tax Court.

(b) Issue: Were the parents entitled to a business expense deduction for their attorney's fees in the divorce case?

(c) Answer to Issue: No.

(d) Summary of Rationale: "If the origin of the [business expense] claim is a marital relationship, the legal expenses are nondeductible even if the outcome affects income‑producing property of the taxpayer." 2018 WL 6629571, at *4. "Deductions are allowable under sections 162 and 212 for activities in which the taxpayer engaged with the predominant purpose and intention of making a profit." Bronson v. Comm'r, T.C. Memo. 2012‑17, 2012 WL 129803 (2012).

The mother argued that she was not a party to the marriage involved in the divorce case so that her legal fees were a valid business expense of Oasis, which she alleged was a rental property. But the court found that Oasis was the parents' personal residence.

Moreover, the mother did not sufficiently prove the amount incurred for legal fees in the divorce case, as distinguished from legal fees incurred for other purposes. There was also no attempt to prove exactly what legal services were provided in exchange for the fees. "Even if we concluded that some of the fees petitioner paid might be deductible under section 212, we would be unable to estimate the deductible amount under the principles of Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), because we have no reliable evidence on which we could base an estimate." Sholes, 2018 WL 6629571, at *12.

Observations:

  1. "Generally, attorney's fees and other costs paid in connection with a divorce, separation, or decree for support are not deductible by either the husband or the wife." Treas. Reg. § 1.262‑1(b)(7). Business expenses must be incurred for the purpose of making a profit, and spouses generally do get divorced for purposes of economic gain. See United States v. Gilmore, 372 U.S. 39 (1963); Barry v. Comm'r, T.C. Memo. 2017-237, 2017 WL 5899406 (2017) (discussed in last year's version of this outline).
  2. "However, the part of an attorney's fee and the part of the other costs paid in connection with a divorce, legal separation, written separation agreement, or a decree for support, which are properly attributable to the production or collection of amounts includible in gross income under section 71 are deductible by the wife under section 212." Treas. Reg. § 1.262‑1(b)(7); see also Gale v. Comm'r, 13 T.C. 661 (1949), aff'd, 191 F.2d 179 (2d Cir. 1951); Wild v. Comm'r, 42 T.C. 706 (1964). This is a fact-specific exception that the courts tend to construe narrowly. See, e.g., Hunter v. Comm'r, 219 F.2d 69 (2d Cir. 1955) (exception does not apply to fees incurred to avoid paying alimony).
  3. The exception probably is not available after 2018 as alimony is no longer taxable income, so the attorney's fees incurred to obtain it are no longer an expense of producing taxable income.
  4. The fees at issue in Sholes had nothing to do with obtaining alimony and therefore fell under the general rule.
  5. The court is especially likely to apply the general rule when the alleged business expense relates to a personal residence that the taxpayer is falsely claiming to be a business.
  6. The court is especially likely to apply the general rule when the taxpayer cannot prove the amount of the legal fees at issue and the services received in return for the fees. "The requirement... that deductible expenses be 'ordinary and necessary' implies that they must be reasonable in amount[.]" Bingham's Trust v. Comm'r, 325 U.S. 365, 370 (1945). The court had no way to determine whether the fees at issue in Sholes were reasonable in amount.
I.R.C. § 1041

1. Text:

(a) General rule. –No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of) -

(1) a spouse, or

(2) a former spouse, but only if the transfer is incident to the divorce.

(b) Transfer treated as gift; transferee has transferor's basis.CIn the case of any transfer of property described in subsection (a) –

(1) for purposes of this subtitle, the property shall be treated as acquired by the transferee by gift, and

(2) the basis of the transferee in the property shall be the adjusted basis of the transferor.

I.R.C. § 1041(a)-(b).

2. No published opinions addressing this code section were released during the period of coverage of this summary.

I.R.C. § 408(d)(6) 1. General Rule

The transfer of an individual's interest in an individual retirement account or an individual retirement annuity to his spouse or former spouse under a divorce or separation instrument described in subparagraph (A) of section 71(b)(2) is not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest at the time of the transfer is to be treated as an individual retirement account of such spouse, and not of such individual. Thereafter such account or annuity for purposes of this subtitle is to be treated as maintained for the benefit of such spouse.

I.R.C. § 408(d)(6). Thus, a transfer of an interest in an IRA pursuant to a divorce or separation instrument is generally not taxable.

  • No published opinions addressing this code section were released during the period of coverage of this summary.
  • I.R.C. § 414(p) and 29 U.S.C. § 1056

    1. Introductory note: The Qualified Domestic Relations Order ("QDRO") provisions in I.R.C. § 414(p) are exactly identical to the QDRO provisions in 29 U.S.C. § 1056. Most cases cite to Title 29, but some cases cite to the Internal Revenue Code.

    2. Summary of the Law: ERISA normally bars any assignment of retirement benefits. But there is an express exception for assignments of benefits under state domestic relations law. The exception applies only if the assignment of benefits is stated in a QDRO. A QDRO directs the employer to pay a portion of an employee's benefits to another person –normally, the employee's spouse. This person is known under ERISA as an alternate payee.

    It is important to understand how QDRO procedure operates. The process begins when the state court issues a domestic relations order –a "DRO" –assigning benefits from the employer to an alternate payee. This order must be submitted to the retirement plan that administers the benefits. The plan then determines whether the order meets certain federal requirements. If it meets those requirements, it is qualified and becomes a QDRO. If it does not meet the requirements, the order is not qualified, and federal law prevents the plan from following it. (The DRO would then normally be modified by the state court to respond to the plan's objections.) The plan's decision on whether to qualify a QDRO can be appealed to a federal or state court.

    In the absence of a QDRO, ERISA bars the enforcement of any state court order assigning ERISA-regulated benefits to another person.

    3. Garcia‑Tatupu v. Bert Bell/Peter Rozelle NFL Player Ret. Plan, 296 F. Supp. 3d 407 (D. Mass. 2017), aff'd, 747 F. App'x 873 (1st Cir. 2019)

    (a) Facts: The husband, a former NFL football player, was divorced from his wife in Massachusetts in 1997. The decree incorporated a separation agreement, which provided:

    At the time of Mosiula F. Tatupu's retirement and decision to draw pension benefits as may be available to him by virtue of his employment with the National Football League from 1978 through and including 1991, Mosiula F. Tatupu, shall pay to Linnea Garcia-Tatupu one‑third (1/3) of the net benefit he receives from said pension benefit plan. Mosiula F. Tatupu shall have exclusive right to decide, if, when, and how he wishes to receive said benefits, having the sole right to choose what payment option he desires without regard to the desires and/or wishes of Linnea Garcia-Tatupu. Whatever payment option Mosiula F. Tatupu elects shall govern the time amount and manner of payments to Linnea Garcia-Tatupu. Mosiula F. Tatupu shall remit the payments due to Linnea Garcia Tatupu within two (2) business days of his receipt of any payments of benefits under said plan. Any and all benefits paid to Linnea Garcia-Tatupu by Mosiula F. Tatupu shall be deemed alimony payments. Said benefits shall continue to be payable to Linnea Garcia-Tatupu subsequent to the death of Mosiula F. Tatupu, if the plan so provides, and if she survives Mosiula F. Tatupu, Linnea Garcia-Tatupu specifically waives any rights to receive any alimony and/or pension benefits in excess of the amount provided herein. The parties agree to cooperate with any plan administrator in coordinating distribution of benefits so long as the distribution is consistent with the terms of this Agreement.

    296 F. Supp. 3d at 409 (emphasis added). Thus, the wife received one-third of the husband's pension benefits and expressly agreed that the benefit options chosen by the husband would determine the benefits paid to the wife.

    No DRO was entered at the time of the divorce. The husband died in 2010; he had not remarried. At the time of his death, he had not elected to receive survivor benefits.

    In 2012, the Massachusetts court issued a DRO, nunc pro tunc back to 1997, which awarded the wife "100% of the Player's [Mosiula Tatupu's] accrued benefit under the Retirement Plan, based on the Player's Credited Seasons earned as of the date of this order and the terms of the Plan in effect as of the date of this order." Id.

    The plan refused to qualify the order on the ground that it awarded an alternate payee more benefits than the employee had earned. The wife sued the plan in federal court to question its refusal.

    In a decision discussed in the 2017 version of this outline, the court refused to dismiss the action. Garcia‑Tatupu v. Bert Bell/Peter Rozelle NFL Player Ret. Plan, 249 F. Supp. 3d 570 (D. Mass. 2017).

    (b) Issue: Did the 2012 Massachusetts DRO meet the requirements for qualification?

    (c) Answer to Issue: No.

    (d) Summary of Rationale (District Court): The language of the agreement clearly gave the wife a right to be paid only one-third of what the husband received. The agreement stated clearly, in multiple places, that the wife was not entitled to any benefits beyond one-third of the benefits that the husband elected and that he had no duty to consider her interests in making elections.

    The husband selected benefits only during his lifetime; he did not elect survivor benefits. By awarding the wife benefits never elected by the husband, the DRO divided benefits not available under the plan:

    Ms. Garcia-Tatupu... agreed to a "shared payment" approach with her ex‑husband. In other words, the Marital Separation Agreement provides that Ms. Garcia-Tatupu is entitled to share in any actual benefit payments made toCand as directed byCMosiula Tatupu. But it does not divide Mosiula Tatupu's retirement benefit into separate portions, or otherwise purport to give Ms. Garcia-Tatupu an interest independent from Mosiula Tatupu's interest in the Plan. By subsequently purporting to give Ms. Garcia-Tatupu survivorship rights, thus allowing her to assert a separate interest in the Plan, the state post mortem and nunc pro tunc domestic relations orders have the effect of altering rights under the Marital Separation Agreement and providing benefits that were not otherwise payable upon Mosiula Tatupu's death. This is an increased benefit under 29 U.S.C. § 1056(d)(3)(D); therefore, the post mortem state domestic relations orders do not provide an enforceable Qualified Domestic Relations Order beyond the terms of the Marital Separation Agreement.

    296 F. Supp. 3d at 416.

    (e) Summary of Rationale (Circuit Court): "[T]he district court's judgment should be affirmed essentially for the reasons articulated by the district court[.]" 747 F. App'x at 873.

    [W]e do not opine upon the circumstances in which nunc pro tunc state court domestic relations orders entered after the death of a plan beneficiary may be treated as QDROs. We merely hold that, on the specific facts of this case –in particular, the language of the separation agreement and the status of Mr. Tatupu's election and receipt of benefits at the time of his death –the domestic relations orders at issue may not be so treated.

    Id.

    Observations:

    1. The 2012 DRO, and an earlier 2011 order on which it was based, both consisted of signatures of the judge on a form order on the stationary of wife's counsel. There was a clear appearance that the state court did not fully consider the issues. No basis was stated for giving the wife additional benefits in 2012, benefits that she had not been given by the original decree and that she had expressly waived in the agreement. There is a strong appearance that the order violated state law.
    2. Federal courts, in determining whether a DRO should be qualified, generally cannot revisit questions of state law. The federal court was therefore not permitted to revisit the state law question. The court expressly so held. But the weakness of the order under state law probably influenced the federal court's reasoning.
    3. The end result is perfectly reasonable on the facts reached, but it poses long-term questions. Suppose that the husband had promised in the order to provide survivor benefits and then refused to do so. The court's reasoning leads one to the conclusion that any state court order giving the wife survivor benefits would be providing a benefit not available under the plan because the husband had never actually elected the benefit. But it surely matters that the benefit was actually available under the plan and that the husband wrongfully failed to elect it. The court's broad reasoning is going to create a problem in situations where a state court's order has a much stronger basis.
    4. It is possible that the state court order might have had a stronger basis. For example, perhaps the agreement in which the wife so clearly waived benefits not elected by husband was signed by the wife under some form of duress. If such a fact pattern existed, however, the state court did the wife no favors by simply signing her draft order. The wife's counsel likewise did her no favors by allowing the state court to do that. A written opinion from the state judge, setting forth the basis for the 2011 and 2012 orders, would have helped the wife immensely in federal court. Of course, it is also possible that there was no proper basis for the state court order.
    5. The problem of hasty state court orders giving alternate payees excessive benefits under state law is difficult to address. The preferred remedy on the facts of Garcia-Tatupu would have been for a state court to reverse the 2012 DRO under state law. It is unclear why the husband's estate did not appeal. The plan, of course, lacked standing to appeal in state court, but it was then able to avoid the order in federal court. Pressure arising from questionable state court orders is likely to encourage federal courts to construe ERISA in ways that create problems. The author would feel more comfortable with a system allowing pension plans a way to question DROs in state court under state law. Over the long term, such a system would remove pressures on federal judges to construe ERISA in problematic ways.
    6. The First Circuit opinion carefully stresses that the result is limited to the facts. This is almost certainly wise. The highly questionable nature of the state court order in Garcia-Tutupu is a fact not likely to recur in future cases, and it had a very strong effect on the result.
    4. Christopoulos v. Trout, 343 F. Supp. 3d 812 (N.D. Ill. 2018)

    (a) Facts: Husband filed a divorce action against wife in Illinois. Immediately thereafter, he changed the beneficiary of his employer-provided group life insurance, naming a series of relatives in varying percentages.

    The wife immediately asked the divorce judge to order the husband to name the children as beneficiaries. The trial court properly entered a handwritten order granting the relief requested.

    The husband did not comply with the order before his death three months later. The parties had not yet been divorced, and the divorce action abated upon the husband's death.

    Seven months after the husband's death, the wife filed a motion in the divorce case seeking clarification of the handwritten order. The motion sought formal entry of a DRO. The state court granted the motion and entered a formal DRO nunc pro tunc to the date of the handwritten order. The husband's estate appealed from the order, but an Illinois appellate court affirmed it, and the Illinois Supreme Court denied review.

    The wife sued the insurance company to force payment to the children. The insurance company moved the action to federal court and interpleaded the policy proceeds. The wife moved for summary judgment.

    (b) Issue: Who is entitled to the policy proceeds?

    (c) Answer to Issue: The children.

    (d) Summary of Rationale: All parties agreed that employer-provided life insurance plans, like retirement plans, are subject to ERISA. Thus, the wife and children could prevail only if one or both state court orders was a QDRO.

    But the relatives did not argue that either state order failed to meet the definition of a QDRO. They argued, instead, that the state court orders were both void because the divorce case had abated. But this was a question of state law, already resolved by the Illinois state courts. The federal court summarily refused to exercise what amounted to appellate jurisdiction over the state courts on a pure matter of state law.

    The relatives also raised the defense of laches. But the real parties in interest on the wife's side of the case were the children. "The defense of laches does not treat a minor's failure to act while still under the age of majority as a culpable delay; that is, the defense does not apply to a minor." 343 F. Supp. 3d at 822. The court therefore rejected the relatives' attempt to assert laches.

    Observations:

    1. While ERISA is mostly frequently applied to retirement plans, ERISA also applies to employer-provided life insurance plans. Any order directing the transfer of employer-provided life insurance must meet the requirements for a QDRO.
    2. ERISA imposes federal requirements that must be met before a state court order can make a valid divorce-related transfer of covered benefits. But it does not allow federal courts to second-guess state courts on issues of state law, especially when those issues have been ruled upon by final decisions of the state appellate courts.
    3. Christopoulos makes an interesting contrast with Garcia-Tutupu. The state court order in Christopolous had a sounder substantive basis. But the extensive state court litigation in Christopoulos also made it much easier for a federal court to decline to review the result. If there had been a less hasty state court order in Garcia-Tutupu, and a state court appellate decision upholding it, the facts would have been much clearer as to why the state court order was proper under state law. In other words, a state court order that survived the state court appellate process would have been stronger and easier to defend in federal court. Where ERISA benefits are involved and federal jurisdiction is possible, a hasty favorable state court order can be a very mixed blessing.
    5. Miletello v. RMR Mech., Inc., 921 F.3d 493 (5th Cir. 2019)

    (a) Facts: Husband and wife were engaged in divorce proceedings. A settlement agreement awarded to the wife $500,000 of the funds in the husband's 401(k) plan.

    Before the husband complied with the order, he died. Two days later, the state court incorporated the settlement into a court order. Fifteen months later, the state court entered a QDRO ordering the plan to pay the ex-wife the $500,000.

    The second wife sued the plan administrator in federal court to recover the $500,000. The plan administrator interpleaded the funds.

    (b) Issue: Who is entitled to the $500,000?

    (c) Answer to Issue: The ex-wife.

    (d) Summary of Rationale: The husband's second wife argued that the state court could not enter a QDRO after the husband's death. She cited Rivers v. Central & South West Corp., 186 F.3d 681 (5th Cir. 1999). But the court held that the law had changed since Rivers:

    Since Rivers was decided, Congress has modified ERISA to make "clear that a QDRO will not fail solely because of the time at which it [was] issued." Yale‑New Haven Hosp. v. Nicholls, 788 F.3d 79, 85 (2d Cir. 2015) (citing Pension Protection Act of 2006, Pub. L. No. 109‑280, § 1001, 120 Stat. 780 (2006)); see also 29 C.F.R. § 2530.206(c)(2) (stating that an "order does not fail to be treated as a QDRO solely because it is issued after the death of the Participant... even if no order [was] issued before the Participant's death"). "The QDRO provisions of ERISA do not suggest that [the former spouse] has no interest in the plans until she obtains a QDRO, they merely prevent her from enforcing her interest until the QDRO is obtained." Nicholls, 788 F.3d at 86 (alteration in original) (quoting In re Gendreau, 122 F.3d 815, 818 (9th Cir. 1997) (emphasis omitted)). We thus reject Pam's argument that the January 18, 2017 QDRO is insufficient.

    Miletello, 921 F.3d at 497.

    Observation: As the cases cited in the quoted passage suggest, Miletello is the majority rule; most circuits will enforce a QDRO entered after the death and/or remarriage of a spouse. But this result is not uniform. The Third Circuit in particular continues to hold that QDROs cannot be entered after death. Richardson-Roy v. Johnson, 657 F. App'x 113, 114 (3d Cir. 2016), reaff'g Samaroo v. Samaroo, 193 F.3d 185, 190 (3d Cir. 1999).

    Whenever possible, it is critical that state court orders dividing retirement benefits be entered as QDROs. Every day of delay between the division of benefits and the entry of a QDRO increases the risk that unforeseen events will frustrate the intended division.

    6. Culwick v. Wood, 384 F. Supp. 3d 328 (E.D.N.Y. 2019)

    (a) Facts: Husband and wife were divorced. Their divorce decree incorporated a separation agreement. The agreement provided:

    [T]he Husband shall otherwise retain all pensions and annuities acquired by him at any time, including during the term of the marriage.... The Wife waives any claims she might have in and to these benefits including the right to be named as a survivor beneficiary.

    384 F. Supp. 3d at 335. The agreement further provided that "nothing herein contained shall require either party to renounce or disclaim any gift, devise or bequest which he or she may be given by the other's Will, Trust, or other document." Id.

    The husband died. At the time of his death, the wife was still named as the survivor beneficiary of his retirement plan under a predivorce designation. The husband's estate assigned its claim to the husband's father. The plan paid the survivor benefits to the wife, and the father sued the wife to recover the amount paid.

    (b) Issue: Who is entitled to the husband's survivor benefits?

    (c) Answer to Issue: His father.

    (d) Summary of Rationale: The retirement plan was regulated by ERISA, and the divorce decree was not a QDRO. Thus, the plan was required to pay the wife. Kennedy v. Plan Adm'r for DuPont Sav. & Inv. Plan, 555 U.S. 285 (2009). But in its infamous footnote 10, Kennedy refused to reach the question of whether competing claims to ERISA-regulated benefits could be raised between competing claimants after the plan paid out the benefits. The court held that such claims do not violate federal law. Thus, the lack of a QDRO did not bar the father's claim.

    The court expressly rejected Staelens ex rel. Estate of Staelens v. Staelens, 677 F. Supp. 2d 499 (D. Mass. 2010), which it construed to hold that federal law does not permit claims between beneficiaries after payment by the plan.

    The wife had expressly waived her right to collect survivor benefits. Therefore, she breached the agreement by collecting the survivor benefits. The survivor benefits were not a gift, because a completed gift requires that the donor give up control over the property at issue at the time of the gift. The husband never gave up control over the survivor benefits during his lifetime. The benefits were therefore not a gift to the wife.

    Observations:

    1. As noted in previous versions of this outline, the court's resolution of the issue reserved in footnote 10 of Kennedy is the majority rule. Most federal courts permit claims to ERISA-regulated benefits between private parties after payment by the plan. See, e.g., Estate of Kensinger v. URL Pharma, Inc., 674 F.3d 131 (3d Cir. 2012); Andochick v. Byrd, 709 F.3d 296 (4th Cir. 2013).
    2. The court's reading of Staelens is questionable. Staelens suggested that federal law perhaps should not permit competing claims. But it recognized that there was contrary First Circuit law. Moreover, as noted in the 2010 version of this outline, the actual holding of the case was that the waiver of benefits at issue was not sufficiently specific to be enforceable. The court's entire discussion of the competing claims issue was not the basis for the decision and was therefore dicta.
    3. The court's holding that any gift was incomplete leads logically to the position that it is impossible ever to make a gift of survivor benefits, which seems doubtful. A more convincing rationale would be that the beneficiary designation predated the agreement and the divorce, so it was among the rights expressly waived by the wife. In other words, the provision permitting gifts applied only to gifts made after the agreement was signed.

    To see the difference, consider what would have happened if the husband had made a new beneficiary designation after the divorce. Under the court's reasoning, the father would still have received the survivor benefits because the husband did not give up control over the benefits. In other words, despite language in the agreement expressly permitting gifts, even a postdivorce gift of survivor benefits would be unenforceable. By contrast, the rationale suggested above would make a predivorce beneficiary designation unenforceable while still permitting enforcement if the husband voluntarily redesignated the wife after the divorce.

    Unmasking Today's Divorce Taxation Problems Part Part 2 »