Income Considered for Purposes of Support, Fiduciary Duties and New Tax Law
With financial negotiations in divorce, one rule has been clear across state lines for 75 years: Alimony was deductible for the payer, and the recipient paid income tax on it. Now, the new tax code is causing confusion for divorce lawyers, mediators and divorcing couples trying to reach settlement.
The New LawThe inability to deduct alimony payments will make negotiations more contentious. The higher-earning spouse will be less willing to agree to bigger payments. Previously, both sides benefited: The provider was able to reduce his or her taxable income, while the recipient, of course, gained more support.
While high-earning spouses have reason to hustle through divorce proceedings this year, dependent spouses may have reason to drag out the process. That's because the tax overhaul also ends the requirement that recipients pay taxes on the alimony as though it were regular income. The new law essentially moves the tax burden from the payee to the payer. Though this may seem to benefit the dependent spouse, the only real winner is the federal government.
Alimony and Taxable IncomeIn higher-earning families, the breadwinner's income is often taxed at 35%, while the dependent spouse may be in the 15% bracket. Under the current tax rules, the payer was incentivized to pay more alimony not just because of the deduction, but because the money would be taxed at a significantly lower rate in the recipient's possession.
The dependent spouse, meanwhile, won't have to pay taxes on that money - but because he or she is in, say, the 15% bracket, that savings does not counteract the 35% hit. In the end, this scenario nets out to 20% more alimony money going to taxes, and 20% less staying in the family.
What is Income?The annual gross income of each parent means income from whatever source derived. Including:
-Commissions, salaries, royalties, wages, bonuses, rents, dividends, pensions, interest, trust income, annuities, workers' compensation benefits, unemployment insurance benefits, disability insurance benefits, social security benefits, and spousal support actually received from a person not a party to the proceeding to establish a child support order under this article.
-Income from the proprietorship of a business, such as gross receipts from the business reduced by expenditures required for the operation of the business.
-In the discretion of the court, employee benefits or self-employment benefits, taking into consideration the benefit to the employee, any corresponding reduction in living expenses, and other relevant facts.
Discretion of the CourtThe court may consider the earning capacity of a parent in lieu of the parent's income, consistent with the best interests of the children. Family Code *4053(f) provides that children are entitled to share in their parents standard of living. The term "net monthly disposable income" is broadly defined.
The following are usually considered in the calculation of guideline child support:
- Meal allowance for employees.
- Vehicle provided by employer
- Free housing provided by employer
- Stock Options
- Reasonable rate of return on invested funds.
- Shares of stock that have been liquidated.
- Proceeds from the sale of a business, to the extent that they have been used for the parent's expenses.
- Repeated cash gifts.
- Personal expenses paid by a family business.
- Voluntary repayment of a debt by a third person.
- Payment of living expenses by a company that is owned by the parent.
- Sublease payments received by the parent.
- Spousal support received from a prior spouse.
- Lottery winnings.
What is Not Income?-Payments received from a public assistance program.
-Support received for children of another relationship.
-Appreciation of the parent's residence.
-Unsold shares of stock.
-Proceeds from the sale of a business unless specified otherwise.
-Life insurance proceeds
-Inheritances *a category of its own, for interest producing assets, interest earned=income*
Fiduciary Duties of Full DisclosureFiduciary duty Family Code *721 (b)--a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other. Duties require each party to disclose information and documents that are material to the case without being requested. These duties to not end with the Judgment of Dissolution.
Mandatory documents and duties include:
-Within 60 days after filing, the moving party must serve its Preliminary Declaration of Disclosure; the responding party must provide its PDD as soon as reasonably feasible thereafter. PDDs include a Schedule of Assets and Debts, and an Income and Expense Declaration.
Penalties For Violating Fiduciary Duty of DisclosureSome penalties one may face include:
-Made to pay the other party's attorneys fees
-Judge may award *all*- not just one-half - of an asset you may have concealed to the other spouse
-Prevention of the offending spouse from presenting his or her case
-Set-aside (void) a court order or judgment that was entered as the result of a party's failure to comply with the disclosure statutes
Is Discretion Really a Discretion?A Calif. 4th District Court of Appeal ruling in Pratt v. Ferguson gave more muscle to support orders by saying a trustee for the parent owing the support can*t arbitrarily withhold it. A child support case with the ruling that has far reaching ripple effects*
In this case, the trust contained a standard spendthrift clause, along with a *shutdown* clause, which read: **All provisions for the payment of periodic installments of principal to any beneficiary shall become inoperative during any period when and to the extent that, if paid, they would become subject to the enforceable claims of creditors of the beneficiary.**
The Court opined that the beneficiary of the trust should not be allowed to enjoy his trust benefits to the exclusion of support of his or her dependents. The Pratt Court concluded that a court may overcome the trustee's discretion.