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1040 name-statusIt’s always nice to see a court cut through the red tape and do the right thing. It doesn’t always work out that way. Here it did.

In its April 29, 2015 decision in Dickson v. Dickson, the Appellate Division, Second Department, reversed Westchester County Supreme Court Justice John P. Colangelo to solve a practical problem resulting from a mistaken assumption in a couple’s divorce settlement agreement.

That agreement provided that the wife would receive one half of the husband’s Time Warner Deferred Compensation Plan benefits. The transfer of the wife’s interest was expressly to be effectuated pursuant to a Qualified Domestic Relations Order (hereinafter QDRO) or a Domestic Relations Order (hereinafter DRO).

What is a Domestic Relations Order? It is common for employers to provide retirement or deferred compensation benefits to their employees. With appropriate plans, there are no income taxes paid by the employee now at time of the employer’s current contributions. Indeed, the employee may also contribute to such plans using “pre-tax” dollars. Income taxes will not be paid on the employer’s or employee’s contributions, or the growth thereon, until the employee withdraws funds from the plan, usually upon retirement.

Incident to a divorce, a share of such plan benefits is often to be paid over, now, to the employee’s spouse. Were that to be accomplished by the employee withdrawing the spouse’s share and paying over the funds withdrawn to the spouse, such could constitute a current invasion of the plan, a withdrawal from the fund subjecting the employee, now, to income taxes, if not early withdrawal penalties, as well.

A Domestic Relations Order is a court decree recognized by the Internal Revenue Service that allows the division of retirement plan benefits incident to a divorce, without triggering current income taxation or early withdrawal penalties. Rather, the employee’s spouse will be subjected to income taxes only when the spouse accesses that share when, as and if withdrawals are made (or if the share is not properly rolled over into an appropriate tax-deferred account of the spouse).

That is precisely what the Dicksons contemplated here. The wife was to receive half of the husband’s Time Warner Deferred Compensation Plan. A Domestic Relations Order was to be used to prevent the transfer to the wife being a taxable event. Rather, the wife would pay income taxes on the amounts she received when, as and if she did so.

However, in this instance the Time Warner Deferred Compensation Plan was not the type of benefit plan that could be made the subject of a Domestic Relations Order. Instead, for the husband to pay over to the wife her 50% share, such would be treated as a current invasion. The husband would, now, be subjected to income taxes on the amount withdrawn and paid over to the wife.Continue Reading Divorce Agreement Reformed Where DRO Not Available To Divide Deferred Compensation Plan

In his February 26, 2013 decision in J.K.C. v T.W.C., Monroe County Supreme Court Justice Richard A. Dollinger held that an attorney could not have a charging lien under Section 475 of the Judiciary Law against the IRA received by his former client (the wife) as her marital share of the husband’s IRA. IRAs, generally, are exempt from creditor’s claims pursuant to CPLR §5205(c)(2).
The attorney had represented the wife in a divorce action. In the retainer agreement, the attorney noted that if fees were due and owing at the time of his discharge, the attorney had the right to seek a charging lien which the agreement described as “a lien upon the property that was awarded to you as a result of equitable distribution in the final order or judgment in the case.” The client also signed a “statement of client’s rights and responsibilities” which stated that a court could give the attorney a charging lien which “entitled your attorney to payment for services already rendered at the end of the case out of the proceeds of the final order or judgment.”

Justice Dollinger recognized several facts as pertinent to his analysis:

  • There was no evidence that the wife ever contested her attorney’s charges until after the judgment of divorce;
  • There was no allegation before the court that the wife ever agreed to pay the attorney’s fees specifically from the IRA account;
  • There was no evidence that the wife possesses any other assets, distributed under the divorce judgment, available to satisfy the charging lien; and
  • There was no allegation that the client, in the divorce judgment, engaged in any collusive or other improper behavior to thwart the attorney’s recovery of his fees.

Holding that a charging lien could not be asserted against an IRA, Justice Dolinger also considered:

  • The federal tax consequences on any withdrawal;
  • The penalty imposed when an unqualified withdrawals is made;
  • The actual ownership of the trust funds by the trustee;
  • The “anti-alienation” provisions of ERISA;
  • The wife’s never having “available cash proceeds” during the trustee-to-trustee transfer of the funds from the husband’s IRA to her own;
  • The broad language protecting IRA roll-overs from the reach of creditors in CPLR §5205;
  • The lack of express direction in Section 475 in the Judiciary Law to permit a charging lien against retirement funds; and
  • The lack of any provisions relating to a charging lien for attorneys fees under New York’s Domestic Relations Law.

Continue Reading Collecting Counsel Fees in Divorce Actions: Charging Lien Against IRA Denied