Blog and Legal News

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Planning for Federal Estate Taxes

One important element of the estate planning process in Michigan involves recognizing those opportunities where one can limit the liabilities facing their estates. Most assume, however, that taxes are one expense they cannot avoid.

Yet that may not be the case. First and foremost, Michigan does impose a local estate tax on its residents. This means that there may be additional potential tax liabilities facing Michigan residents’ estates outside of the federal level. However, one might be able to limit that expense or even avoid those federal taxes entirely.

Understanding the federal estate tax exemption

A federal estate tax exemption exists that limits the tax liability estates may face. According to information shared by the website SmartAsset.com, the estate tax exemption threshold for 2021 is $11.7 million. This means that those estates whose total taxable value does not exceed that amount will not be subject to tax.

Leveraging estate tax portability

Married couples might be able to extend their exemption amounts even further. Tax portability allows eligible parties to share their tax benefits. In regards to estate taxes, one can claim the unused portion of their deceased spouse’s exemption.

To make the most of this benefit, one must plan to leave their entire estate to their spouse upon their death. This takes advantage of the unlimited marital deduction (which allows one to pass an unlimited amount to their spouse tax-free). This preserves their entire estate tax exemption, which (per the Internal Revenue Service) their ex-spouse can then claim by filing an estate tax return within nine months of their death electing portability.

One must remember to plan for this final step (as portability does not occur automatically). A failure to do so could inadvertently push the values of the surviving spouse’s estate above the threshold (making it subject to tax when it otherwise would not have been).

How Does LLC Ownership Work?

The limited liability company (LLC) is a popular business structure for new businesses, but what does it really mean to own an LLC? LLCs provide unique opportunities to customize business ownership to fit the particular needs and circumstances of the owners. Here is what you should know about LLC ownership.

The Basics

The owners of LLCs are often called members. If a single person or a single business entity owns an LLC, it is called a single-member LLC. If multiple people or entities own an LLC, it is called a multimember LLC. LLCs can have an unlimited number of members. When ownership is established, the membership interests are usually expressed in one of two ways: 

●     by membership units similar to corporate shares

●     by percentage

The terminology you choose to use for a membership interest should correspond to your vision for the company. For example, if the business is owned primarily by your family, identifying the membership interests by percentages may keep things clear and straightforward. However, if you intend to seek funding from individuals outside of the family, you may find that labeling the ownership interests as membership units facilitates the easy transfer of ownership rights. 

Establishing Ownership Rights

To be an LLC member, some form of contribution is required; however, the contribution need not be cash, which is called a capital contribution. LLC members can also contribute property or services. Additionally, unlike contributions to a corporation, when an LLC member makes a capital contribution, the concomitant ownership rights and distributions can be customized. For example, if one member were to contribute 40 percent of the capital in an LLC, that member and the other LLC members may still choose to split profits fifty-fifty.

Generally, LLC members are entitled to share in the company’s profits and losses, vote regarding key LLC matters, inspect and review the books, and enjoy a host of other rights.; however, they may be customized through contractual agreements. The contractual agreement that typically governs LLC ownership rights is commonly known as an “operating agreement.” Operating agreements may include the following common customizations:

●     distributing profits and losses in a way that does not match the members’ capital contributions

●     Who will manage Company Day-to-day Affairs

●     Voting

●     How additional members are added

●     Loans

●     Who is authorized to sign contracts

Management

LLC members can choose to be managed either by the LLC members (a member-managed LLC), or by nonowners or certain members designated as managers (a manager-managed LLC). When an LLC is managed, it is vital to identify and articulate the decisions for which the members bear responsibility and the decisions the managers must make. If the decision-making authority is not clear, the resulting uncertainty can hinder effective management of the LLC. 

Payment

LLC members can pay themselves in several ways, such as

●     receiving income in the form of distributions of profits at the end of the year, 

●     receiving draws, which are periodic payments based on the estimated profits for the year, or

●     receiving periodic payments as employees of the business.

These three methods are not mutually exclusive—a member can take advantage of more than one option. However, members must remember that each option has unique tax consequences. LLC members should account for Social Security and Medicare taxes. When LLC members pay themselves as employees, the LLC is expected to withhold taxes as it would for any other employee. Conversely, when members pay themselves based on their profits, they must pay self-employment taxes. Either way, LLC members must be mindful of the tax consequences of the payment methods they choose.

Next Steps

If you are considering creating an LLC, I can help you develop the right ownership structure for your business. Call Herbert Machnik to schedule an in person or virtual meeting soon.

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HOW TO PREPARE FOR AN ESTATE PLANNING MEETING

Setting up an appointment with an estate planner is a great first step to take when creating an estate plan, but what comes next? The legal industry can be confusing, and it’s hard to know how to prepare for your appointment. While your attorney should be available to answer any questions you have, it never hurts to prepare on your own. Utilize the following tips to ensure your first estate planning meeting goes smoothly.

LOCATE IMPORTANT DOCUMENTS

Bringing important documents to your first appointment helps your estate planner structure the financial and personal aspects of your estate plan. Documents and information you should bring with you include:

  • Financial documents, including retirement accounts, life insurance policies, and a list of assets
  • The legal names and addresses of all heirs or institutions you plan to name in your documents
  • A list of items, such as family heirlooms, you plan to leave to specific individuals

MAKE SOME DECISIONS IN ADVANCE

Making decisions before you meet with your estate planner can speed up the process of creating your documents. A large component of estate planning involves naming individuals to fill different roles in your estate plan. Deciding who you’d like those people to be in advance means you’ll be ready to go when your attorney asks who you have in mind for certain tasks, such as:

  • A legal guardian for any children who are minors
  • A personal representative to shepherd your estate through the probate process when you die
  • Medical and durable powers of attorney to make medical and financial decisions on your behalf in the event of a medical emergency or incapacitatation

TALK TO LOVED ONES AND THOSE LISTED IN YOUR ESTATE PLAN

Talking to the individuals listed in your documents is an important pre-meeting task to complete for several reasons. One, sharing that you’re working on your estate plan gives you the chance to explain the reasoning behind the decisions you’ve made. This can prevent family conflicts from occurring. Two, talking to the individuals you plan to have fill roles in your plan prevents those individuals from being blindsided when you need them. Being a legal guardian or personal representative requires taking on a lot of responsibility. It’s important to make sure the person you plan to name is up to the task.

HOW CAN Herbert machnik law FIRM HELP YOU?

Herbert Machnik Law Firm can help you with your estate planning, Medicaid planning and probate law needs. To contact Herbert Machnik Law, click here.

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Types of Divorce in Michigan

There are three basic divorce options available in Michigan. These are:

Simplified Dissolution of Marriage – Also called simplified divorce. It is available to couples who have lived in Michigan for at least 6 months, agree on the same terms, have no minor children and are not expecting one, and are not seeking alimony. Both parties must attend the final divorce hearing.

Uncontested Divorce – If the parties agree on all issues such as the division of property, debt, alimony, child support, and parenting plans, leaving nothing for the judge to decide, they can file for an uncontested divorce. In this case your attorney will draw up a Marital Settlement Agreement, and then either one or both parties will go to court for a final hearing.

Contested Divorce – If terms cannot be worked out amicably by both parties, then decisions must be made by a judge. Contested divorces take the longest because the case goes to trial and a judge has to go through every document to settle all disputes between the spouses. Both parties have to attend mediation required by almost every court in the State of Michigan.

How long does it take to get a divorce in Michigan?

How long it takes to get a divorce in Michigan will depend on the type of divorce you are filing for. The process of a simplified divorce usually takes 30 days to complete as long as there is a complete agreement on the terms of the divorce and it is uncontested.

In an uncontested divorce case, often parties will enter into a written settlement agreement, with the help of their attorney, prior to filing for their uncontested divorce. From the time of filing until entry of a final judgment of dissolution of marriage, an uncontested divorce could generally take around 4-6 months.

If the matter is contested, however, parties are looking into a much longer process, particularly if minor children are involved. In some Michigan counties, parties with minor children will be required to attend mediation. A contested divorce can take anywhere from 9 months to 3 years or longer to be completed, depending on the facts and circumstances.

Do you get your inheritance if your parents don’t have a will?

Most people don’t like to think about their own mortality or the idea that their parents will eventually die. However, having a friend or neighbor lose a parent can serve as a major wake-up call. You may start to wonder what the future will hold for you as you listen to them explain how stressful and frustrating going through probate court has been for their family.

You might find yourself worrying about whether you will have to endure the same kind of stress when your parents die someday in the future. How difficult handling their estate will be for you depends in large part on how carefully they plan ahead of time.

What happens if your parents die without a last will or estate plan?

If someone passes away without an estate plan on record, intestate succession laws apply to their property and debts. In Michigan, parents, spouses and children have the most significant inheritance rights when someone doesn’t leave a last will. There are rules that apply for both nuclear families and blended families where the parents don’t necessarily share parentage of the children.

In an intestate succession scenario, family members will need to put together information about the assets and debts held by the deceased party and submit that information to the Michigan probate courts. The courts will then oversee the administration of the estate to ensure that all debts receive proper repayment and all assets get distributed in accordance with state law.

An estate plan helps even if your parents want you to inherit everything

Maybe you don’t have siblings, and your parents just intend for you to inherit everything. Perhaps you do have siblings, and they anticipate that you will split everything evenly among yourselves when they die. Your parents might think that intestate succession laws offer enough protection for your family when they die.

Talking with your parents about the complications of going through probate without a last will could help. If they understand that the estate could lose significant value due to probate costs and that you and other beneficiaries will have major delays while waiting for access to those assets, that could motivate your parents to create a last will now to protect their wishes and your inheritance.

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Do I need a Death Certificate to Open an Estate in Michigan?

Given the unprecedented number of COVID- related deaths in Michigan, families are having to wait weeks for a loved one’s death certificate to be executed and returned. Even in ordinary times, death certificates are often delayed when an autopsy is planned or when there is a death investigation. Not only is the death of a loved one tragic, but family members may have the added concern about the delay in opening an estate. Often a family member may need to open an estate quickly in order to access funds in a bank account, pay a mortgage or other bills related to the decedent or to obtain insurance benefits.

Fortunately, in Michigan, you do not have to have a death certificate to open an estate. If no death certificate is available, the Probate Court will allow you to provide alternative documentation of the decedent’s death. This following documentation can be used as an alternative notice of death:

  • Obituary
  • Funeral notice
  • Memorial information
  • Probate notice or legal notice of publication in a newspaper
  • Newspaper or printed online article about accident or crime related death
  • Medical records
  • Letter from a funeral home or medical examiner’s office

The Probate Court needs to make a finding that venue is appropriate. In other words, the Probate Court needs information showing that the person was domiciled in the county in which you are opening an estate. Accordingly, try to make sure that the alternative documentation shows both the date of death and the place of residence of the deceased person. Alternatively, you could provide a copy of the person’s driver’s license or a utility bill to show the home address.

You should attach the alternative document to the Application or Petition for Probate. A short letter indicating why the death certificate is unavailable is also helpful to explain why the alternative documentation is necessary. Once you have filed to open the estate, you can file the death certificate with the Court at a later date.

Please do not hesitate to contact our office at (269) 459-1432 if you have any other questions about opening a probate estate in Michigan. Our office is able to conduct meetings remotely and accommodate the filing of documents during the Covid-19 lockdowns and uncertainty surrounding availability.

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What to do if Children don’t want to go to Visitation with the Other Parent?

Once the Michigan family court has issued custody and parenting plan orders, you should do everything in your power to comply with these orders. Sometimes, the issue in executing a court ordered parenting plan isn’t an uncooperative parent, but a child who refuses to do visitation. It is usually in the child’s best interests to have a relationship with both parents, but there comes a point when you can’t force your child to attend visitation with their other parent. What are some options that are available to you to assist?

Reasons Children May Not Want Visitation with a Parent:

  • The child doesn’t get along with their other parent’s new partner or other children from separate relationships 
  • The other parent has strict household rules that the child doesn’t want to obey
  • The other parent lives far away from the child’s school, friends, and extracurricular activities 
  • Your child simply has never gotten along with the other parent
  • The child has resentment towards the other parent and blames them for the divorce. This can be an issue if you are the reason your child feels this way. Badmouthing your ex in front of your child is known as parental alienation, and evidence of this can be used against you in future custody proceedings. 
  • The child has an event they want to attend that is only possible at one parent’s household

Legal Reasons to Refuse Visitation with the other parent:

  • Parental incarceration
  • Substance abuse
  • Physical or emotional abuse
  • Sexual misconduct, including exposing the child to extreme sexual behavior
  • Parental kidnapping

Is withholding visitation against the law?

Unless there is an emergency situation, you should follow your court ordered parenting plan to the letter. Many parents assume they can withhold visitation if the other parent is behind on child support. There are plenty of methods to get a parent in arrears to catch up, such as wage garnishments, interception of tax returns and lottery winnings, suspension of driver’s and professional licenses, and property liens. Withholding child visitation isn’t on this list. 

There are plenty of other reasons that parents withhold visitation under the mistaken belief that they have legal cause to do so. You can’t deny visitation because the other parent doesn’t have a bedroom for your child at their house. You also shouldn’t withhold visitation just because the other parent is late or otherwise violates the court orders in minor ways. Don’t schedule a vacation with your child during your ex’s parenting time, as this isn’t a valid excuse to deny visitation. Illness also isn’t a reason to deny visitation, and you should alert the other parent if your child is hospitalized so they can attend visitation in the hospital. 

What Happens with Visitation if there is no court order?

Some parents choose to establish an informal parenting plan agreement without going through the courts. This works best when the parents are amicable and likely to follow the agreement. The drawback is that when the court hasn’t ordered the parenting agreement, the court can’t do anything to enforce it. Either parent can technically pick up the child at any time and go wherever they want. However, failure to follow an informal agreement can be used as evidence in a formal custody hearing that the parent is uncooperative in parenting plans.   

Do I Have to Force my Child to visit his Mother if he doesn’t want to go?

If your child confesses that the other parent is beating, molesting, or otherwise abusing them, obviously no one can tell you to send your child back into the arms of their abuser. Along with refusing visitation, you should also petition the court for supervised or no visitation at all. 

At some point, you probably won’t be able to physically force your child to do anything they don’t want to do. If you have teenagers, you already know this to be true. Courts will likely understand if you are able to show that you have attempted to comply with court orders, but based on your child’s age and maturity, you can’t force them to spend time with their other parent. The law doesn’t require you to tie up your child or drag them to force them to attend visitation. Saying your child refuses to visit the other parent works better when the child is 16, but doesn’t sound as believable if the child is 6. 

Strategies for Dealing with a Child who refuses Visitation with the Other Parent.

  • Find out why your child doesn’t want to visit with the other parent. Your child likely doesn’t understand the consequences of disobeying a court order. Asking why they don’t want to go, instead of simply ordering them to go, will give you insight into how you should best handle the refusal. Showing that you care and understand their situation could help convince your child to go to visitation. 
  • Document each time your child refuses visitation. Ask them the reason each time so you can list it. The other parent may bring you to court and accuse you of noncompliance with the court order, so you need to have evidence to defend yourself and your child’s wishes. The other parent may try to prove noncompliance on your part in future custody proceedings, which will hurt your position. 
  • Call the other parent when your child refuses, and try to have the child speak with the parent and explain why they are refusing visitation. The other parent may be more effective at convincing the child to cooperate, and that way the other parent can’t accuse you of intentionally disobeying court orders. Phone records and text messages are more difficult to dispute in court than word of mouth. 
  • Make pick ups and drop offs as stress-free as possible. Maybe part of the reason that your child doesn’t want to attend visitation is because you and your ex frequently argue during transitions. Do your best to hold your tongue and be the bigger person if your ex tries to incite you during custody transitions. If your child is leaving for an extended visitation, make sure their bags are packed and all other preparations are handled well in advance. Rushing all over the house and forgetting beloved items are avoidable things that can cause anxiety. 
  • Continue encouraging visitation. Don’t throw in the towel after one refusal. You should discuss your child’s cooperation with the parenting plan at times besides immediately before pick ups or drop offs.  
  • Remember that you are the parent. You are the one in charge, not your child. You know your child better than anyone, and maybe the soft, gentle approach doesn’t work for them. You may feel guilty for making your child do something that they don’t want to do, especially after the stress of a custody battle and/or divorce. 

herbert machnik Law firm may be the solution to your child refusing visitation.

After the stress of a custody battle, hopefully you won’t also have to deal with the recurring problem of a child who refuses to spend time with the other parent. If you do, it’s your duty as a parent to handle it in a fair way, not based on resentment and bitter feelings towards your ex. If you still have concerns about what to do with your visitation refusal situation, call Herbert Machnik Law Firm at 269-459-1432, or Contact Us Here, for your free consultation with one of our family law attorneys. Our attorneys have dealt with hundreds of cases where one parent or the other struggles with a child and the set visitation schedules.

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PRIVACY POLICIES

Privacy policies are often an afterthought, especially for new businesses. They’re widely perceived as a pile of boilerplate—a term many mistake as a synonym for “unimportant.” While I’ll save that axe for grinding in another post, I do want to focus in here on the significance of privacy policies and a few tips on how to go about getting them in place.

What’s A Privacy Policy And Why Should You Care

In a nutshell, a privacy policy describes how a business collects, uses, shares, transfers, and stores personal information. The acronym “PII” which stands for “personally-identifiable information” is commonly used in place of “personal information” but there are enough acronyms in life and so I’ll use the phrase “personal information” here.

Note: Personal information includes things like name, address, social security number, credit card number, biometric data (like fingerprints), and more.

Businesses should care about privacy policies if they collect personal information, which nearly every business does, whether from employees, customers, or others. They should care because they may be subject to privacy laws that regulate how they deal with personal information and, regardless of the laws that may apply to them, they may be subject to consumer scrutiny concerning privacy practices.

While privacy regulation in the US still consists of a patchwork of laws, there are no shortage of headlines for companies that have fallen short of societal expectations for safeguarding personal information. For a recent example of this, look no further than the negative response to Zoom’s privacy practices during Covid-19.

What You Need To Know To Put Together A Privacy Policy

Realistically, if you’re creating a custom privacy policy for your business, you’re likely doing it with the help of a lawyer. But that doesn’t mean you get to take your hands off the wheel. You’ll need to help educate your lawyer on how you deal with personal information in order to make the privacy policy tailored to fit your practices.

How Your Business Deals With Personal Information

Remember, a privacy policy describes how a business collects, uses, shares, transfers, and stores personal information. So you need to know how your company does these things (or how it plans to) before you can prepare and implement a privacy policy, whether you do it yourself or with the help of a lawyer. Figuring this out may, depending on the business, require you to talk to people in operations, HR, IT, marketing, legal and more.

Tip: It may be useful to create a data map to help with the process of tracking how personal information is handled.

No matter what tools you use, make sure you’re describing how things are, rather than how you think they ought to be, unless you plan to align your company’s privacy practices with the policy once drafted.

What Privacy Laws And Regulations Apply To Your Business

The US lacks a comprehensive federal privacy law. But the Federal Trade Commission regulates consumer privacy and so you may have obligations at the federal level. There are also certain states—California, with the recent passage of the CCPA, chief among them—that have their own privacy statutes that your business may be subject to. And if you’re collecting personal information outside of the US, you may have to deal with other privacy laws, including, for instance, the GDPR in the EU.

Also, depending on the industry in, the type of personal information you’re collecting, and certain other factors, you could be subject to more niche pieces of privacy legislation. Without going into great detail, if you’re a financial institution, a healthcare institution, or a collector of personal information about children or students, just to name a few, you should work with a lawyer to understand additional privacy obligations you may have.

Whether Institutional Gatekeepers Will Require Privacy Policies

Even if you’re not concerned about privacy laws and regulations, you may have to contend with privacy policy requirements from institutional gatekeepers. A good example of this is for businesses with mobile applications. If you have a mobile app, you’re likely planning to make the app available for distribution through one of the major app stores (i.e., the “institutional gatekeepers”). If so, you’ll find that Apple requires your app to have a privacy policy and Google requires most apps to have a privacy policy.

What You Need To Do To Implement A Privacy Policy

You could have the most comprehensive, beautfully formatted, user-friendly privacy policy out there, but if you don’t implement it correctly, it won’t do you much good. The best practice is to provide real and timely notice when users are given the option (or the requirement) to share personal information. A common example of this is providing a link to the privacy policy wherever personal information is collected.

Tip: It’s a good idea to require your users to acknowledge having read and understood your privacy policy at certain points of collection of personal information.

Keep in mind too that some notices must be delivered in a certain way to be effective; for instance, HIPAA has particular delivery methods that must be followed. This is just one example, though. There are plenty of others that may need to be considered.

Remember also that once you’ve put your privacy policy out there for all to see, you’re telling the world how you deal with personal information. If you, for whatever reason, fail to make good in practice on what you’ve told the world you would do in your privacy policy, the world may not take kindly to that. So it’s important to make sure what’s on paper (or online) matches what happens in practice.

What You Need To Do After Implementation

Implementation should not only be user-facing. Your employees should be aware of and understand their obligations under the policy. And if policies change, they need to change in both writing and in practice, meaning that regular auditing should be conducted. Changes that impact users may also need to be communicated directly to those users (for instance, in the form of an email or a website banner notifying users of an updated policy).

You should also be regularly reviewing and updating your privacy policy to ensure it aligns with your company’s current practices and with any changes in the laws.

Example: In late December 2019 and early January 2020, you probably received a deluge of privacy policy update emails from various large companies. This was in response to the CCPA going into effect, which caused many companies to change their privacy policies.

As part of this, it’s wise to include the privacy policy’s effective date, which should change every time the policy is udpated. That way it’s clear at which points in time the various terms of your policy are in effect.

Finally, it’s a good idea to tell how consumers can contact your business if they have questions or issues regarding your privacy policy or practices.

Takeaways

The biggest takeaway here—that is, once you have a privacy policy in place—is to view your privacy policy as a living document, rather than a template you park in the footer section of your home page and never think about again. If you’re able to view your policy through this lens, you’ll be more likely to review it regularly and revise its terms when your company’s practices or privacy laws change.

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What is a Durable Power of Attorney and How Do You Set One Up?

Setting up a power of attorney (”POA”) is very useful if you anticipate being incapacitated or unable to manage decisions in the future. It’s also a good idea to set up a power of attorney even if you don’t expect anything preventing your decision making abilities in the future. Life is uncertain and you never know what might happen, so, being prepared is key. There are many different kinds of POA. What is a durable power of attorney and how can you set one up?

What is Durable Power of Attorney?

Durable POA is also known as the financial power of attorney or Power of Attorney for Property in Illinois. When setting up a durable POA, you are appointing a trusted person to act in your place to legally make decisions about your financial matters. This can be set for an indefinite amount of time or for a specific period of time. A specific time can be set for periods where you anticipate or know you will be unable to make financial decisions. This can include reasons such as… 

  • Being deployed in the military
  • Having a major surgery with a lengthy recovery
  • Working overseas or offshore for an extended period of time

The most common reason individuals set up a durable power of attorney is in the case of incapacity. Many individuals who are older or are in poor health feel it necessary to set up a financial POA in the case that things go downhill. To learn about the durable power of attorney is Michigan, please feel free to give us a call or send a us note here. Michigan law has a specific procedure for setting up a durable POA, so make sure that you’re protected in the event that you have major life-changing event.

How To Set Up a Durable POA

To set up a durable POA, certain requirements must be met. Having an experienced attorney can help you meet these requirements when filling out the proper paperwork. It is easy for things to slip through the cracks when you’re filling out legal paperwork on your own. Having an attorney who deals with legal paperwork for a living can make sure your request for a power of attorney is successful. What are some of the requirements that your POA must meet?

When setting up a POA, you are known as the principal and the person you appoint as your POA is referred to as the agent. The proper documentation will name who your agent will be and will detail the scope of what their powers will be. It is also required that you properly sign the documents wherever signatures are needed. As with many legal documents, it is required to have one or more witnesses and a notary public. 

If you need help finding the proper paperwork to fill out or have questions about how to fill out the POA forms, contact the Herbert Machnik Law Firm. We are a Kalamazoo and Southwest Michigan Law Firm that specializes in Estate Planning and Probate. Make sure you are taken care of in the event of major surgery or an unexpected accident. You can call us at 269-459-1432 or you can Contact Us here.

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WHAT ARE THE CONSIDERATIONS IN DECIDING TO KEEP THE MARITAL HOME?

It may be surprising, but it is rare that both married partners want to remain in the marital home. If this happens in a court case, a court may look at how the best interests of the children will be served in making this decision. A court may order the house to be sold, although this is always a last resort.

Often, when one party is considering keeping the marital home, it is because of the desire to maintain consistency for their children. It is understandable that parents are deeply concerned about the impact of divorce on their children and wish to keep them in their home, neighborhood, school and community if at all possible.  As lawyers, our concern is that a decision to keep the family home may be a financial hardship, which itself can be harmful to a family.

In a divorce or dissolution, if real estate is going to be retained by one party, a decision must be made about the value of the property.  This can be done by agreement, where both parties feel comfortable with a certain number.  Often, people obtain a real estate appraisal by a certified appraiser or bring in a realtor to provide comparative sales. To determine the marital equity of a home, the fair market value is reduced by any outstanding mortgage to arrive at the marital equity.  (Note, there may also be separate equity if a party used separate money toward the purchase of the house.)

Traditionally, the marital equity is divided equally which will require a payment from the person keeping the house to the other party. This payment may come from savings, or taking  a new mortgage on the property or surrendering one’s right to other assets, such as retirement, as a trade-off for keeping the home value.  Each of these options will impact the financial position of the keeper of the home.  Most financial planners will question the wisdom of someone relinquishing retirement money to keep a house because it is a short term decision impacting one’s long term financial security.  The alternative of borrowing more money may create cash flow problems, as will a depletion of savings.

There are other considerations. If a mortgage is in joint names, which is common, normally the person keeping the house is required to refinance the mortgage so the other party is no longer liable.  This requires lending approval which may be difficult depending on one’s income and the amount of support that is to be received.

Another consideration is when the home equity is determined, normally the costs of sale, including a realtor’s commission are not considered.  Take for example a decision to keep a $400,000 home with a $200,000 mortgage.  The person keeping the home will likely be required to refinance the mortgage.  This may mean a mortgage rate higher than the current loan.  If the spouse is owed $100,000 for his or her equity, the refinanced loan may jump to $300,000, likely causing a higher monthly payment. Then consider after one or two years, the person who kept the home realizes it is not financial feasible and has to sell. If the sale is for less than $400,000, the home owner loses out, and even if it sells for $400,000, the owner will have to pay a real estate commission, probably around $24,000 and the owner is likely to pay for various repairs to place the home on the market and to pass an inspection.  In this scenario, the decision to keep the house may have been costly.

Of course, there is the possibility a house can be sold for more than the agreed upon value, or sold by owner, or with a mortgage at a lower rate.  The point of this article is to explain the factors that should  be considered in making a decision about keeping a home and to assess the amount of risk one is willing to accept.

If both parties agree to sell their home, normally the proceeds are divided equally, meaning that the parties share the real estate commission and all costs of sale, and there would be no reason to appraise the property.

When facing this issue, one must weigh all factors, including the desire to maintain stability as well as the financial impact of this decision. Please reach out to our firm to have one of our experienced attorneys help you with your divorce and property division. You can Contact Us here or call us at 269-459-1432.