It's Not a Settlement Until the Taxman is Paid

The goal of each and every mediation is to amicably resolve a dispute based on a solution that can benefit all the parties involved. A large variety of issues can be debated during the course of a mediation but, it is crucial that all parties make sure to talk about the potential tax consequences of the settlement they are about to agree on.

It is stating the obvious that, it would be useless for the participants to the mediation as well as for the mediator to spend numerous hours of mediating a case and having the parties finally closing in on a full settlement, and have one of them suddenly ask "But, what are the tax implications of this agreement?"

Ideally, it would be best, to have the parties check with a tax professional whether or not the partition of the estate might have tax consequences and to include the data provided by such professional into the scope of the negotiation process. That said, we all know that most parties, because there is a fight, will not be willing to pay to get a professional tax opinion upfront.

Mediators are not CPAs and/or tax specialists and shall by no mean give any legal or tax advice. Therefore, when preparing for a mediation session, every mediator should ask himself/herself if some of the subject matters that will be discussed may trigger tax consequences such as but not limited to:

1/ Federal estate tax and deduction;

2/ Federal income tax and deductions;

3/ California income tax and deductions;

4/ California real property tax;

5/ Federal gift tax;

6/ Generation skipping tax;

7/ Marital deduction;

8/ Charitable deduction.

If this is the case, the mediation agreement should include a provision that allow the parties to consult not only a lawyer but also a CPA or any financial advisor of their choice before signing the agreement.

Lastly, mediators should also be aware of proposed tax legislation that may impact the taxation of an inheritance in the future such as the current Prop 19, which would put an end to children inheriting their parent's favorable property tax rate unless they moved into the home as their primary residence within a year of inheriting the property.

To conclude, knowing that the IRS looks at pleadings, discovery, and settlement to determine the validity of claims asserted, settlement agreements should include facts that support the party's claim and that achieves favorable tax results. Tax issues should be considered at the beginning, middle and end of a case. When applicable, the pleadings and discovery should be structured around a party's best tax approach. And, the mediated settlement agreement should support that approach.