Pasternak & Fidis Reporter

April 30, 2012

New Year, New Opportunity to Clean Up a Marital Mess

With each new year comes another opportunity to evaluate one’s life and make changes for the better. That can be particularly true in the domestic context, where a marital mess may be lurking. This article explains how postponing or prolonging a divorce or living in an ambiguous marital status may have a long-reaching, even catastrophic, impact. There’s no time like the present to start cleaning up a marital mess.

The Perils of a Prolonged Separation and Divorce

Maryland law recently changed to shorten the separation time to get a divorce from two years to one. This intimates that time is of the essence, and it definitely is when it comes to divorce. Separating without actually divorcing is perilous. Unless the spouses have a marital settlement agreement, separation without divorce does not fix their rights. This can be problematic. In Maryland and the District of Columbia, property acquired after a marital separation will still be classified as marital property. For example, a separated spouse may earn wages, contribute to retirement, buy a new house, or win the lottery. The other spouse would have a claim to a share of these assets, even though the parties may have been separated for many years and are no longer an economic partnership. Further, if a spouse dies, the surviving spouse would be entitled to a share of the estate notwithstanding the separation and regardless of what a will may provide.

Estranged spouses should also consider the risk that the other spouse may become disabled during an extended separation. For example, Maryland’s alimony statute provides for alimony for an indefinite term if one spouse is disabled. Without a marital settlement agreement or a divorce, even after years of separation, a working spouse may be liable for the support of a disabled spouse through an alimony award that can last a lifetime.

Conversely, a spouse who has been voluntarily supporting the other during an extended separation may find that he or she gets no credit for the time spent supporting the other spouse. The payor-spouse’s support duty will be measured from the time of divorce forward, notwithstanding any contributions that were made during the separation period. Moreover, support money paid to an estranged spouse will not be treated as alimony for tax purposes unless paid in accordance with an agreement or court order. Thus, an informal support arrangement, especially when it lasts over a lengthy period, could create unwelcome tax consequences for the payor. Further, when a spouse moves out of the marital home, and there is no agreement or court order giving the other spouse exclusive rights to live in the home, if enough time passes the spouse who left may lose the $250,000 home sale exclusion to shelter gain on a later sale to a third party.

Post-separation adultery is still adultery. A court can consider marital fault in deciding on a fair division of marital property and in determining alimony. An extended separation can hinder both parties’ ability to move on with their lives, or can create the risk that marital fault will adversely affect the division of property or an alimony claim when a spouse does decide to move on.

A messy or prolonged divorce can be just as perilous as a prolonged separation. Adverse tax consequences are just one type of risk. Parties who wait too long after entering into a settlement to get divorced, or who wait too long after a divorce to transfer property under a settlement agreement, may not be able to make the transfer tax-free.

Delay in the submission of a court order to divide a retirement account creates another type of risk. A former spouse could remarry, leave employment, or die, any of which could threaten the other spouse’s ability to receive benefits to which he or she is entitled. Further, when a spouse is to receive a fixed sum from a retirement account, delay could erode the value to the recipient, if the stock market goes up, or erode the amount remaining for the account owner, if the stock market goes down.

Another way of creating a mess occurs when a retirement benefit owner fails to change a beneficiary designation from the former spouse to his or her children, new spouse, or other preferred recipient. A 2009 Supreme Court case, Kennedy v. Dupont Savings and Investment Plan, mandates that the plan administrator pay benefits to the named beneficiary, even if he or she expressly waived rights in an agreement or his/her rights were divested by court order. Whether the named beneficiary can be forced to turn over the benefits to the estate of the deceased former spouse is as yet unresolved. Owners of retirement plans should change their beneficiary designations immediately upon entry of a judgment of divorce; in some cases, the owner may be able to change the beneficiary before divorce and, if possible, should do so.

The Problem of Status

Sometimes a marital mess can be created unwittingly by confusing or complicating marital status. For example, in Maryland, the District of Columbia and Virginia, parties may obtain a decree of legal separation, also called a limited divorce. A limited divorce does not sever the bonds of matrimony or permit remarriage. Property is also still subject to division by a court even though a limited divorce has been granted. A couple who gets a limited divorce, but fails to have the decree enlarged to an absolute divorce, remain married for purposes of surviving spouse rights. If one dies, the survivor is entitled to a portion of the deceased spouse’s estate even if he or she has a will that makes no provision for the estranged spouse.

A different status problem occurs in the same-sex marriage context. Same-sex marriage is legal in the District of Columbia, and may become legal in Maryland, but in many states is not recognized. And, changes in law may increase or reduce the number of recognition states. Parties to a same-sex marriage who move to a non-recognition state may find themselves without a way to get divorced if the relationship fails. A court generally will not grant a divorce unless the couple is actually married; therefore, a same-sex couple who live in Virginia, for example, will not be able to get a divorce because, under Virginia law, they are not married.

However, they are still married under the law of the District of Columbia and the other recognition states. This means neither can remarry without becoming a bigamist under the law of the recognition states. If one member of the couple dies as a resident of Virginia, the surviving spouse would have no rights to an automatic share of the deceased spouse’s estate, but would be entitled to those rights under the law of the District of Columbia. To make things more confusing, in some states the marriage may be recognized as a registered domestic partnership or civil union, but not as a marriage, and the rights created by law for such persons may be comparable, or not, to those of marriage.

Cohabitation can also create complications. This problem cuts both ways—causing some to be viewed as more entangled than they want to be, and others to be less entangled than they intend to be.

To form a common law marriage in the District of Columbia, the couple must cohabit as husband and wife, expressly agree to consider themselves married, and hold themselves out to the world as such. Some couples create ambiguity by being inconsistent in what they say about their marital status. For example, introducing a live-in as one’s spouse, but checking off the “unmarried” box on an employer’s retirement benefits form, creates inconsistency that can lead to messy litigation.

There is no such thing as a common law divorce; the couple cannot simply split up and agree to go their separate ways. When a couple enters into a common law marriage that is never dissolved through a court proceeding, an estranged party may later come calling for a marital property award or surviving spouse rights after death. And, if the undivorced spouse had remarried in the meantime, he or she would be a bigamist (a felony) when alive, and, at death, will have two surviving claimants to his/her estate.

On the other hand, a couple that lives together, but does not claim to be in a common law marriage, or lives in Maryland or Virginia, where they cannot form such a marriage, may encounter another set of problems. Without a valid marriage, or an express written contract that creates rights for a surviving cohabitant, he or she will have no legal rights at death, even if the parties have cohabited at length as a couple, and even if the surviving partner made financial contributions to the deceased partner’s acquisition of assets. Similarly, if the parties end their relationship, their property and support rights will be limited no matter how long they lived together or how much one may have contributed to the other’s property. There are legal theories that a surviving or former cohabitant can pursue to make a claim, but they are difficult to prove.

Conclusion

These are only a small sample of the ways a domestic arrangement can turn into a big, costly marital mess. Most problems can be prevented or mitigated with the appropriate legal documents if couples take the necessary steps to create and, if needed, to dissolve their domestic arrangements as promptly as circumstances permit.