What is Spousal Support?
Spousal Support is financial support that is sometimes paid from one spouse to the other, during and after a divorce. The higher earning spouse provides financial support to his or her spouse to help equalize the funds available to pay living expenses during the divorce process and after the divorce. Spousal support is separate from child support and if you are divorced before December 31, 2018, spousal support is reported as taxable income to the recipient and is a tax deduction for the payor. If your divorce is finished after December 31, 2018, spousal support will not be taxable or deductible.
Temporary vs. Permanent or Post Judgment?
There are two types of Spousal Support in California: Pendente Lite or temporary spousal support; and Permanent or post judgment spousal support. Temporary spousal support is designed to “keep everyone afloat” during the divorce process, and is primarily based on earned income. Post judgment support looks at income that is or can be produced from earnings and assets, once the divorce is final and all of the assets and debts have been allocated between the spouses.
How to Determine Support?
Temporary support is often calculated using a computer program called DissoMaster. This program calculates a mathematical formula which allocates the after-tax income available for support. This calculation does not consider the expenses except for the cost of health insurance. Tax deductions can make a difference in the amount of support a person pays or receives. One example is rent vs. mortgage. In most cases the amount of spousal support will be higher if the payor has mortgage interest and property tax deductions, as this reduces the income tax paid, and leaves more income available from which to pay support. Conversely, if the recipient has mortgage interest and property tax deductions he/she will receive less, as they pay less tax and have more after tax income.
The DissoMaster approach often does not take living expenses into account. To address this short coming, the approach often used in the Mediation, Negotiated Settlement, and Collaborative Practice settings is a “Needs Based Approach”.
The “Needs Based Approach” also looks at after tax income, and also considers expenses. Step One in the Needs Based Approach is for each spouse to develop a budget. Once the budgets are finalized and accepted by both spouses, the income will is allocated to meet both party’s needs. Budgets have three categories of expenses: (1) Fixed Expenses – those you cannot really change i.e. mortgage, health insurance, etc.; (2) Variable Expenses – those which you need but have some control over, i.e. Groceries, Utilities, etc.; and (3) Discretionary Expenses – those which you can do without, but don’t want to, i.e. entertainment, gifts, vacations, etc. If there is not enough cash flow to go around, we usually look at reducing discretionary expenses first. Step Two is to allocate the after-tax income, looking to maximize tax savings and “increase the pie,” and hopefully meet each party’s needs. If this is not possible we move to Step Three which is to decide how to eliminate the negative cash flow. Can income be increased? Does one person reduce expenses more than the other? Do the children’s extracurricular or education expenses change? Do the parties share the “pain” equally? These conversations can be useful in determining long term needs and often times giving a much needed reality check for making important financial decisions.
Permanent support is determined by looking at what each spouse earns or can earn from all sources, both earned income and income from assets. Permanent support is based upon the income that the payor spouse earned during the last few years of marriage. If the payor has a higher paying job after the divorce, the income above the average earned during marriage ended is not considered for spousal support. In the Needs Based Approach we look at the budgets and collective income of both spouses to cover those needs. Provided the budgets are considered reasonable by both spouses, the available income is allocated in an effort to ensure that both spouse’s and the children’s reasonable needs are met. Often all income is considered. This is not always possible, and sometime spouses must use savings to meet expenses.
How long does spousal support continue?
Temporary support often continues through the divorce process, and then, if warranted, permanent or post judgment support is determined. Although called permanent support, it is often not permanent. Spouses receiving spousal support are required to use reasonable efforts to support themselves. This may mean that a stay-at-home spouse must return to work or work more hours. Often, support ends when the higher earning spouse retires. Currently, the earliest a spouse can retire under California law is age 65.
In the Needs Based Approach, spousal support continues for a long as the parties determine is reasonable. Often retirement is a time when spousal support ends, because the retirement income earned during marriage and social security is available to both spouses, and the income of the higher earner is substantially reduced.
Spousal support also ends upon the remarriage of the recipient spouse and death of either spouse.
Monthly payments vs. lump sum:
Sometimes the parties agree upon a tax-free lump sum of support up front. The amount of the lump sum is calculated by taking the monthly support payment, multiplying that by the estimated number of months or years that support might be paid, and discounting this amount for taxes and a conservative rate of return which can be earned on the lump sum payment. This has both advantages and disadvantages. Advantages include not needing to revisit support in the future or paying support monthly. Emotional advantages include fostering better co-parenting relationships because ongoing money concerns are eliminated. Another advantage is the payor spouse is free to earn as little or as much as they want without needing to involve the recipient spouse. Disadvantages include the recipient spouse re-marrying right away, so the payor will have paid more than was required. Another disadvantage is that either spouse could become disabled or unemployed changing financial situation such that support might have been modified.
There are many factors to consider for both the payor and the supported spouse in looking at Spousal Support. Working together in an alternative dispute resolution process such as Mediation or Collaborative Practice offers a forum for exploring creative options to craft a more durable and satisfying agreement.
Lisa R. Murray is a family lawyer concentrating on mediation, Collaborative Practice and negotiated settlement, with an office in Burlingame, California.
Natalie Leininger is a Certified Financial Planner and Certified Divorce Financial Analyst with offices in Pleasanton and Lafayette