Planning For Death (of a Marriage) Using Estate Planning Tools: Removing Spousal Support as a Contested Issue in a Divorce
Posted: August 15, 2011 Filed under: Estate Planning, Law, Probate | Tags: divorce, estate planning, goals, Probate, spousal support, trust, will Leave a comment »Introduction
One could say that we rarely live in the present. We are either preoccupied with demons in our past, or busy planning for and anticipating future events. Paraphrasing John Lennon, the present is what happens when we’re busy worrying about the future. Since there is not much we can do about the past, we utilize therapy to cope with it. But we can still affect the future, though, and all the uncertainties that come with it.
As a society, we have tried to calculate the probability of every occurrence. Actuaries work day and night trying to figure out which cars get in the most collisions in each region of our country. Life insurance companies try to determine how long we are all going to live. Floods, earthquakes, fires, theft, health—you name it, we have statistics about them. Our financial institutions attempt to speculate with our markets, resources, and commodities. Our political machine tries to anticipate what the electorate most desires in the coming election cycle. And our retailers try their best to learn consumers’ innermost desires.
As individuals, we have become more astute and sophisticated as it relates to personal planning. We plan to have children. We save money for their education. We plan for our retirement. A smaller percentage will plan for their deaths by way of an estate plan. The irony of it all is that the one certainty in all of this—death—is the one least anticipated.
After reading the preceding three paragraphs, you may notice one glaring omission. In modern society we have two “d” words: death… and divorce[1]. Aside from death, divorce is probably the second most likely event in all those described above (single people excluded, obviously).
It is tough to determine an accurate divorce rate from state to state, no matter what any statistic says to the contrary. Not every married couple divorces in the same state in which they married. For example, Nevada (because of Reno and Las Vegas) probably has a disproportionate number of marriages performed there than divorces. One source states that in Las Vegas alone, almost 120,000 marriage ceremonies are performed each year. For a state of 2.6 million people, the divorce rate in Nevada, based on number of marriages, would be extremely low. However, we can likely agree, at least anecdotally, that divorce rates are higher in the early 21st century than they were in the early to mid 20th century.
Divorce is often not in the planning equation. We have tools in the form of agreements to anticipate divorce, such as cohabitation agreements, prenuptial agreements, and postnuptial agreements. However, for whatever reason, nuptial agreements are commonly taboo, associated with some sense of distrust, greed or being cold-hearted.
In many divorces, the specific issue of spousal support (commonly referred to as “alimony”) harbors much of the malevolence associated with a divorce. Although California has been a “no-fault” jurisdiction for over four decades, the issue of spousal support amplifies a lot of the resent and bitterness that lay in the background of the court action, which can be part of an acrimonious divorce.
Divorce should be an event that is planned for, but hopefully never experienced. Specifically, the issue of spousal support—frequently an issue that causes a lot of resent between divorcing spouses—should be dealt with using common estate planning tools. By planning for spousal support that may be part of a potential divorce, using many of the tools commonly used for estate planning, spouses can contain many of the messy issues related to a contested support issue[2].
Spousal Support – Background
As a general rule, as long as husband and wife are living together, they owe each other a mutual duty of support. The mutual spousal support duty during marriage operates independently of the spouses’ marital estate or financial circumstances. The spouses’ respective support obligations are not conditioned on the existence of community property or income. However, during divorce proceedings, a court has the ability to award a support order to one of the spouses. The trial court has broad discretion in making the order. The propriety of a spousal support award (whether to order it and, if so, its terms) is judged broadly by the parties’ “circumstances” in reference to the standard of living established during their marriage and their respective needs and abilities to pay[3].
Without going into the specifics of the factors that must be analyzed in order to shape the support award, courts apply a formula that calculates an initial (temporary) spousal support order. This calculation is often performed using court-authorized software applications. The software generally deducts a percentage of the lower-earning spouse’s net income from the higher-earning spouse’s net income. The remaining amount is the support obligation that the higher-earning spouse must pay to the lower-earning spouse until final resolution of the case, or modification/termination of the court order, whichever happens first.
Problems Spouses Face With Spousal Support Orders
Spousal support orders often create or amplify acrimony between two ex-spouses. A strong possibility is that financial issues were the cause of the breakdown of the marriage. Whatever the reason for the divorce, when one spouse is ordered to pay the other spouse after-tax money, every month, it tends to rub the higher-earning spouse the wrong way. Two main problems result from spousal support orders.
First, spousal support orders can fuel a spiteful fire. Spousal support orders create a disincentive for the lower-earning spouse to find a job if he or she is unemployed, or to seek out better opportunities if he or she is under employed. The lower-earning spouse could choose to benefit from his or her higher-earning spouse’s net income rather than to go and get a job. This would also create a spiteful burden on the higher-earning spouse.
Second, fewer dollars are left for minor children or other important expenses. With every dollar spent on spousal support, it equals a dollar fewer to be used toward the children’s expenses, or toward expenses that may indirectly benefit the children of the spouses, like a nice place to live close to a good school.
Additionally, family resources are often expended on attorneys during the divorce to prove the parties’ incomes in order to determine the appropriate spousal support amount. Time and money, both which the parties will never see again, are wasted contesting the singular issue of spousal support—an issue that is as much emotional as it is pecuniary.
The days of Ward and June Cleaver are long over. In this sophisticated, and more expensive, day and age, two incomes are commonly required to run a middle class household. Spousal support orders create strife, undue burden, and acrimony in an already stressful situation.
Using Common Estate Planning Tools to Avoid Spousal Support Orders
In general terms, a spousal support order creates an income interest for the lower-earning spouse in the parties’ joint net revenue stream. In crudely general terms, it’s much like an annuity or income interest from a trust. The legislature decided years ago that two former spouses owe each other a duty to support each other in the event of a divorce instead of laying the burden on taxpayers (public benefits for the lower-earning spouse). This assignment of burden is justified and well reasoned. However, the spouses should plan better to avoid splitting the limited net income pot at the time of divorce.
Spouses, and business partners, often have to deal with the idea that neither partner is immortal. To that end, partners typical purchase life insurance. The thinking is usually summed up with the phrase “you never know”. Divorce should be treated with the same care. You never know.
Spousal support orders in divorce proceedings should be treated like a cross between retirement and death. It is like retirement in that you never know what your financial situation may be like in the future. It is like death in that you never know when it’s going to happen.
Financial institutions could offer programs that are like individual retirement accounts. Spouses can then make either pre-tax or post-tax contributions to the account. The funds are invested in a diversified portfolio. Conditions are placed on the account such as early withdrawal penalties, minimum contribution limits, maximum contribution limits, et cetera.
The current method of dealing with spousal support in a cash-poor household, via current financial products like qualified retirement accounts or life insurance policies, the spouses would have to withdraw the funds early, paying a penalty, or borrow against the funds, creating a debt obligation that may end up being as burdensome as the spousal support order itself.
With a spousal support contribution account, in the event of a divorce, the parties are then allowed access into this “joint” account. The lower-earning spouse would have a greater share than the higher-earning spouse. The longer the spouses remain married, the larger this fund becomes. In many respects, the marital union itself has a “retirement” account. If the spouses never divorce, conditions can be placed on the account regarding the manner in which the funds can be used with both spouse’s consent. For example, the spouses can decide to put the funds toward an adult child’s down payment of a home. The idea would be that toward the latter end of a marriage, the expenses are lower and the likelihood of a drawn-out acrimonious divorce is ostensibly lower.
A spousal support contribution account can also accept contributions from sources other than the spousal income. This fund can be treated in conjunction with each spouse’s estate plan. It can have a life insurance quality to it as well, whereby the fund is distributed upon one spouse’s death to the surviving spouse. If both spouses pass simultaneously, it can have a designated beneficiary, which could be their family trust or surviving children.
Possible Pitfalls
A spousal support contribution account is no free lunch. It certainly cannot contemplate every situation in which spousal support would be unexpectedly warranted.
First, a spousal support contribution account is most effective with long-term marriages, as the funds have had time to grow into a sizeable amount. A spousal support contribution account will do little good for a marriage of shorter than, say, five years, for example. It may provide for some relief to the higher-earning spouse, but the account is presumably not very large five years in.
Second, the contribution account does little to provide an incentive for the lower-earning spouse to obtain gainful employment. Said another way, a “deadbeat” spouse can still sit back and collect the income from this account upon divorce. That being so, the account provides clarity to both spouses as to the finite amount set aside for support. More importantly, the amount in the fund is pre-determined. It has been contributed into over the course of the marriage. A spousal support order would require the higher-earning spouse to compensate the lower-earning spouse on the fly, regardless of current financial obligations.
Third, in light of the recent economic downturn, one of the first expenses that would likely be cut by a struggling family would be a spousal support contribution fund. Unless the divorce is very likely to happen, contributing to a spousal support account when a family is having a tough time making ends meet would be absurd. Therefore, spouses would likely not contribute to this fund when times are tough. Ironically, when times become tough is when spouses usually contemplate dissolving the marriage.
Fourth, with all other contributions—retirement accounts, children’s savings, general savings, daily expenses—the spouses will need to determine an appropriate amount to contribute to the spousal support fund for the fund to be worthwhile. As mentioned above, planning for divorce is not the top priority for most people. It comes in a distant fourth to death, retirement, and children’s savings. That being said, even if both spouses contributed a collective $500 per month, that is a $6,000 contribution annually which could be rather sizeable after even ten years.
Conclusion
Divorce usually gets paid short shrift when it comes to marital planning. The specific issue of spousal support can prove to muddy the waters of the river that is divorce. For the higher-earning spouse, this means being in the unfavorable position of literally paying your soon-to-be ex-spouse’s way. For the lower-earning spouse, spousal support means using the double-edged sword that is not looking for work and requiring your spouse to pay you after-tax monies.
One way to ease stress on the back end is to “amortize” it over the course of the marriage. With such estate planning devices like qualified retirement plans, annuities, life insurance policies, and other similar financial products, people are able to plan for death, injury, and the inability to work due to old age. However, divorce oftentimes creates similar hardships. Thus, estate planning techniques should be employed to anticipate a potential future obligation such as spousal support. If a joint contribution fund is employed, the spouses will have transparency and clarity as to the nature and extent of a spousal support obligation in the event of a divorce. Additionally, if divorce never occurs, the spouses will ostensibly have a sizeable asset with which to invest or distribute. Divorce, and related issues such as spousal support, should be treated in the forefront of a marriage and not in the shameful backroom. Divorce is a fact of life that carries with it substantial economic and emotional turmoil. It would be absurd not to plan for it.
[1] All references in this post to divorce and marriage also include related concepts for registered domestic partners. Although the accurate legal term for “divorce” is “dissolution”, I will refer to dissolution by its common name of “divorce”.
[2] The scope of this post is limited to the issue of spousal support as it relates to a divorce and does not touch upon issues related to child support. Child support may just as easily arise out of circumstances unrelated to marriage or divorce. As such, it is a much more complicated issue than this post would like to address.
[3] See Cal. Fam. Code §§ 4320, 4330(a); Marriage of Meegan (1992) 11 Cal. App. 4th 156, 161.
Faulty Support System
Posted: November 20, 2010 Filed under: Family, Law | Tags: divorce, family law, policy, reform, spousal support Leave a comment »What makes a law or policy “good” or “bad”? Often, we measure how good or bad a law or policy is by how effective it is–how precisely it met its objective, with as little unintended consequences as possible. For example, most people would say that the “seat-belt” law is a good law because it is a very cheap and easy solution to save a lot of lives, and by extension, makes society a better place. Conversely, some people may argue that the ban on talking on a cell phone while driving is a bad law because it is tough to enforce and leads drivers to more dangerous methods of communication like texting or holding the phone below the window line and using speaker phone. It’s tough to measure, really. However, when unintended consequences manifest themselves, then we should be proactive about correcting the law or policy.
One law and policy that has me up in arms lately is California’s current system of awarding spousal support to divorcing spouses. Spousal support is often commonly referred to as “alimony.” The simple purpose of spousal support is to compensate a lower wage earning (or unemployed) spouse with assistance from the higher earning spouse in order to allow both spouses to maintain the “marital standard of living” during the divorce, and possibly for a period after the divorce.
What the hell does that mean in plain English?
Imagine a couple who was married for ten years. Midway through the marriage, the wife became pregnant with the couple’s child. The couple decide that one spouse (doesn’t matter which) should stay home and the higher-earning spouse should continue to work to support the family. Five years pass, and for whatever reason the couple decide the marriage is so damaged that it is beyond repair. The couple divorce. The spouse who has not been working for the past five years is now finding trouble meeting his/her bills, and additionally having trouble finding work as a result of being out of the workforce for such an extended period of time.
What is the unemployed spouse to do?
Their marital arrangement (where one spouse stays home and one works) should not be subsidized by taxpayers, so government benefits seem inappropriate here. The taxpayers didn’t decide that one spouse should stay home, so the taxpayers should not have to come to the rescue, either. Fair enough. That means, then, that it’s the other spouse’s responsibility to pick up the slack. Right? After all, the two spouses chose the arrangement, so they should have to bare the burden of figuring out how to make the bills and care for their child in the process.
We would be hard-pressed to find someone who would read the above situation and disagree with the outcome. But, that’s the easy case. One spouse is employed, one was caring for the child, and now it makes sense to help the non-working spouse back on her feet. What if we add some complicating factors in? What if the child was school-aged, thus not needing all-day child care, and the stay-home spouse worked seasonally? What if the stay-home spouse worked part-time? What if the stay-home spouse could have worked but instead chose to volunteer? What if the stay-home spouse went to school instead? More commonly nowadays, what if the stay-home spouse did side-jobs (think carpentry, handyman, cleaning services, etc.) and did not declare his/her income?
It gets rather complicated, and issues of proof are abundant. Very few couples have the foresight (nor should we require them to) to predict the precise time he/she will contemplate divorce. Sometime it becomes difficult to prove what the stay-home spouse earned, or could earn if employed.
Let’s throw in another wrinkle: what if the stay-home spouse had a long-term motive to make as little as possible in order to necessitate the other spouse to pay him/her support? We are not all naive enough to presume that divorcing spouses all have good intentions.
Let me give you a specific, real example of how this plays out. Mother and Father are married for 14 years. Mother earns a good six-digit income as a professional. She has had this position for upward of 23 years. Father held down a job as a delivery driver a few years back, but due to an injury and not being the most motivated individual, has not worked recently. On the side, he designs and sells t-shirts at ballgames and sells them on consignment at some stores. Mother and Father have two teenage children who are both attending a private high school. Both children are excellent students, participate in extra curricular activities, and are the children anybody would be proud to have raised. One giant elephant in the room: for the past 15 years, Father is highly physically and verbally abusive toward Mother. There are well-documented events of domestic violence, one that even rose to the level of a 6-month restraining order. For whatever reason, they stuck it out until now. Mother pays all the bills, including the children’s very expensive school tuition. Now that they are divorcing, custody, visitation, and support are all contested issues. Father, immediately before the hearing on all the mentioned issues, was training to be a bus driver with a big city transit line. He was a probationary employee. After six weeks of training, the employer inexplicably terminated Father as a probationary employee. (What likely happened was that Father’s attorney told Father to play up an injury thus disqualifying him from the job.)
Fast forward to the hearing on spousal support. Mother makes a good income. Father makes nothing. Mother knows that Father loafs around and probably makes money on the side, but has no proof to his income. Even though there is documented domestic violence, continuously for over a decade, California only pays attention to the preceding five years, and in that time there is nothing definitely demonstrating that Father was abusive toward Mother. Furthermore, Father was awarded joint physical custody, having his time with children predominantly on weekends. The children were interviewed by the custody mediator, but both children were too frightened by their Father to really throw him under the bus. Since they are well-adjusted, academically flourishing children the mediator took them at their word and thought nothing of the past instances of domestic violence.
Outcome? Mother pays to Father both spousal and child support, and only gets to have one to two weekends per month with her children. And ohyeahbytheway, Mother’s obligation to pay Father support will now make it extremely difficult to pay for the children’s tuition. The children will likely have to be pulled out of private school to attend public school. Public school is not per se inferior, but the children must leave their friends and comfortable surrounding to a new, unfamiliar environment.
Gender stereotypes aside, does this seem like a fair outcome? Hardly. As I stated above, the purpose of spousal support was to prevent the situation where the stay-home, child-rearing parent from becoming homeless at the sudden loss of family income. This is far from that situation. It is imperative that we, as a state and society, come up with a better way to prevent deadbeat spouses from parasitically sucking resources away from productive members of the family. This is not a gender issue. This is not a payback issue. This is a children issue. There are surely situations where spousal support is not only appropriate, but absolutely necessary. However, blindly awarded spousal support creates a disincentive for non-working spouses to work. Something must be done. As a side note, reform of spousal support determinations and payments will also avoid unnecessary costs derived from support litigation. If the pot at the end of the rainbow is reformed such that it isn’t a guarantee to those that don’t work, then parties will at least think twice about pursuing that avenue of litigation.
