Family Support Risks and Rewards

family support

What is Family Support?

Family Support is the common term for what courts refer to as “unallocated alimony and child support” and a tool for maximizing the after tax cash flow for both households after divorce.

In cases where the divorcing parties have minor children and disparities in their incomes it is likely a judge will order alimony and child support as two separate payments in two separate amounts with different duration.

  • Alimony (spousal support) is intended to provide for continuation of the lower earning party’s standard of living and training if necessary to reenter the work force. Alimony can last for a number of years or a lifetime depending on the circumstances and the jurisdiction where the divorce is being completed. Alimony is taxable to the recipient and tax deductible for the payer.
  • Child support is intended to provide for basic needs of minor children from the marriage and ensure they have a similar standard of living in both new households. Child Support usually ends when the minor child turns 18 years old or graduates from high school, whichever comes last. Child support carries no tax liability for the recipient and is not deductible to the payer.

In some cases it makes sense financially to play with the allocation between these two payment amounts in order to provide the best bang for the buck and maximum cash flow to the newly formed separate households. Family Support can be a powerful tool for maximizing the after cash flow for both households but it comes with complications.

First an example using a single income household then we will talk about the risks and rewards:

Meet Sue and Dave

 

Facts

  • live in California
  • have been married for 17 years,
  • have two minor children aged 10 and 13
  • Dave makes $360,000 per year
  • Sue has been a full time mother and homemaker since the birth of their oldest child and has no earned income
  • Child sharing agreements have been reached with Sue remaining the main caregiver with 60% and Dave with 40% time share

Traditional Results

  • Child support is determined to be $3,983 per month
  • Spousal Support (alimony) is determined to be $5,845 per month
  • Sue’s Net (after tax) Disposable Income = $9,375
  • Dave’s Net (after tax) Disposable Income = $10,743
  • Total Net (after tax) Disposable Income = $20,118

Family Support Results

  • Child Support is set at $0 per month
  • Family Support is determined to be $12,527 per month
  • Sue’s Net (after tax) Disposable Income = $9,600 (+$225 per month)
  • Dave’s Net (after tax) Disposable Income = $11,000 (+$257 per month)
  • Total Net (after tax) Disposable Income = $20,600 (+$482 per month)

Rewards

  • If used appropriately Family Support allows the parties to achieve a higher net transfer of cash flow from the payer to the recipient by moving the income from the payer’s high income tax bracket to the recipient’s lower bracket.
  • The payer, Dave, simply has a larger tax deductible payment which increases his after tax funds available to pay support. Sue pays taxes on the family support in her bracket at a lower rate. The net benefit to the family cash flow is $482 per month, $5,784 per year or $57,840 over ten years.
  • The benefit of the cash flow increase is shared almost equally between the parties. $225 per month to Sue and $257 per month to Dave.

Risks and Complications

  • Family Support is typically a temporary agreement used to help maximize cash flow during the months or years divorce negotiations are pending and can help facilitate economic transition into two separate households. Opinions are mixed on how the IRS or state taxing authorities would look at longer term payments characterized this way and if they may try to “recapture” a portion of the tax deduction taken by the payer.
  • Click here for information from the State of California taxing authority which does recognize Family Support as fully tax deductible.
  • At least one federal court has invalidated a family support order in terms of deductibility to the payer (Wells v. Commissioner)
    • In order for family support to be deductible at the federal level it cannot be disguised child support so cessation of payments should not be contingent on child related events such as attaining the age of 18. Notice the example of Dave and Sue uses a ten year duration for payments for that exact reason.
    • The payments must also terminate upon the death of the recipient. This is a requirement for any alimony payment to be deductible.
    • With careful drafting by an experienced attorney we think Family Support can pass muster for long-term deductibility.
  • Both parties must fully understand the tax consequences before agreeing to Family Support. Sue will now have to make large estimated tax payments or face penalties and interest on unpaid taxes.
  • Courts do not typically order Family Support because the law requires them to maintain jurisdiction over child support as a matter of public policy.
  • Even if Sue and Dave chose to write Family Support into their agreement, either party could walk into court a week later, ask the judge for child support and expect to be granted the guideline amount effectively terminating their original agreement and potentially triggering tax trouble.

Help is out there.

Be sure to consult your Wellspring Divorce, tax and legal advisers about the risks of Family Support and applicability to your personal situation and stay out of the court system because a judge will never order Family Support for longer periods. Amounts and duration used in the hypothetical are not meant as advice or opinion for what you should expect in similar circumstances.

Spousal Support IS Modifiable

spousal support

Can Spousal Support be Changed?

YES! The amount and duration of Spousal Support may be modifiable. You can go to court and ask the judge to increase, decrease, or stop spousal support any time during the period when court has jurisdiction unless you agree otherwise in your settlement.

In most states the court will retain jurisdiction over spousal support for different periods of time based on factors in the case. The main factors include:

  • Length of marriage
  • Age of the parties
  • Each party’s ability to support themselves by earning a living and or living off of the assets they own after the divorce.

Here’s an example.

A couple in their mid 50’s who has been married for 25 years with one party having been a full time parent would likely see the court retain jurisdiction over modification of spousal support forever in California. The length of marriage and ages of the parties would likely classify the example as a long-term marriage.

The working and paying spouse would be allowed to retire at normal retirement age, 65 or 67 depending on who you ask, at which point the amount of support could be modified to reflect the decreased income of the payer. If the payer continues to work past their normal retirement age they may be required to continue paying support at the same level. This has become more common as many baby boomers work past normal retirement age. Laws vary from state to state so be sure to consult experts in your home state.

During the court’s jurisdiction either party may petition the court for a modification based on a change of circumstances. A change of circumstances may include:

  • job loss by no fault of the worker
  • disability
  • decrease in earnings of a small business owner due to economic circumstances
  • retirement at an appropriate retirement age
  • many other factors.

What other life changes apply?

It can also go the other direction where a payer has a large increase in income, a one time financial windfall through bonus or stock compensation. In this case the payee could seek to modify the support amount upwards. We often work with the payee spouse to determine whether they should seek an upwards modification of support. In order to do so we may ask for the payer to provide annual income disclosures so we can be aware of any factors suggesting an upwards modification may be appropriate.

In some cases it makes sense for the parties to agree to a non-modifiable spousal support order. This so called non-modifiable spousal support can stipulate duration of the payment and or dollar amount or both. Non-modifiable spousal support comes with risks and rewards for both the payer and the recipient but can make sense for both parties in the right circumstances.

Some cases build modifications into the original agreement corresponding with the recipient reentering the work force or some change in financial circumstances in the future. These are often called step down orders.

 

Protect your Assets: Prenuptial Agreements 101

prenuptial

What is a prenuptial agreement?

A prenuptial or premarital agreement is a negotiated agreement reached between two parties in advance of marriage. The agreement typically deals with the ownership of assets in the event the marriage ends in divorce. Some prenuptial agreements will also cover alimony and child support. There is a great overview from a legal perspective here.

Do I really need a premarital agreement?

About half of marriages end in divorce in the United States so it may be prudent to consider signing one. Following are some considerations to help guide your decision making.

Timing is everything

Many newly engaged couples believe the entire concept of prenuptial agreements is unromantic or even disgusting because the party proposing the agreement may be planning for the marriage to fail. If you plan on asking for a prenuptial agreement in your future marriage we suggest you start the conversation early so expectations are not shattered weeks in advance of the big day.

Many jurisdictions even require a party be given a certain amount of time to review and negotiate the terms of a prenuptial before the marriage date. If the adequate time is not provided the agreement can be rendered unenforceable. In California the party receiving the prenuptial agreement must be given at least seven days to review the agreement before it is signed. If someone is not given the seven days, a court may consider it to be signed under duress and refuse to enforce it’s provisions.

Protect yourself.

Prenuptial agreements should be negotiated with the assistance of licensed and independent legal counsel. Independent is a key word. We have seen many prenuptial agreements drafted for couples by one attorney. Usually the drafting attorney is working for the person with the money. So how could the other party hope to get fair and complete representation from this lawyer if they are already working for their soon to be spouse? Unfortunately they usually do not.

In the State of California the party receiving the prenuptial agreement must be represented by independent legal counsel at the time of signing the agreement or waive their right to do so in writing. If independent counsel is not present the agreement may be rendered unenforceable.

This facet works to the advantage of both parties. For the party receiving the prenuptial agreement they will have access to competent and experienced legal counsel to ensure they understand what they are signing. For the person offering the prenuptial it provides additional assurance the agreement will stand up in court if the day should come. Bottom line don’t use your fiance’s attorney.

Protect your future.

Prenuptial agreements are all about money. One or both parties have it or the expectation of having it and want the money protected in the event of divorce. They are not only for celebrities or the super rich. Say you started a business before you were married and the business is just starting to gain traction. If the business grows to a value of millions of dollars during your marriage, the value may be considered part of your marital estate and you will have to pay your spouse to keep it in a divorce.

You may wish to have the business carved out as your separate property through the use of a prenuptial agreement. If the business does not take off as expected you would still have the peace of mind to know it is yours. If it does take off, you and your new spouse probably enjoyed the fruits of this success during your marriage through the income it was able to pay you.

Be prepared.

Prenuptial agreements require diligence and full disclosure. One of the many problems we see with prenuptial agreements is a complete lack or poor effort at disclosure of financial information. A good prenuptial agreement will include exhibits attached showing the assets, debts, income and expenses of both parties. You may not be able to prove assets not disclosed in the financials of the prenuptial agreement are governed by the provisions.

Take for example a brokerage account. You sign a prenuptial agreement saying all assets owned at the time of marriage are considered the separate property of the owner. What if the brokerage account was with Lehman Brothers who subsequently goes bankrupt and their records are no longer available. Your account balance will not have disappeared with the bankruptcy but your ability to prove it existed at the time of your marriage may have. If you cannot prove it existed at the time of marriage you may not get it awarded as your separate property in divorce. Start with full disclosure, be diligent about keeping records and consider updating or amending your prenuptial agreement as circumstances change and assets move around.

 

Stay tuned for more on the topic as we dive into Best Practices, explain Common Provisions, uncover Postnuptial and cohabitation agreements, share some horror stories of Prenuptial Failures and maybe even convince you Prenups are Romantic.

Breadwinner Moms: The rise in women paying spousal support

Breadwinner Moms

Do women pay spousal support?

Absolutely! Women pay spousal support and it is becoming more prevalent as women continue to make advancements in career and compensation (sometimes known as Breadwinner Moms).

Most compensation studies in the United States point to gender gaps in compensation between men and but women are still working more and making more money than ever. Women now make up 47% of the workforce and employment rates for married mothers are up from 37% in 1968 to 65% in 2011. Our modern economy has created more dual income families than ever and the number of women acting as the main bread winner in their household has increased dramatically.

Breadwinner Moms

29pew-web1-popupA Pew Research Center study from 2013 titled “Breadwinner Moms” found 40% of all households with children under 18 years old boast mothers as either the sole or primary breadwinner in the household. Compare this 40% to only 11% in 1960. The study was based on analysis of US Census data. It is important to recognize one major factor in these figures. 67% of those Breadwinner Moms are single mothers. Only 37% of them are married. This factor is important because the single mother cohort has a median income of only $23,000 versus the married cohort with a median income of $80,000. The married Breadwinner Moms are making more money than their husbands and more money than the national median which makes them very likely to be in a position of the spousal support payer if they were to divorce. This means there are 5.1 million women in the United States who will likely end up paying spousal support (alimony) to their former husbands in the event of divorce. Thanks to these encouraging demographic trends more women pay spousal support than ever.

What about gender preference?

If the husband can demonstrate a reasonable need for spousal support and his ex-wife has the ability to pay, then he is a good candidate for spousal support. The law has no room for preferential treatment of one gender in divorces so there should be no consideration of the support recipient’s gender in setting spousal support.

Having said that we have some observations to share from our experience working with Breadwinner Moms and their spouses:

 

  1. Women are likely to fight harder than their male counterparts to avoid paying their former spouse long term alimony.
  2. Men are more likely to refuse spousal support because they may feel it is emasculating.
  3. Women often expect their former husband to “take care of himself” after divorce.
  4. Some Men still believe it is bad for their wives to out-earn them during marriage and this may even be a central theme as to why the marriage ended. This feeling is quickly disappearing and i am sure would quickly disappear if the men knew households with the woman as the main bread winner earned higher average income compared to those households with men as the main breadwinner.

 

Bottom line, there are still many traditional gender roles at play.

 

Wellspring Divorce Advisors offers the creative options, financial analysis and strategies necessary to ensure you obtain the most financially advantageous settlement possible. Click here to find out how we can help you!

Hidden Assets in Divorce Panama Papers

Clients of Wellspring Divorce Advisors regularly express concerns about hidden assets in divorce proceedings. Often trust has been lost thanks to an affair and it is easy to take the next step and believe one lie makes it likely there are others. In most cases a Certified Divorce Financial Analyst at Wellspring can either confirm or deny these client fears through forensic review of financial records but the realizations found in the Panama Papers have proven it may be possible to hide assets. At least for a while.

The Panama Papers, published the International Consortium of Investigative Journalists or ICIJ, reveal

  • Offshore companies used ‘in a game of hide and concealment’ after marriages break down
  • Documents list luxury cars and yachts, lavish homes, and art collections
  • Spouses face a costly battle to prove ownership of offshore assets in protracted divorce proceedings

The ICIJ published a story “How the One Percenters Divorce:Offshore Intrigue Plays Hide and Seek with Millions” in early April of 2016. Most of the names revealed in the papers are international but the South American location of the law form involved does not render American citizens immune to the frauds perpetrated.

Concerns for hidden assets in divorce are common and widespread. If you share these concerns you must ask yourself; How much is the peace of mind worth? The peace of mind to know your spouse did not defraud you in the divorce proceedings. The peace of mind to know you got what you were owed in the financial settlement. There are ways to uncover hidden assets in divorce if you have the time and money to pursue it. We suggest you work with your Wellspring Divorce advisor and your attorney to look at the cost versus benefit of doing so and make your decision on how to proceed with the professional advice in mind.