For couples going through divorces, the joy of the holidays and New Year often goes hand in hand with emotional, logistical, and financial challenges. Here are some of the end-of-the-year issues couples should consider when in the process of a divorce or in the midst of a separation:
Year-End Distributions. As anyone familiar with the Griswold family knows, the holiday season often coincides with receipt of annual bonuses, commissions, and other year-end distributuions, all of which can impact the amount of spousal and child support members of a divorcing couple owe one another. While California courts generally use the parties’ base incomes to calculate monthly support payments, they also apply so-called “escalation provisions” when either spouse earns income in addition to their base salaries – for example, from bonuses or commissions. Derived from a series of cases known as Smith-Ostler, these escalation provisions may increase or decrease the amount of child and spousal support owed depending on whether the payor or payee spouse (or both) earns income in addition to their base salary.
Consider the example of Spouse A and Spouse B, who share one minor child: Spouse A earns $475,000/year, and Spouse B earns $45,000/year. For purposes of this example, let’s assume the child resides with Spouse B approximately 75% of the time. After considering all the relevant deductions and credits, let’s say the court determines that Spouse A owes Spouse B $3,700/month in guideline child support and $9,700/month in spousal support for a total monthly support of $18,000. If at the end of the year Spouse A receives an annual Christmas bonus of $400,000, the court, after applying a multi-factor formula that takes both the parties’ base incomes into account, will make what is known as a Smith Ostler order, directing Spouse A to pay a percentage of the bonus to Spouse B as additional child and spousal support.
In the example above, Spouse A may be ordered to pay as much as 6% of $400,000 bonus as additional child spousal and 33% as additional spousal support for a total additional support amount of $156,000. On the other hand, if Spouse B also receives bonuses and/or commission on top of their $45,000 base salary, the amount they are awarded from Spouse A may be proportionately reduced.
If you are going through a divorce and either you or your spouse earn income above and in addition to your base salaries, it is important to consult with an attorney as to what each of your rights and responsibilities with regard to support payments may be.
Date of Separation. Establishing a date of separation is another critical element of any divorce proceeding in community property state like California, because it determines when property transitions from belonging to the community, to belonging to the individual parties. For example, if Spouse A and Spouse B are married in 2010, separate in 2015, and divorce in 2017, generally their wages for the five-year period prior to separation are considered community property. Disputes about separation dates can have a huge financial impact on the ultimate outcome of a divorce.
If there is a subjective disagreement between the parties as to the date of separation, the court will look at many objective factors including how the parties hold themselves out to the rest of society. This can present substantial difficulties for couples navigating a divorce while attempting to keep up appearances during the holidays at family gatherings, religious ceremonies, and holiday office parties.
Consider a case in which our firm represented a wife who decided to separate from her husband but agreed to wait to formally file for divorce and physically separate until their 12-year-old daughter left the family home for college. While they continued to hold themselves out to the rest of society as a married couple (attending family functions and school events together), there was a mutual understanding between themselves that their marriage was over. They slept in separate bedrooms and, other than appearances for the sake of their daughter and the business they ran together, led separate lives. Unfortunately, during this period, the husband also happened to rack up millions of dollars in gambling debt and investment losses. Six years later, when their daughter graduated from high school and left for college, the couple finally filed for divorce. During the proceedings, the husband alleged a date of separation being the date they filed for divorce instead of six years earlier in an attempt to claim the debts he incurred during the six-year period as a community loss not his personal loss. After reviewing the evidence presented at trial, the court found that the date of separation had occurred six years prior – even though the two participated in activities that made them appear like a married couple. It was their subjective understanding (as evidenced by the behavior between them), which proved to the court that they had in fact been separated for six years, and the husband’s debts were awarded to him as his separate liability.
Contrast this with the 1977 case of In re Marriage of Baragry: despite deciding to end their marriage, the husband continued to eat dinner at the family home, brought home laundry, went on vacations with his wife without their children, and sent her Christmas and Birthday cards including the words “I love you”. When the couple formally filed for divorce four years later, the court determined that the filing date was their date of separation because their previous behavior had not demonstrated an intent to permanently terminate the marital relationship.
If you are planning to divorce, wish to retain your current earnings as separate property, but need to attend family events, work functions, and other holiday gatherings with your soon-to-be ex, it is wise to establish a clear understanding between you, maybe even in a writing like an e-mail or text, that, the attendance does not symbolize a reconciliation. The same approach can be taken for gift-giving: establish in writing (for example, in texts, e-mails, or the card accompanying the gift), that the presents you may be exchanging are not an attempt to or indication of a desire to rekindle the marriage, but merely thoughtful gestures.
In re Marriage of Baragry (1977) 73 Cal.App.3d 444
In re Marriage of Manfer (2006) 144 Cal.App.4th 925
In re Marriage of Ostler & Smith (1990) 223 Cal.App.3d 33
Cal. Fam. Code § 771(a)