WHO WILL HAVE ACCESS TO WHAT WAS MARITAL INCOME? The statute and case law presumes that the family court orders will include provisions that will allow both parties to have sufficient financial resources after the divorce or legal separation. The law establishes that the starting point is dividing the net income 50/50 to allow both parties to maintain the same standard of living that was enjoyed during the marriage. The court can award maintenance to effectuate that division of income. Maintenance is what used to be called alimony or spousal support. This is a payment between spouses that is separate and distinct from child support. In determining if maintenance is appropriate the court will evaluate the parties’ needs and earning capacities. In addition to considering the standard of living that was enjoyed by the parties during the marriage, the court will also evaluate the fairness of a maintenance award to ensure a fair and equitable financial agreement. The statute sets forth the following factors to consider when determining if a maintenance order is appropriate:
- The length of the marriage.
- The age and physical and emotional health of the parties.
- The division of property.
- The educational level of each party at the time of marriage and at the time the action is commenced.
- The earning capacity of the party seeking maintenance.
- Feasibility that a party seeking maintenance can become self-supporting at standard of living reasonably compared to standard enjoyed during marriage.
- Tax consequences.
- Mutual agreements made before or during marriage.
- Contribution of one party to education, training, or increased earning power of other.
- Other factors as the court deems relevant in individual case.
HOW LONG WILL THE MAINTENANCE PAYMENT BE ORDERED? If the court finds that an award of maintenance is appropriate, the court will then determine the term or duration of the maintenance award. A maintenance obligation can be for a limited or indefinite period of time. An indefinite term is until the remarriage of the party receiving maintenance or until the death of a party. In limited term maintenance orders, the court will set the duration of time based on the length of time necessary for recipient spouse to become self-supporting at an appropriate standard of living or as otherwise determined appropriate by the court.
ARE THERE ANY TAX IMPLICATIONS FOR MAINTENANCE PAYMENTS? Yes. The tax consequences will be considered when the court orders maintenance. Under the prior tax code, and absent some agreement to the contrary, the party paying maintenance had been allowed to deduct the value of the payment from his/her income and the party receiving the maintenance payment had to report that payment as income. The tax implications for maintenance under the new tax code have yet to be concretely determined, but it is expected that payments will no longer be deductible for the payor nor included as income for the payee. Special care will be needed to properly apply the terms of the new tax code. There may be additional factors to consider when determining how the maintenance payments are structured. In some instances, a three-year recapture rule may apply if the maintenance payments are not carefully structured. Tax consequences of maintenance are not easily navigated and should be left to the advice of an experienced family law attorney, such as those at Your Family Law Center, S.C.
CAN MAINTENANCE BE CHANGED? In some instances, a maintenance order can be modified. The party seeking to modify maintenance must file a motion with the court. The party seeking change must show that there has been a substantial change of circumstances warranting modification since the entry of the last order.
ARE THERE ALTERNATIVES TO PAYING MAINTENANCE?
- Section 71 Payments: Section 71 payments can be used as an alternative to maintenance payments. Section 71 refers to the Internal Revenue Service tax code that outlines the requirements and tax effects of such payments. Section 71 payments are guaranteed payments from one party to the other. These payments are guaranteed because Section 71 payments allow the parties to secure payments that are not modifiable in amount or duration by the parties or the court.
- Customarily Section 71 payments were included in the taxable income of the recipient and are deductible to the payer.
- Much like maintenance payments, Section 71 payments will terminate upon the death of either party. However, the payer may be ordered to carry a life insurance policy with the recipient as the beneficiary to cover any unpaid amounts upon their death. Generally, Section 71 payments do not terminate upon the remarriage of the recipient.
- Family Support: In some cases, family support is ordered in lieu of child support and maintenance. With the assistance of an experienced family law attorney, a family support order may have favorable tax treatment.
- Maintenance Buy-Out: Another alternative to paying maintenance is to calculate the present day value of the maintenance and use the marital estate (assets and debts of the marriage) to offset the value of the maintenance. In other words, the person who would otherwise be eligible for a maintenance payment could be awarded more of the marital estate (i.e.: 50% of the marital estate + the present day value of the maintenance).
Bankruptcy: Neither maintenance payments nor Section 71 payments are dischargeable in bankruptcy. Maintenance awards can have very significant implications for both the payor and the payee. It is important to understand how to calculate maintenance and the tax implications of maintenance. Due to the significant impact on a person’s finances and the complications of the calculations, a party in a case with a claim for maintenance should seek out an experienced family law attorney, like those at Your Family Law Center. If you have questions regarding maintenance or modifying a maintenance order, contact one of the experienced family law attorneys at Your Family Law Center, S.C.