What is a Separation Agreement?
The term and role of a separation agreement can be confusing, either for parties or for practitioners. Parties often come to my office who need assistance walking through a separation agreement that they themselves have prepared. Other clients walk into my office with no written agreement, but instead, with a simple representation that they are separated "on agreement". This can cause obvious confusion when a disagreement arises between the parties in the implementation of the separation agreement or agreement. But even those clients who walk into my office with an actual separation agreement may not know the full scope of what their agreement or agreement should be. So, what exactly is a separation agreement?
A separation agreement, like its name indicates, is simply the legal agreement whereby two people decide that they will not live with one another for some particular reason(s), in a manner which intends to resolve their issues between them before they proceed with a divorce. It can be an all-inclusive agreement which covers everything from custody of the children (if any), to alimony, child support, equitable distribution of assets and debts, and even possibly waivers of spousal rights in the interest of the other spouse’s estate planning (although given the statutory rights, such waivers cannot be done easily). It can also be a stand alone agreement which resolves as little as the parties wish while they decide how or whether their marriage should continue. A separation agreement is meant to be an "until further notice" agreement in which the parties conditionally agree with one another to settle their issues between them until either they become agreed again, or until they become un-agreed to the point where another separation agreement must be made or they proceed to divorce. A separation agreement can be used in anticipation of or in connection with a divorce, but it does not need to be. It can be used to establish a legal date of separation and become ancillary to a divorce complaint that is filed after the fact. However , a separation agreement can also be used to eliminate the need for a divorce or never proceed to the divorce, if reconciliation occurs. There is nothing legally wrong with that.
This leads to another problem with separation agreements. As mentioned above, the parties are CONFIDENTIAL to the extent that they can decide and work out their own issues and then present that agreement to the Court for review and implementation in the form of an Uncontested Divorce Complaint. The spouse, therefore, is unable to learn the terms of the agreement before signing it unless they inquire about them directly to the other party. Most times the untold terms are the alimony and equitable distribution (aka asset distribution) aspects of the agreement. That is, because both parties do not have any idea as to what the other party would ‘live with’, nor do they have the knowledge of the family finances, a sense of misinformation may develop about what is factually reasonable within the negotiation of the separation agreement. So, unless there is an attorney involved, it is less likely that the alimony and asset distribution terms of a separation agreement are accurately negotiated. This lack of negotiation can lead to the outcome where a Separation Agreement has been entered into, signed and then later merited a complaint for divorce on grounds of fraud and/or unconscionability. On occasion, the divorce complaint is sought as a result of the third-party (his/her lawyer or family member) discovering the agreement and explaining how that agreement is in his/her best interests.
The separation agreement is meant to define the terms agreed upon by the parties and dispense with the need for a more formal arrangement for the continuance of their relationship apart from one another. It is an agreement which is to be strictly construed to the terms negotiated between the parties and is incorporated, but not merged, into a Divorce Decree later on. This means that the terms, as expressed, must be performed or else whatever terms the parties agreed upon will be enforceable in court if one or both parties does not perform.
The Challenges For People Over the Age of 40
Considerations for those Over 40 in drafting a Separation Agreement:
A common sight at an association of divorce professionals is a couple who have been married for many years and now at least one of them is in their sixties. Contrary to popular belief they are not necessarily better off financially then their children, but they may feel they deserve to "cash in" the savings, including retirement, earlier in life. Those who are at least over 40 must give careful consideration to the consequences of a divorce on them where while they are also separated.
The court will consider multiple factors in determining how to divide any appreciated value of a home and what is appropriate in a property settlement agreement. For parties over 40, consideration of reasonably expected changes in health insurance will be a large factor in the property settlement agreement. I have also had clients ask for provisions in the settlement agreement that they are entitled to the same medical plan as they had during the marriage, that the other spouse will pay for health insurance on their children until they are aged 26, that the other spouse will pay continuing medical support until their children are age 23. Many times, the plans offered by independent contractors change every few years and these types of provisions in the settlement agreement are often disallowed by the court.
In particular, the court will look at the impact of the end of COBRA coverage, as well as the availability of affordable health coverage from other sources.
Another consideration as to the impact of preparing a property settlement agreement when deciding about medical coverage is that while the non-custodial spouse will keep health insurance on the child until age 18, the policy will revert to the custodial parent when the child turns 18. If the parents wish to continue the policy until the child completes college at age 24, they need to agree that the non-custodial spouse will make the payment as is required under Pennsylvania Act 155 or by some other means.
Things That Should Be Addressed
The specific clauses that should be included in a separation agreement for a person over 40 with the most impact on future rights are those that deal with retirement plans, health care, and property division.
Retirement Plans. Most people these days have different types of pension and retirement accounts, including: (1) traditional pensions; (2) defined contribution plans such as a 401k, 403b or other manner of profit sharing plan; and, (3) individual retirement accounts (IRAs). Each of these plans can have different rules (retirement age, etc.), options (joint survivor annuity, choice of payout), and tax consequences.
Health Care. These days, more and more people have employer-provided health care including the new programs from the Affordable Care Act. Without proper provisions, a separation agreement may terminate you, or your spouse’s, eligibility for affordable health care.
Property Division. Another major issue will be the division of the real estate of the parties. How the house is to be treated (i.e., who gets it, when, how, responsible for all expenses, when can it be listed, etc.) is an important clause to include in any settlement. Additionally, the value of the home is an issue of vital importance. Because the housing market has been through a downturn, some parties may not know the fair market value of their home. Equitable Distribution. All property subject to equitable distribution should be listed in a schedule and values assigned. The date on which the value is assigned (on the date of settlement, for example) will impact the distribution of retirement and bank/investment accounts, especially where the parties were married for a long time.
How to Ensure Your Agreement is Fair
When it comes to preparing for divorce or separation, timing dictates how memorable a person’s thoughts are on the topic. That is particularly true when they are over the age of 40. With about a lifetime’s worth of experience accumulated up to that point, divorces tend to be based on practicalities rather than the angst and elevated emotional qualities that many previous generations of divorces have stemmed from. This can be an advantage or not.
Its simple to break things down simply: divorce much after age 40 is going to be about assets. Its going to be about the best deal a person or couple can get getting out of the marriage without ruining their personal finances and their future.
Even so, many people never get to the stage of divorce. Indeed, separation agreements often become more common later in life as the realities of moving on with one’s life become more difficult.
Unfortunately, a large part of the reason so many people over 40 get married only to end up separating or divorcing involves finances to begin with. People today marry later in life because both people involved have careers. Even in previous generations, it simply made more sense to be married – particularly if you wanted kids to wait until both parents were receiving a certain amount of income.
When it comes time to draft a separation agreement, however, things change. In a person’s early 30s or late 20s, it’s all about having enough money for a family and making room for the idea that one person or the other may want a divorce someday due to the realities of marriage. A few years later, however, that changes.
In most cases, people in their late 30s or early 40s are focusing on the long-term and what assets they have left to build. Whether they have a child or not, much of their focus is on ensuring their stocks, bonds, savings, investments, house, etc., never drops below a certain amount. Couples also tend to start separating assets between pensions and other forms of retirement saving. By the time a couple is in their 50s, a divorce or separation likely means dividing up a wealth of assets that have been built together over a lifetime. The last thing anyone wants is to undervalue a property or account, making it impossible to live out one’s golden years.
The process of drafting a separation agreement can be tough for a couple. Most people don’t hire an attorney when negotiating the terms. Oftentimes, an agreement is arrived at through some form of negotiation between parties. When the process is completed in an amicable situation, it becomes a simple matter of finding an accepting third-party – usually just a notary public – to provide the agreement with their seal of approval. When couples simply cannot agree, however, the ugly truth about separation agreements arises. They are woven-of-paper legal documents that can be amended and changed down to a single word. Even a single word can make a difference in how much money a person receives in a divorce. It’s for this reason that it always pays to talk to a lawyer before agreeing to anything. Consultations are usually low-cost and give you a full grasp of what you are entering into before putting your pen to paper.
The Importance of Mediation
For those over the age of 40, mediation is still a commonly used and often very effective tool to help work through the terms of a separation agreement. Even though most often it is used in conjunction with parties who are on amicable terms and are able to have a reasonable discussion about their financial and child custody issues, mediation can also be effective in more contentious situations as well. Oftentimes, parties do not realize the real benefit of mediation in the divorce process until they find themselves in the midst of their first session, and then they realize that it can actually be a cost saving and time efficient tool during these often very difficult times. For this reason, many lawyers use the threat of mediation to help move more contentious separation agreements forward rather than allow the litigation to drag forward with multiple appearances before a judge to work out even the most minor of issues. One of the benefits of using mediation is that for many people, being in a room one on one with their soon to be ex-husband or wife, and now looking them directly in the eye, rather than over a program such as Skype or a conference call helps to diffuse some of the emotion and replace it with logic as the parties must always remember that their continuing communication should be on a civil level. As many attorneys have told their clients, if they wish to be so angry or upset with their spouse, now is not the time. Now is the time to be pragmatic and rational in order to help your family move forward. Most people are quite surprised when they realize that their spouse is not out to try and ruin their very livelihood or make them look like a ridiculous fool on the world stage by claiming false torts against them, because those are the things they often believe going into this kind of negotiation. Certain people allow their emotions to cloud their judgment and force them to be necessary rather than reward themselves by taking the emotion out and replacing it with logic. Certainly there are points of negotiations that people feel so strongly about , especially those relating directly to the children, that they are unwilling to budge on an issue or two. However, it is important to remember that the law does not allow for any parent to be totally out of the children’s lives or have no parental contact with them. In fact, that is extremely rare for both parents. Therefore, parties should use those times where the children are out of the picture and the only people present at the table are the two parents to be, since that is what is really important in those moments, and it is the only thing standing in the way of the mediation process. The people in the room should be focused on working out their issues and their problems within the realm of the space that is created by the mediation, rather than focusing on the past and how the other parent created issues for them and now their life. Mediators also work hard to keep the process focused on the issues that are directly at play in that particular negotiation. If parties are going off topic, and talking about things that are completely irrelevant to the issues of child support or custody or alimony or equitable distribution, the mediator will focus the parties, and ask them to return to the actual issue at hand, rather than turning it into a forum in which to air their grievances and concerns about how the other parent acted during the course of the marriage. These behaviors best belong in a therapist’s office than in a mediation session. Mediation truly works best in circumstances when the parties are willing and able to behave in a manner that is appropriate, rather than acting out emotionally, remembering that this is a business deal in order to facilitate a future that is acceptable for both parents and their children.
Lawyers, Advice and Representation
Yours truly is a strong believer in self-help. If you’ve got the time, the inclination and the capability to do research to find your way through the omega labyrinth of separation agreements, great. However, in the area of family law, self-help is usually anything but "self". For example, people over 40 usually have assets and income acquired through their careers and getting that all right in a separation agreement is very important.
Also, understanding the tax implications of the various terms you propose in the agreement is likewise tricky stuff. My rule of thumb is that if you’re going to be divorcing after 10 or more years of marriage, then you need professional help.
Because there is so much at stake with a separation agreement, your next step is to make sure you have a competent lawyer. It pays big dividends in the long run to get your agreement done properly the first time around. Obtaining legal advice on your rights and obligations regarding the divorce process, negotiation of the separation agreement, and the impact of the separation agreement on your rights and obligations, and obtaining advice in relation to drafting and negotiating the financial terms in the agreement, are all areas where having the right lawyer is key. The courts will not interfere with what you and your spouse agree upon simply because one of you realizes later that what was agreed to isn’t fair. Also note that the divorce court isn’t very big on enforcing separation agreements either! The importance of getting this stuff right the first time around assesses a premium of perhaps 2 or 3 times the normal hourly fee for your lawyer’s services under these circumstances.
All lawyers have their strengths and weaknesses. Those who are skilled in the fields relating to separation agreements include accountants, architects (for some reason), and lawyers. You can expect to pay lawyers anywhere from $200 to $600 per hour to assist you with preparing an amendment or a new separation agreement. If you think you can do it yourself and save yourself a big fee, please remember that sulking is free, and legal fees are always way less than the cost of a court application to rectify mistakes in your agreement that could have been avoided.
A few final notes on lawyers and separation agreements. While you can save a lot of time by having what amounts to a template agreement to start with, there is no guarantee that it will be adequate for your situation. Each separation agreement must be assessed on its own merits because even when two couples may appear to be quite similar at first blush, the devil is always in the details.
When choosing a lawyer for a separation agreement, try to choose someone who specializes in family law, knows their way around your court system, and has a keen appreciation of the tax rules that apply to your situation. Good luck with your separation agreement!
Changing Your Will and Other Documents
Finally, you need to update legal documents, including your will, to reflect your new circumstances. This includes, but is not limited to, removing your former spouse as your executor, victim, guardian, trustee and agent for purposes of the Health Care Representation Act. It is all too common that people leave their wills in place, either because they do not think of them, do not want to pay a lawyer to draft a new one, or because the provisions are not automatically revoked under the Divorce Act. A parent or a spouse (if no children), in particular, ought to consider naming a new executor and guardian for children so as to avoid inadvertently leaving them in the hands of his or her former spouse. Keep in mind that if your spouse is not removed as executor, trustee or guardian and you pass away, they will have a legal duty to act in a manner that may be contrary to your intentions set out in your divorce agreement. The named party has a fiduciary duty to act in the best interests of the beneficiaries. It is very common for an ex-spouse to act against the intention of the parties where the documents are out of date or contrary to an order or agreement. Your Retiree Health Benefits plan may allow you to change your beneficiary designation and so you would likely need to update that as well.
Pitfalls to Avoid
Common Mistakes to Avoid When Drafting Your Separation Agreement
One of the prevalent errors made in the drafting of a separation agreement concerns health benefits. Oftentimes, the matter resolves with law firm assistance and then the client tries to negotiate with the medical insurance company. The insurance company will tell them they have no coverage since the divorce was never instituted by Complaint and Decree was never entered. Unfortunately, since health benefits are one of the four major components of a divorce settlement which is subject to equitable distribution, the parties must be cautioned that if they have agreed to post-dissolution benefits, those benefits must be obtained through the Complaint and Decree route. Otherwise, the parties may find themselves still married because the terms of the agreement are unenforceable. Moreover, if there are children involved, to fail to obtain a Divorce Judgment could jeopardize those children’s right to support and benefits since technically they are not legally separated and are still living together as a family unit.
With regard to QDRO’s altering retirement benefits, if a Separation Agreement does not specifically reflect that the parties know this will be necessary, the Agreement may become unenforceable by one or both parties since the Agreement is a contract between the two of them and it is not binding on the court to provide for QDRO preparation. In short, if one party agrees to give another 20% of their pension, rather than give the actual 20% to the non-participant, it would be better to do so under the terms of a Court Order, rather than in an Agreement since the latter is not enforceable against the retirement plan.
Inclusion in an agreement of a dissolution of marriage in a foreign country may be difficult to enforce here if no attorney in that foreign country participated in the preparation of the agreement under that country’s laws .
Oftentimes, even the most sophisticated people allow themselves to sign off on a separation agreement which contains vague language because it is presented as a compromise. For example, if one party agrees to pay health benefits until the other party has health insurance through another source "including employer provided insurance," the other party more often than not is misled into believing they will continue to have health benefits provided by the payor even in the event that they get access to Medicare, Medicaid or some other form of health benefits.
Any agreement which sets forth a continuing obligation of any sort must specify exactly what that obligation is and how long it shall exist. For example, if one party agrees to pay for college for the parties’ child, the agreement must say clearly what colleges that includes, what degrees that includes as opposed to just sending the child to college for four years of undergraduate and state whether the obligation continues for graduate school and how long. Many parents have agreed to free education for their children in the belief that it meant free education at any college or graduate school the child chooses and then find out afterward that the provision means limited education.
One of the best ways to avoid pitfalls is to have an attorney working with both spouses to come to an agreement which will become the basis for negotiation of a Separation Agreement. The attorney should be competent to perform due diligence with regard to assets so that all assets are discussed. However, if the spouses wish to engage in mediation either before hiring the attorney or after hiring the attorney, at the very least when the final agreement is written up, it will be necessary for the attorney to then review the entire agreement and ensure that all the necessary finalization language is included, such as stating the effect of the agreement on the marital portion of a pension, which is necessary to enforce the agreement properly.
