I don’t practice family law. I don’t litigate. I don’t take worker’s compensation settlements.
I’m a tax lawyer. I do tax law. And sometimes that means I dip into related areas, but when it gets beyond my area of expertise, I tap into the collective experiences of my colleagues.
This makes sense to me. I don’t go to a podiatrist when my chest hurts. I don’t see a dentist for a broken leg. And I don’t leave my eye exams to my gynecologist.
Folks choose specialties because no person, no matter how smart, how brilliant, how talented, can know everything. And thinking otherwise can get you into trouble.
Just ask Seth Fielding. Fielding is a doctor who claims that he suffered a huge tax bill as a result of a settlement negotiated by his divorce lawyer, Stephanie Kupferman. Dr. Fielding’s settlement required him to make a significant payment out of “immediately available” funds. Only Dr. Fielding didn’t have that much in the way of “immediately available” funds since he was unable to tap into his Upper West Side apartment before the divorce (he had planned on a mortgage or line of credit). Dr. Fielding claims that Kupferman refused to renegotiate, so he had no alternative but to dip into a retirement account to pay the settlement. Dr. Fielding also claims that Kupferman did not advise him that doing so would result in a huge tax bill.
In fact, according to Dr. Fielding, Kupferman was surprised to learn that there would be tax implications from the withdrawal. According to the complaint, Kupferman actually called Dr. Fielding’s broker “to ask why” the entire amount was not immediately available.
A majority of Dr. Fielding’s investment assets (about 75%) were held in a profit-sharing Keogh plan. A Keogh plan is a retirement plan for self-employed persons. It works like a profit-sharing plan in that it’s funded with net earnings from your business or professional income. When money is withdrawn from the plan, it is subject to tax at the ordinary income rates (since it’s pre-tax money to begin with) plus an early withdrawal penalty if the participant has not yet reached retirement age.
So, whereas the settlement might have contemplated an equitable distribution based on a total amount of assets, the post-tax total was much lower. As in six figures lower. Dr. Fielding thought that the negotiated settlement would leave each party with $1.2 million. However, due to the tax burden, Dr. Fielding claims that he was left with $850,000 and the burden of an additional mortgage.
Dr. Fielding filed a malpractice claim against Kupferman in October 2007. It was dismissed by the lower court in January 2009. However, the claim was reinstated by a unanimous panel of the Appellate Division, 1st Department, which found that the evidence “clearly establishes” that the Keogh funds were not “immediately available” for purposes of the settlement. As a further *ouch*, the panel found that there was sufficient evidence to allege that had Fielding not received “faulty advice” from Kupferman, Fielding “would not have incurred the tax liability.”
Procedurally, that’s not a verdict. It means that the trial will go on since the panel reversed the dismissal. Fielding has since amended his complaint to ask for attorney’s fees. No trial date has been set.
You can read the entire decision, as filed in New York on August 11, here.
Wow! Just wow!
I googled Ms. Kupferman and discovered she’s been a practicing attorney specializing in divorce law since 1992. This is not exactly a wet-behind-the-ears lawyer. (In fact, she even ran for Congress. Although her bid was unsuccessful, she attracted the support of George Bush and Rudy Giuliani. Author Tom Wolfe held a fundraiser for her.)
Even though she’s not a tax law specialist, it’s hard to imagine that she wouldn’t realize that withdrawals from retirement funds can carry significant tax consequences! Surely in 18 years of practice she must have had other clients whose assets included retirement plans.
It seems to me that any responsible attorney specializing in divorce law should make it her business to know at least enough about tax law to recognize that this client’s situation called for a consult with a tax pro.
Indeed, since she is apparently a small business owner herself (a partner in a law firm), it seems to me that she should be learning something about self-employment retirement plans so she can make responsible plans for her own personal financial future. For that matter, if she has a Keogh plan of her own, she should look into her own possible tax consequences if she is forced to liquidate it in order to settle or pay a judgment to Dr. Fielding! (Although ERISA retirement plans are protected against creditors, many Keogh plans do not fall under ERISA, so she might ironically find herself facing the prospect of liquidating her own Keogh, if she has one, to pay Dr. Fielding.)
Tax touches just about every aspect of life, and therefore, tax touches just about every aspect of law.
In my opinion, EVERY lawyer needs to know enough about tax to recognize when they need to consult an expert.
Here’s another troubling situation involving another tax law specialty: an elderly woman on a very modest income consulted an attorney specializing in elder law when her seriously mentally ill husband could no longer live at home, because he was a danger to himself. He needed to be committed to a locked ward of a specialized nursing home, and it was clear that their assets would need to be almost totally “spent down” before he could qualify for Medicaid. The eldercare lawyer told her that she could keep her house and her car, but she would have to pretty much drain their savings accounts before Medicaid would start paying for her husband’s care.
So she dutifully followed her attorney’s instructions. Almost all of their savings were in IRA’s in her husband’s name, so she used those funds to pay for her husband’s care until the money ran out some months later.
What she did not realize at the time, and what the eldercare lawyer failed to warn her about, was that her draining the IRA would cause a significant tax bill that year. (For many years, she and her husband had not had any income tax bills at all, because they had just taken minimal required IRA withdrawals, which were very small, and their total income had been so low that they had no taxable income since their retirement.)
So….you can probably guess what happened next. The following year, when she went to do her taxes, she was hit with a huge unexpected tax bill–and no money to pay it, because she’d already spent the proceeds of the IRAs on her husband’s nursing home care.
She called her eldercare attorney and asked what she should do. The attorney could only advise her to take out a mortgage on her house in order to pay the tax bill. She did this, and she is now stretching her small social security income and tiny pension to make the payments on that mortgage.
In my opinion, the eldercare lawyer would have served her client much better if she’d advised her to consult a tax pro UP FRONT and to have the proper amount withheld from the IRA before she spent the rest of the proceeds on her husband’s care.
” And I don’t leave my eye exams to my gynecologist.”–I see :} (pun!)
I guess I was under the impression that if the Keogh was part of the marital assets to begin with, couldn’t half be transfered to the divorcee within a year of the divorce without liquidating the assets within the account-thereby retaining its tax status? Thanks Kelly for a great site…
Thanks for making a VERY good point! I practice employment law, and my fee agreement clearly advises my clients that I do NOT practice tax law, and that they absolutely should consult with a tax attorney regarding the implications of any settlement or verdict. I cannot believe how many attorneys (including mediators) tell their clients that a settlement in an employment case is not taxable as income…..