Why Uncomfortable Conversations Now Lead to Better Outcomes Down the Road

Congratulations! You and a friend or family member have decided to start a business. Now what? Before you set up shop, it’s important to talk through everything that could go wrong.

One of the most critical things that you can do at the outset of a business relationship is to outline your mutual expectations and determine how decisions will be made as you move forward with your venture, especially if you will own that business in partnership with someone else. In recent years, the number of “business divorces” has been increasing— most often due to situations in which both parties assumed they were on the same page at the beginning—and weren’t.

In any company—whether a limited liability company, a corporation or a partnership—there are three major areas that, if not addressed early, are cause for disputes down the road. The questions to ask at the outset are:

1. What is each party bringing to the business, in terms of money, assets, and time and what are the ongoing expectations?

2. What will happen if a major decision needs to be made and the owners do not agree?

3. What will happen if one party needs or wants to leave the business?

All of these issues can be mitigated with careful planning at the beginning of the venture.

When it comes to contributions to the business, parties should be clear about their expectations. Will both partners be responsible for infusing cash into the business if it runs short or will only one party be responsible for doing so? Are there any consequences if only one party contributes? What about the day-to-day running of the business? Are both parties expecting to work full time? If not, how will you determine whether each party is contributing his or her fair share of “sweat equity” to the business? Is one party bringing a critical asset to the table, such as a piece of real estate or major intellectual property? These are among the vital details that form the basis of a good business relationship.

Second, what happens if there is a decision to be made and the parties simply cannot come to an agreement? This is a particular issue for companies where two parties will own the business 50-50. It is critically important that a method for breaking any deadlock be discussed and agreed to before disputes arise, lest it mean the end of the business—or costly litigation. There are many methods to be considered and there is no “one size fits all” answer. For example, the parties may agree that one person’s decision will always control. Alternatively, if one party has specific expertise, their decision in that area will always win. Other times, a deadlocked decision can trigger a forced buyout of one party. Some parties even resort to a coin toss (but we don’t recommend that)!

Third and finally, you should consider and agree upon a process to handle the exit of one of the owners. This exit may be voluntary—in a case where someone receives a new job offer, decides to retire or moves, or involuntary—such as when a party dies or becomes disabled. How will the company interact with the departing owner or the estate? Will there be a buyout? On what terms? Addressing these issues calmly ahead of time could prove critically important in the event of the likely much more stressful circumstances of a partnership dissolution.

It may be uncomfortable to consider the potential end of a business just when it is getting started, but the best time to have these difficult conversations is before disputes arise. If you are a business owner, Rucci Law Group can assist you with these necessary discussions, leaving you free to focus on growing a healthy business.

Congratulations to Kate Diehm who has been has been included in New England Super Lawyers Magazine as a Rising Star for the third year in a row and to George A. Reilly for being a 9-time, top-rated attorney included in New England Super Lawyers Magazine. No more than five percent of attorneys from each state are included in Super Lawyers designation for any given year. The multi-factor selection process includes independent research, peer nominations and evaluations, as well as professional achievement in legal practice.

Additionally, George A. Reilly has been recognized for his practice area of family law in Best Lawyers in America^© 2019, whose lists are compiled based on an exhaustive peer-review evaluation. He is also an “Honored Listee” in Marquis’ Who’s Who in America 2018 edition.

When Darien’s 104 year-old Ox Ridge Hunt Club decided to embark on a major renovation and rebranding, it had more than the usual real estate and zoning details to consider. The plan was to sell a portion of the Club’s property, build a new state-of-the-art clubhouse and equestrian facilities, and add squash courts in an effort to modernize and broaden the Ox Ridge membership base to appeal to today’s families. The Club would reopen with a new identity—the Ox Ridge Riding & Racquet Club, a sporting club for active families. The property sale came with a host of deed restrictions put in place many years ago, plus concerns of neighbors and other townspeople. Not to mention the added complexity of having stabled horses on the property. Negotiating all that required specialized legal expertise, and Rucci Law Group, LLC (“RLG”), as the Club’s longstanding lawyers, went to work to steer the club through the transaction.

The first part of the process was to sell 16 acres of undeveloped land, the proceeds of which would finance the renovations. There were several interested buyers, but the Town of Darien had a right of first refusal and ultimately ended up purchasing the parcel for $6.25 million.

“The Ox Ridge Riding and Racquet Club is a very unique, historic property,” said Amy Zabetakis, attorney and a founding member at RLG. “Its size, its placement in the middle of town, and its status as one of the last large remaining open spaces in Darien meant that every public official and many residents had an interest in the outcome and were vocal about their requests and concerns.” There were also a number of limitations on the property—including an open space provision that requires the parcel sold to the Town to remain substantially undeveloped until 2042—that made valuation of the property difficult.

The attorneys at RLG have handled a number of high profile zoning matters and quickly began advocating for their client through numerous meetings with Town officials and presentations to the Darien Planning and Zoning Commission. The horses added unusual considerations to the contract negotiations. Ms. Zabetakis noted, “The fact that the Club is an equestrian facility added complexity to the sale since we wanted to be sure the Town’s uses would be compatible with those of the Club. For example, we needed to clarify that the Town property would never be used for fireworks or other activities that might startle the horses.”

Once the sale of the parcel to the Town was completed, the Club turned its attention to the renovation. That process, too, took quite a bit of coordination with the Town and the neighbors. The Club took pains to preserve the historic look of the equestrian property while updating an outdated facility to bring it in line with the times.

One of the most difficult pieces to work through was designing a clubhouse building big enough for squash courts, plus a separate building big enough to house an indoor riding ring. The old riding ring, which was torn down in this renovation, was a WWII airplane hangar, and the new one had to meet more modern building safety, fire code, insurance, and drainage standards.

While Ms. Zabetakis focused on the real estate and zoning aspects of the renovation, Attorney Michele Gartland helped the Club rework and modernize its corporate documents. The Ox Ridge Articles of Incorporation had not been revised since the Club was founded in 1914 and were not adequate for the rebranded Club. For example, the Club’s Articles featured old-fashioned language explaining the organization’s purpose: To promote the frequent meeting together of members of the Ox Ridge Hunt and their invited guests for fox and drag hunting and cross country riding.

The Club will feature an 18,000-square-foot clubhouse, a dining facility, a fully-equipped fitness center with locker room and exercise classes, platform tennis, and eight singles and doubles squash courts. “A major impetus for the Club’s changes is to make its activities more relevant to today’s families,” Ms. Zabetakis pointed out. “In addition to its equestrian facilities, the Club will be the only Darien facility to offer squash, which is one of the area’s most rapidly growing sports.”

As of early 2019, the $11.5 million project is well underway. The renovations, expected to be completed in time for the Club’s highly-regarded charity horse show in June, will showcase updated riding facilities. The riding area will include a 26,000 square foot indoor riding ring, two outdoor rings, and a renovated stable complex with adjacent 12 grass paddocks.

“RLG is proud to have supported one of our town’s oldest and most unique institutions as it builds for the future,” concluded Ms. Zabetakis.

With the end of the year approaching, there are many things on our to-do lists. One item you may want to add is reviewing your property assessment. This is an important item not to be overlooked. New Canaan, Darien and Norwalk are among a number of towns in the state of Connecticut conducting property assessment revaluations. The state of Connecticut mandates by statute that each town conduct a town wide property revaluation every five years in order to reset what is referred to as the “Grand List”. The Grand List is the value of all residential and commercial properties in the town that make up the town’s property tax base. The Grand List values are the assessed values of each property equal to 70% of the fair market value of the property. Each town’s Board of Finance uses the Grand List to set the town’s annual mil rate in order to ensure sufficient funding for the annual budget.

All three towns have hired an outside company to perform the revaluation. The revaluation company will be looking at sales within the past year and then using those sale values to set the assessment for similar houses. Toward the end of the revaluation process each property owner will receive notification of the new assessed value. Take time to review your new assessment carefully and compare your assessed value to the sale price of similar homes that sold in your neighborhood in the past year. If you are not aware of any similar houses that have sold in your neighborhood, it may be worthwhile to hire an appraiser to perform an appraisal of your property as of the revaluation date, which was October 1, 2018. If you believe there is a discrepancy of your property value between your calculation and the town’s, you will be given the opportunity to have an informal meeting with the outside revaluation company to discuss the methodology and correct any errors in December or January.

Once the informal meetings have completed the new assessments become final but you still have an opportunity to appeal your new assessment to the town’s Board of Assessment Appeals. The deadline to file an appeal is February 20, 2019 and appeal forms will be available on the town’s website generally beginning in January. Note that if you miss the deadline to appeal your new assessment to the Board of Assessment Appeals you cannot challenge your assessment until the next Grand List is posted in October of 2019.  

If you decide to appeal your assessment to the Board of Assessment Appeals, you should bring a list of comparable sales that support your position on the value of your property as of October 1, 2018. The easiest way to do this is to appear with an independent appraisal of your property. If you are dissatisfied with the result of the Board of Assessment Hearing the next step is to appeal the town’s decision to the Connecticut Superior Court. This appeal must be taken within two months of the date that the notice of the Board of Assessment Appeals decision is postmarked.

Due to the depressed housing market, particularly in some portions of New Canaan and Darien, many homeowners may see their assessment go down in this revaluation cycle. However, do not let this decrease lull you into thinking that your taxes will be reduced. As was stated at the outset, the mil rate is based on the total Grand List. If the value of the Grand List goes down, the mil rate will increase to meet the town’s budget needs. Therefore, a lower assessment could still result in higher taxes. For this reason, it is essential that you carefully review your new assessment and be prepared to appeal it to the Board of Assessment Appeals if it is not in line with the other homes in your neighborhood. If you wait to pay attention to your new assessment until your new tax bill comes out in June of 2019, it will be too late.

The appeals process can be a tedious one. If you need assistance, Rucci Law Group can help guide you through it.

Amy Zabetakis is one of founding members of Rucci Law Group, LLC. She practices primarily in the areas of real estate, zoning and land use litigation. Amy can be reached at 203-202-9686 or at [email protected]. 

What are the advantages of practicing law in a small town?

I really enjoy knowing the town as well as I do. I understand the political, administrative, education, recreation and commercial interests and concerns of Darien. I know family histories and property issues and tax implications. All of that helps me form the advice I give to my clients and makes me able to put their needs in a larger context. In my matrimonial practice, I know the child care issues, the schools, the resources available as well as housing costs and real estate investment issues. A small-town law practice doesn’t limit my firm’s service to small ideas — we are entrusted with complex U.S. and global business development and family wealth management matters — but it does allow me to offer more personal service because I share so many connections to my clients, who are also my neighbors.

How has the practice of law in Fairfield County changed over your career?

All matters seem to require immediate attention; it is no longer a matter of exchanging correspondence by fax over a day or two with clients or other counsel or third parties, now it is a matter of responding to email within hours if not minutes. That’s fine as long as there is still time to reflect on the big picture and long-term goals. Our courts expect equally quick turn-around in many circumstances. Sometimes clients are pressed to make decisions too quickly although more time may actually be needed to consider all ramifications. The internet age has made information readily available, but that knowledge needs to be filtered by someone with experience and sensitivity to the specifics of each party and case.

What drew you to the area of family law?

At different times, I have concentrated on different aspects of the law. I have 35 years of litigation experience, for instance. I have worked in estate planning, real estate, corporate development and estate administration, and I have worked at several family-focused non-profit organizations. Just before joining the Rucci Law Group, I spent nearly 10 years as a principal in a firm that exclusively handles family law issues from divorce to custody and from support to modification, many in high-net worth cases. My work included prenuptial and post-nuptial agreements, abuse issues and children’s issues. Over the past 15 years I have been a strong proponent of the Collaborative Divorce model of practice, which is an alternative to litigation for divorce and custody issues. This model encourages parties and counsel to resolve issues around a conference table rather than in a courtroom. The collaborative model is often less expensive emotionally and financially. I have moved from an exclusive focus on family law because many friends and neighbors have needs in estate planning, land use issues, developing businesses and real estate. With Rucci Law Group, I now have the resources to provide first class service in all of those areas to my clients.

You have devoted quite a bit of your time to non-profit organizations. How does that relate to your law practice?

It’s a two-way trade. I have certainly used my legal knowledge in my non-profit work, and I’ve put my non-profit skills to use in my law practice. I am constantly learning from the non-profit world about business management, corporate governance, establishing best practices, estate planning (including charitable interests) and planning for the future. All of those areas provide information and skills that are vital for practicing law.

If you hadn’t become an attorney, what do you think you would be doing now?

I bet I would be involved in public affairs, government relations for businesses, lobbying or public interest work where so many actions are affecting the everyday lives of others. I started a career before law school working for a Fortune 500 company in public affairs. I enjoyed it, but the attraction to law school and a more locally-oriented practice overpowered me, with no regrets.

The Tax Cuts and Jobs Act of 2017, or TCJA, signed into law by President Trump on December 22, 2017, reversed seventy-five years of tax treatment of alimony and, as a result, has taken tax policy concerning family support in divorce back to the first half of the last century.

Since 1942 alimony has been counted as income for the former spouse who is receiving payment. In addition, the federal tax code provides that such payments are deducted from the income of the spouse paying alimony but taxable to the recipient. Prior to 1942, the argument was made that the parties with financial resources in the marriage ought to continue to support the family despite the divorce without any tax advantage. That changed with the Revenue Act of 1942 when alimony became deductible to the payer and taxable for the recipient.

The TCJA now reverts to the pre-1942 view in which the alimony transfer between former spouses is treated as if the marriage had remained intact. Effective January 1, 2019 all alimony will not be deductible from the income of the payer nor will it be included in the income of the recipient for federal and Connecticut tax purposes unless otherwise agreed in writing by the parties. The most apparent reason for this change is to include the funds used to pay alimony in the higher-earning spouse’s income which is likely to be subject to a higher tax rate and therefore generate greater tax revenue.

The TCJA also provides that if alimony is modified after January 1, 2019, the payments may continue to receive the same tax treatment as they did upon the entry of the original judgment, or the parties may opt in to the new tax provision.

Since alimony became tax deductible, the U.S. Internal Revenue Service has created a definition of “alimony” and related rules to insure that only the intended payment of support to a spouse could be deducted. Now that alimony will no longer be tax deductible, the definition and rules are moot for such payments. This has a variety of consequences.

Alimony will no longer be a line item for taxable income on the U.S. tax form 1040 except to the extent the forms must still cover payments being deducted under judgments entered prior to 2019. This eliminates an easy resource that some have been known to use to confirm alimony income for prospective borrowers, renters, business partners and others.  There will also no longer be an issue for the IRS to seek to “recapture” certain alimony payments and impose income tax on the theory that such payments were not made for support but were actually a transfer of assets. The IRS currently can recapture payments which are reduced by more than $15,000 in the third year of payments or reduced significantly in the second and third year from the amount paid in the first year. Alimony will also presumably no longer be required to be paid in cash unless a court’s judgment provides that it must. An asset with an agreed-upon value such as stock, bonds or a car could substitute for an alimony payment, depending on the language of the judgment. The rule that the two spouses may not live under the same roof for the payment of support to constitute alimony is eliminated. The requirement that alimony payments must stop on the death of the recipient is also eliminated.  

The tax aspects of the payment of alimony have been a carefully considered factor in the determination of the amount of alimony to be paid in each case. Under current tax law, there is generally considered to be an advantage if the higher income earning spouse, who would typically pay alimony, deducts the alimony from income thereby saving tax and potentially reducing the applicable tax rate.  A portion of such savings could be shared with the alimony recipient. For example, if the spouse paying alimony is earning $350,000 that spouse is in the 35% federal tax bracket (for 2018). If the amount of alimony paid is $100,000, under current law that spouse will pay $35,000 less income tax with the alimony deduction. That spouse’s adjusted gross income of $250,000 would then be in the 24% federal tax bracket so that spouse would pay 11% less in tax on the balance of the federally taxable income. However, under the TCJA, there will be no such adjustment to the income tax obligation beginning in 2019.

Also, the spouse receiving alimony is often at a lower tax rate so that such spouse could receive less cash and end up with the same amount of cash after taxes. Receiving more alimony might have  put the recipient into a higher tax bracket so the benefit of the higher payment might be lost.

The determination of the amount of alimony to be paid is often a contentious and life-altering aspect of divorce.  These issues of deduction for the spouse paying alimony and inclusion in income of the recipient have required close scrutiny and compromise. The goal is often to try to maximize the benefit to both parties while providing an affordable order that helps maintain the standard of living of both parties.

There is also an impact on Connecticut income tax payers in 2019. Since Connecticut bases its income tax on the federal adjusted gross income, which will then no longer include alimony received and will not deduct from income alimony paid, Connecticut too will not provide for a deduction for alimony paid from income nor include alimony received as income.

There is no change to the fact that child support payments are not deductible for a parent paying such support nor included in the income of the receiving parent. Now the difference between alimony and child support will simply be the purpose and duration of the payments.  In Connecticut, the child support obligation generally applies until the child attains the age of majority (18) or graduates from high school, whichever is later (though not beyond age 19). The amount of child support is set by reference to the state’s Child Support Guidelines.  The amount and duration of alimony remains an issue for resolution between the parties or the Court as there is no definitive law making that determination in Connecticut.

The TCJA has provided an incentive for the spouse likely to pay alimony to want a judgment entered in 2018 so that it will be tax deductible in future years. The recipient spouse may well have some incentive to delay any judgment until 2019 so that the alimony is not taxable in future years.  Negotiations or resolution by a court will be required to arrive at a fair result for both parties.

We were happy to sponsor the New Canaan Rotary Club again this year for their amazing Lobsterfest! Joe Rucci was there once again, helping to serve up those delicious dinners.

On September 23, 2018, RLG team member Julie Jaramillo ran in the Miles for a Mission road race to support Americares Free Clinics through St. Francis Episcopal Church. Rucci was proud to be a gold level sponsor for this event.

The ABC House College Tailgate Gala was held on October 20, 2018. RLG was a sponsor and Amy Zabetakis, Sarah Mead and Dianne Covello were all on-hand to help out at the event. It was a great evening for a great organization.