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)
The final months of 2017 saw Congress pass widely publicized legislation promising broad-based reform of the federal tax system. The final measure – which is due to be signed by the President prior to the upcoming holiday recess – reflects a consensus between sweeping changes proposed by the House and a more moderate counterproposal offered by the Senate. Provisions eliminating the taxation and tax-deductibility of alimony payments and lowering the mortgage interest deduction cap mean the substantial impact predicted for the public and private sectors is likely to also be felt by couples going through divorce. For those of you contemplating or currently pursuing a divorce, here are the two main ways the new legislation may affect you:
Alimony. Under the present system, alimony payments (referred to under California law as spousal support) are treated as taxable income for the recipient spouse, and tax-deductible income for the paying spouse. Take, for example, Spouse A (who earns $500,000 per year) and Spouse B (who earns $0). During their divorce proceedings, the court orders Spouse A to pay Spouse B $175,000 a year in alimony. Spouse A is currently allowed to deduct this $175,000 from their taxable income, while Spouse B has a baseline taxable income of $175,000. Under the new legislation, alimony is neither tax-deductible for the payor, nor taxable for the payee. Because their alimony payments are not considered taxable, Spouse B would receive $175,000 tax-free, while Spouse A would pay $175,000 from their post-tax income. The new legislation will not come into effect until January 1, 2019, so only couples who execute or modify their divorce decrees after December 31, 2018 will be impacted. While the law as currently applied arguably incentivizes an accelerated settlement process by providing a tax break to payors of spousal support, the new law risks creating a disincentive for individuals to settle to spousal support disputes. Since spousal support is a common point of negotiation between divorcing couples, increased contention on this point risks prolonging the settlement process, resulting in a higher emotional and financial costs for the couple, and a negative impact on judicial economy.
Mortgage Interest Deduction. Currently, the tax code allows homeowners to deduct interest on the first $1 million of a new mortgage. Congress has imposed a temporary lowering of this cap to $750,000 through the end of 2025. While this won’t affect divorcing couples who already have a mortgage (current mortgages are grandfathered in to the current $1 million cap), couples who obtain a mortgage after the passage of this new legislation and later decide to get divorced may be impacted. According to the California Family Code, the statewide uniform guide for determining child support takes into consideration the “state and federal income tax liability resulting from the parties’ taxable income […] after considering appropriate filing status, all available exclusions, deductions, and credits.” Spousal support is also a function of the net disposable income of both parties. Therefore, if the deduction cap is lowered, it may result in the payor being able to deduct less from their taxable income under the compromised plan, giving them less net disposable income, and reducing the amount of support received by the payee.
In light of the passage of this new legislation, it is critical to stay on top of the constantly changing legal landscape. Couples undergoing a divorce deserve a law firm with a team of experienced experts to explain how the changing tax code may impact the trajectory of their divorce. At the Law Offices of Diana P. Zitser, our network of brokers, appraisers, forensic accountants, and other tax professionals can provide this invaluable insight. For more information on how current legislative trends could affect your divorce proceeding, schedule a consult with our offices by visiting our website, or calling us at (818) 763-5274.
 Jeanne Sahadi, What’s in the GOP’s Final Tax Plan, CNN Money (Dec. 20, 2017, 8:21 AM), http://money.cnn.com/2017/12/15/news/economy/gop-tax-plan-details.
 Alexis Leondis, Why You Don’t Have to Rush to Get a Divorce Before 2018, Bloomberg Politics (Dec. 18, 2017, 7:37 AM), https://www.bloomberg.com/news/articles/2017-12-18.
 Mercado, supra note 3.
 Leondis, supra note 2.
 Mercado, supra note 3.
 Cal. Fam. Code, § 4055 et seq.
One of the most contentious issues in a divorce proceeding is the division of the marital property, also known as community property or properties obtained during the marriage, between the spouses. 35 years ago, California became the first State to enact a law announcing that community property in a marriage stops being earned when the couple started to live "separate and apart." The governing statute, Family Code, section 771, subdivision (a) states, "[t]he earnings and accumulations of a spouse... while living separate and apart from the other spouse, are the separate property of the spouse."
At first glance, the meaning of “separate and apart” seems simple--husband and wife break up, wife moves out and lives with her best friend or a relative; or as often depicted in movies and TV shows, the husband, moving out and living in a hotel or an apartment. Thereafter, one or both spouses file for divorce. Per section 771(a), each of the spouse's earnings when one or both of them moved out will not be counted towards the marital property subject to division during the divorce. But this simplistic and literal understanding of the statute proved to be unworkable in real life situations.
One of the most important elements in any California divorce is the date of separation. As a general rule, everything that a person earns from the date they get married to the date of separation is treated as community property. The date of separation also has an impact on the valuation and division of assets, including pension and retirement plans as well as debts. In California, a community property state, the community estate is divided equally between the parties, and everything that a person earns or accumulates and incurs after the date of separation is usually considered to be their separate property or debt. Therefore, the date of separation can have a major impact on the valuation and division of the parties’ assets and debts. When the parties disagree about the date of separation, depending on the facts in the case it may be prudent to bifurcate the date of separation issue and have a separate trial on that issue alone.
The phrase ‘date of separation’ refers to the language of California Family Code Section 771, which is the statute that outlines the general rule described above. The phrase does not come directly from the statute. The relevant language in Section 771 is: “while living separate and apart from the other spouse.” At first glance, this language appears to mean that the date of separation occurs when one of the parties moves out of the family home. However, California law recognizes that neither real life nor relationships are that simple. Two people can continue to live in the same home long after their marriage is effectively over. This seems to have become especially common in recent years, perhaps because of widespread economic difficulties. Alternatively, a married couple may remain committed to each other even if their jobs or other factors cause them to live in separate homes, or a couple may temporarily live in separate homes during a rough time in their relationship, then get back together.
According to news reports, Clint Eastwood’s wife of 17 years, Dina Eastwood, has filed for divorce. Ms. Eastwood is seeking spousal support and full custody of their 16 year old daughter.
If you or someone you know is going through the divorce process, you have probably heard discussions about spousal support. The purpose of spousal support is to provide an ex-spouse with an income for basic needs and to maintain the marital standard of living. When calculating spousal support, the court considers many factors, some of which include: (1) the earning capacity of each party and its relationship to the standard of living established during the marriage; (2) the extent to which the supported party contributed to the attainment of education, career training, and licenses of the supporting party; (3) the ability of the supporting party to pay such spousal support; (4) the obligations and assets of each party; (5) the duration of the marriage; (6) the age and health of the parties; and (7) the balance of hardships on each party.
You may have seen a May issue of Time magazine that had an article on alimony, which is called spousal support in California. The article details the growing movements challenging permanent spousal support, the kind that is paid until a spouse dies or the recipient remarries.
There are two sides to this issue. Those in favor of spousal support say the payments are justified because those spouses who may have stayed at home for many years gave up time not pursuing a career, not building marketable skills and not networking. According to the article, on the other side are a growing number of second wives who are seeking spousal support reform, claiming that their husbands may not be able to pay their spousal support.
A recent Forbes article noted changing dynamics of married couples’ finances. A growing number of wives are out-earning their husbands in dual-income households. While this is not the new norm, the occurrence is certainly increasing. High-income earners and high net-worth couples have unique considerations regarding their marriage. Prenuptial and postnuptial agreements can help address some of these considerations by safeguarding assets and avoiding significant hassle in the event of a divorce.