What to Know About Property Settlement Agreements in Pennsylvania
Define a Property Settlement Agreement
A property settlement agreement (PSA) is a legally binding contract that outlines the terms and conditions of a divorce settlement. In Pennsylvania, property settlement agreements are central to the divorce process, addressing important issues such as property division, debt allocation, spousal support, alimony, and child support. The PSA is typically negotiated between the two parties, either through informal discussions, or with the help of attorneys and/or mediators.
The purposes of a PSA are twofold. First, it may be the only written agreement the parties have as to their rights and in fact memorializes an arm’s length agreement. Second , it provides a framework for how the parties will proceed during and after the divorce process. It helps to simplify the proceedings and avoid costly litigation. Virtually all issues can be addressed in a PSA. Courts do not like to change the terms of a PSA or modify one because that undermines the benefits of pre-divorce planning and smart negotiation. Courts generally approve of negotiated agreements if they are thorough and reasonable based on the facts and circumstances uncovered in the proceedings (although most people do not want to go through the entire proceedings).
What Are the Legal Requirements of a Valid Agreement in PA
In order for a property settlement agreement to be legally binding in the Commonwealth of Pennsylvania, there are a number of requirements that must be met. Perhaps foremost among them is the requirement that the agreement must be voluntary. The key to any settlement agreement is that both parties negotiate the terms without excessive coercion from one side or the other. Undue influence, fraud or duress can all make invalid a property settlement agreement. The object here is to determine if the agreement was consensual on both sides, and that there was full knowledge and disclosure of all relevant facts. Notably, neither party is required to hire a lawyer to finalize a property settlement agreement. However, attorneys do play an important role, as they can point out mistakes to their clients, such as not understanding the provisions of agreement, or realizing the consequences of signing it. Parties also have to make sure they have enough information about all family assets to make a fair and accurate accounting in agreement.
Essential Elements of a Property Settlement Agreement
A seamless and comprehensive marital settlement agreement should include a thorough list of the parties’ real estate, bank accounts, retirement plans, and pensions. In addition, provisions for the division of marital debt is necessary to create an enforceable agreement. The Court would be likely to reject an agreement where there is no allocation of credit card debt, personal loan balances, or medical bills.
In Pennsylvania, a spouse may be entitled to spousal support, alimony pendante lite (APL), or alimony. This may also be addressed in the written agreement. Real estate is often a couple’s largest asset. When dividing real estate, the parties can first deduct the outstanding mortgage balance and the cost of selling the property, including real estate commissions and other settlement expenses. The net equity resulting from this calculation can be divided between the parties as they agree. For instance, if the parties are divorcing and have children to whom one spouse will be paying child support, it might make sense for the spouse with the higher income to be awarded the real estate. This will allow that spouse to claim the mortgage interest deduction for taxes, may result in a child support deviation, and allow the spouse the advantages associated with being the owner of the real estate. The parties can also agree to give one spouse a distributive award (i.e. lump sum payment) from the equity in the real estate so that the real estate can be sold immediately and the profits distributed. This can also help prevent an unnecessary delay in the division of the marriage assets or help the untethered spouse remain in the home temporarily while securing new housing. Blended families can increase the complexity of a property settlement agreement. Step-children can further cloud issues of support and division of property particularly when a spouse does not have a legal obligation to pay support. Problems can arise if a decision is not made regarding the division of property or when a child is left out of the agreement. In the case of a blended family, it might be better to grant the spouse a portion of the asset in lieu of creating an alimony obligation. The parties can carve out provisions that specifically state whether or not the child of a previous relationship will inherit any existing or future assets.
Spousal support, APL, and alimony will require the exchange of income tax returns, W2’s, 1099’s, paystubs, funds from bank accounts, and bills. Once the income is established, medical insurance and out of pocket costs can then be deducted from the income figure and child support guidelines can be applied to calculate a child support obligation.
The final step involves the division of debts. The parties can choose to equally divide the debt, or they can otherwise agree to who will be responsible for the payment of which debt.
Advantages of a Property Settlement Agreement
As discussed previously on this blog, one of the requirements in Pennsylvania, prior to filing for a divorce, is for the parties to hold a hearing and a conference with the master and judge. After this hearing, the judge will issue a Divorce Decree, which will end the marriage and (if issues are not already resolved in prior dealings) allow for an open period of time for the parties to resolve their ancillary issues.
The same procedure occurs in an Uncontested Divorce, but the parties have already settled all of their issues. The Uncontested Decree can be obtained by filing a Property Settlement Agreement, which is an agreement signed by both parties to settle the divorce, including the division of all marital property.
The benefits to obtaining such an agreement are numerous. The first benefit is that at the hearing, if the judge and/or master have to determine the value of the property, then it could turn into a lengthy hearing. For example, what is the current market value of the marital residence? Of the 2nd property? Of the family vehicle? Of the trailer at the beach? And, more importantly, how do you divide it, since the marital residence cannot be cut in half and sold?
Another benefit of having a Property Settlement Agreement is that it identifies the issues, resolves them, and saves the parties from any further litigation on those matters. If an agreement is filed with the court, then unless it is vacated, the parties cannot litigate the underlying issues.
The third benefit of a Property Settlement Agreement is the ease of your future. For example, a wife agrees to receive the marital residence and husband agrees to receive marital assets valued at $X. Further, the wife agrees to transfer her interest in the 401k plan to husband, who will then transfer a similar amount to her from his IRA. The wife will take a lump sum of $Y from the marital account, and will get a court order to remove him from her health insurance plan. The parties agree that the support obligation will terminate when the daughter reaches the age of 18.
This is a deal that takes care of all of the issues. The wife gets the house and the man gets the 401k and transfers from the IRA. The wife gets some money from the joint account and the father will pay child support until the child turns 18. The deal is done. There is no possibility that the father will pay support until the daughter finishes college because the support ends at 18.
The benefits of an agreement go on and on. Do your best to secure an agreement, no matter how difficult it may appear at the outset. It will be well worth it in terms of future peace and prosperity.
Common Pitfalls, Mistakes and What to Avoid
When drafting a property settlement agreement, many parties fail to consider their tax implications. One thing to be particularly aware of is the difference between alimony (which is tax deductible for the person paying the alimony and includible in the gross income of the person receiving the alimony) and child support (which is not tax deductible to the person paying it and not includable in the gross income of the person receiving it).
Another common mistake is using outdated terminology in the Agreement (i.e. "separation agreement" instead of "property settlement agreement" with regard to child custody issues, use of the term "uncontested divorce" instead of "no-fault divorce") .
Pulling or modifying an old Agreement can also result in language that is no longer applicable or enforceable. A Modification of a property settlement agreement may be within the power of the parties; however, if the original Agreement was incorporated into a final decree of divorce, a court must approve the Modification before it is enforceable.
Perhaps the most frequent pitfalls in preparing a property settlement agreement are failing to record all assets and liabilities, omitting the extent to which the parties have contributed to pension plans during the marriage, and failing to provide for any tax issues that may arise due to the parties’ filing status or loss carryovers that occurred after the separation.
How Attorneys Can Prepare and Draft Agreements
While the parties are expected to be familiar with the basic terms of their property settlement agreement, an attorney can be a significant benefit in: explaining how the agreement is drafted, drafting the agreement and negotiating the terms of the agreement.
In many instances, the advice of an attorney is essential to ensure that the agreement is drafted effectively. If not drafted properly, you may be subjecting yourself, and your former spouse, the potential for extensive additional litigation. As an example, if you agree to an arrangement wherein your former spouse is to maintain insurance on your child in the amount of $50,000.00, it is absolutely essential that your agreement specifically provide for the following three important issues:
- If the insurance is soley for the child’s benefit, the Child Support Guidelines permit you to maintain a credit against your child support obligation for the value of premiums paid.
- Because, ordinarily, the receiving party (in our example the child) shall be the owner and beneficiary of the policy, the agreement must provide that your former spouse shall be the owner of the policy (or that you shall be the owner of the policy until the child reaches adulthood and then the child shall become the owner of the policy).
- With respect to the beneficiary of the policy, it is often better for the agreement to state that the insurer shall be notified that upon the death of the child, the proceeds of the policy shall be payable to you (or whatever other instructions you wish to provide). If the insured parent is no longer living at the time of the child’s death, you would want to receive the proceeds of the policy and raise the child.
In my opinion, it is critical that negotiated agreements be reviewed by an attorney. There are a multitude of issues which must be addressed to ensure that the agreement is drafted properly. In my experience, it is not uncommon for a party to object to provisions of the agreement or to misrepresent its terms once the negotiation phase has ended. I have learned from my own tenured experience that the best outcomes occur for my clients when the parties have been educated and assisted through the process.
Enforcement of a Property Settlement Agreement
Any order, statute or regulation can only be enforced by the parties. A Property Settlement Agreement is the same. If one party violates the agreement, the other party must take the responsible party to court. A party requesting enforcement of a Property Settlement Agreement may bring an action in equity, file a petition for contempt or file a complaint at law. While enforcement actions to the Family Division may be brought under any of these 3 civil actions, most often, petitions for contempt are filed. Petitions for contempt are also the only forum where the Court will award attorney fees and costs to the petror (prevailing party). However, this is not true for equitable petitions and petitions for money damages.
The action may be brought in the Court of common pleas for the county where the property settlement agreement was signed or in the county where the respondent resides. An enforcement action may be filed under salable or unsaleable terms. If the terms of the agreement are unsaleable, the Court can not order compliance. Salable terms mean that the court does not have to order compliance with the terms of the agreement. Rather the court has the option to order other conditions. Unsaleable terms mean that the agreement must be complied with, unless it violates strong public policy, or unless enforcement of the agreement would lead to real and substantial injustice.
Amending and Modifying Agreements
Subject to a few exceptions, agreements are modifiable. Hence, the agreement is subject to modification based upon a showing of a material, substantial and/or permanent change in circumstances. The change in circumstances generally must be significant in order to warrant a modification. Under some circumstances, agreements cannot be revised. The most common reason this happens is due to an agreement being incorporated into a judicial decree (i.e., an Order of Court). An agreement that has not been incorporated into a judicial decree may still be subject to revision based upon a showing of the change as described above.
In addition, all parties to an agreement must consent to the modification. If the parties do consent, then the court will review the agreement for consistency with public policy and the proof of all other requisite aspects of validity of contracts. If consent is given by all parties, the court will generally permit the modification. A key consideration in connection with a modification includes whether or not the modification creates an illegal contract. The courts will not create a new contract that the parties did not make .
If the parties cannot agree to the modification, then a motion to revise or modify filed with the Court would be necessary. If the motion is contested, then the matter could be listed for evidentiary hearing. Certain motions would be scheduled for a conference before a conference officer.
A modification can also occur in terms of the documents or pleadings being modified. An example of this occurs in post-decree divorce matters. In such situations, a divorce decree is entered pursuant to a proprietary settlement agreement, and the parties later decide to modify the property settlement agreement and the property distribution in the decree. Such an agreement can be filed with the Court.
The party possessing an interest in a property settlement agreement has standing to seek modification of the agreement. Hence, standing exists for those who may seek to enforce the rights under an agreement. This includes third parties who may rely on a particular aspect of the agreement. For example, the IRS would be a third party with respect to an agreement that treats a former spouse as being responsible for taxes associated with certain IRA withdrawals. In such circumstances, the IRS could challenge the agreement with respect to that issue.