After weeks of back-and-forth in Washington on the issue of supposed “tax reform,” there is a final determination of the issue concerning spousal support (alimony) deductibility. In order for spousal support to be tax-deductible you must fall into one of the following two categories:

1. You obtained a spousal support order or entered into an agreement regarding the payment of support prior to December 31, 2018; or
2. You modified  an order that was obtained prior to December 31, 2018

Anyone who obtains an order for support commencing January 1, 2019 will not have the benefit of tax-deductibility when it comes to the payment of spousal support.  Similarly, those who are the recipients of support ordered after January 1, 2019 will not pay income tax on the support received.

Tax deductibility of support was originally implemented in order to allow divorcing parties to maximize the cash available between their split households by shifting the tax burden from the payor of support – “the higher earner” to the recipient of support. Given that the higher earning spouse was already paying significant taxes on his or her earnings, but not receiving the benefit of all of those earnings because she or he had to pay support, shifting the tax liability to the other spouse to pay on what he or she received enabled the payor to have greater income available with which to pay.  This resulted in higher support orders and more money available between the two households, because the spouse that was receiving support had lower income and therefore paid tax at a lower rate.

The loss of this deduction is going to be significant commencing January 1, 2019.  Without the support deduction, the cash available between the two households will likely be less given that the higher earner will be paying tax on her or his gross income, then turning over some of that income to the lower earner.

As previously discussed, the irony in all of this is that while the “conservative agenda” seeks to promote “family values” – this provision has two implications that fly in the face of those values: 1) It incentivizes people to get divorced before January 1, 2019 to get the benefit of the deduction and 2) it reduces the amount of money available to support two households making things more difficult, especially for the children of divorcing families.  

Hidden within the so-called tax reform bill is yet another indicator of the Republican party’s pandering to its so-called “conservative base.”  In addition to the bill allowing expectant parents to make contributions to a 529 account for a fetus, there is also the penalty to be imposed on those getting divorced and the additional impact on their children.  Specifically, the House bill seeks to eliminate the deduction for spousal support or alimony.

The bill is intended to eliminate the deduction on any settlement or judgment that is executed after December 31, 2017.  The bill would have a major impact on those persons who are presently involved in divorce proceedings where an agreement on support is not reached before year-end, and on those who initiate proceedings after the first of the year.

The impact of this change in the law is significant.  For many years, the Internal Revenue Code has allowed a support payor, in most circumstances, to deduct the entirety of spousal support payments.  The recipient must pay income tax on that support.  Because the higher earning spouse has received a tax break for the payment, the amount of support paid is higher than it would be if the support were not tax deductible. And while the recipient spouse has had to pay income tax on that which he or she received, because that spouse is often in a lower tax-bracket, the deductibility of support was used as a tool to generate overall tax savings thereby increasing the amount of available cash between the two households.

The disallowance of the deduction is going to result in reduced money available to supported spouses.  But that is not the only impact.  The secondary fallout in states like California is the impact on child support, which has never been tax-deductible.  Given that the support guideline attempts to apportion net (after-tax) monthly disposable income between parents, child support awards which take into consideration the receipt of spousal support are going to end up being lower as well. The reason for this is that the child support formula in California is built on the premise that a parent with higher tax deductible expenses has greater income available to pay support. If the higher earner has a higher tax bill, then the child support payment is going to be reduced.

The fallacy of believing that making life after divorce more costly will deter divorce itself is just that.  What this bill ends up doing is penalizing just about everyone affected by a divorce – including the children who have nothing to do with the situation in the first place.  

It may not be apparent at first glance, but divorces and support disputes often require the assistance of an expert witness, in addition to an attorney.  A case involving any financial complexity often requires that a qualified witness provide information to the parties and to the court on any number of issues.  

For example, if a divorcing couple owns a business, that property – normally not divisible between the parties – will have to be accounted for.  The spouse who is operating the business will most likely continue to operate it after the divorce.  The other spouse is entitled to his or her share of the value of the business at the time of the separation.  Business valuation experts, and forensic accountants who have that additional qualification, are often employed to determine what the value of the business is. And oftentimes, the value for family purposes is not consistent with what the business could be sold for on the open market.  In fact, businesses such as professional practices often cannot be sold on the open market, as clients are hiring the owner/operator for their individual professional abilities and without the owner, no one would hire that firm. At the same time, the business still has a value for property division purposes.

There are other reasons that such an expert witness is often retained. In a situation where someone will be paying or receiving spousal or child support, such experts often opine on the level of income that is available for the payment of support.  While federal law requires that compensation be documented and income tax be paid thereon, people often pay certain expenses out of a business and deduct those expenses from the business gross income.  Nonetheless, those expenses are frequently benefiting the individual owner, not necessarily the business.  The classic example of this is the business owner who deducts all automobile, travel and meal expenses from business income when a good portion of those are incurred for the personal benefit of the owner.  Family law principles hold that this component of business expenses constitutes income available for the payment of support.  Such an expert can quantify the amount of income to be added to the support formula, which can often result in a substantial increase in the amount of support to be paid.  By the same token, such an expert can also assist in defending against claims of that income being available for support purposes when it may not be.

Additionally, these witness can offer expertise on the cost of the standard of living for the married couple and the amount of spousal support, and in some instances, child support, that should be paid. And often, divorce actions involve claims of reimbursement for joint expenses after separation, or the use of joint or separate money to pay liabilities. .

A competent and qualified attorney will have ongoing relationships with such experts and can make recommendations on whom to retain. These attorneys will be able to work in conjunction with the expert in preparing the case for settlement or trial.  Appropriate qualifications and ability to be deemed a qualified expert by a court are paramount here.  If the expert is not credible, there can be more damage done than good.  

For some time now the frequency of divorce has been declining in most segments of the population, except for one: those people who are in the age group of 50 years or over; the people we know as “baby-boomers.” And since many of these people have gray hair, a new moniker has been applied to their situations.

There are various reasons why people who have been married for 20, 30, or even 40 years decide to split; they include clients saying “we have grown apart;” children – who held them together as a couple – no longer living at home; retirement which makes them aware of their spouse in a different way than when they were away at work most of the week; age – one person is aging faster than the other and the other does not want to be around someone who “makes them feel old” or who “acts old;” disputes over spending habits; differences in sexual desires; or they are simply tired of life as it and think that this is the last chance to make a big change.

These cases would seem, at first blush, to be less complicated that those involving children and custody disputes – but in many instances they are not.  This segment of the population has unique issues to deal with that earlier generations do not.  By way of example, one party might be in need of spousal support and had they divorced in their 40s, the supporting spouse may have had another twenty-five years of work and income flow coming to him or her.  When both parties are near or at retirement age, a court isn’t going to expect one to keep working so that the other can pursue a lifestyle that does not involve work.  Couples in this age category oftentimes have passive sources of income which may be sufficient to enable them to live a comfortable lifestyle but will not generate enough income to support two households at the same level, even if they are households of only one person.  Baby-boomers who had financial success in earlier years may find themselves now possessed of assets that may have significant value – such as real estate which, upon sale, will generate a large, otherwise unanticipated, tax liability diminishing the value of the overall estate.  And, given the ages of these people, there are often issues concerning health and related expenses that are now part of one of the parties’ basic needs, but may not have been five or ten years earlier.  Where the family has an ongoing business that has achieved significant value over the years, there are complications when the non-working spouse wants his or her share of the appreciated value in that business which might only be obtainable through a sale which could affect their children or grandchildren.  

These cases oftentimes require creative solutions that might not otherwise be applicable to a divorce involving younger folk. They most often require the use of the family’s financial consultants or outside experts to take more active roles in coming up with solutions than might otherwise be required.  And, it is often the case that when the parent’s divorce means a significant change in the financial expectations of their adult children, it is not uncommon for them to jump in and begin attempting to influence the outcome of the process to protect their own interests.   For these reasons, it is important that people who are contemplating divorcing after 50 engage in some strategic planning with their lawyer and financial advisors before jumping all the way into the process. 

The calls come in regularly: “I need a sperm donor agreement.  Our donor is a friend.  He isn’t going to be the father, but he is going to spend time with our child.  We want our child and the donor to have a relationship, but he isn’t going to have any legal rights, we are going to make all of the decisions.”

And the answer is always the same: “The agreement is fine to cover you up until the birth of your child.  What happens after that is dependent on what you allow the donor to do with your child, not what the agreement states.  So, if you decide to let your donor act like a father, and he wants then to become a father, he might be able to do that. If you don’t want him to be able to do that, then you need to control the access that you give him, regardless of what the agreement states – or get sperm from a sperm bank where the donor is anonymous.

That is because most states which follow the Uniform Parentage Act (including California), allow a man who receives a child into his home, and who holds a child out as his own, to become a legal father (and by the same token, a woman who does the same thing with a child has the same rights).

That is because the law is geared toward protecting the rights of the child, not the parents.  The law wants to protect the established relationship that the child might have with the donor – provided that the relationship rises to the level of one that would be legally protected – such as between a parent and a child.  

In the recent second published decision obtained by our office in the Jason P. v. Danielle S. case (9 Cal. App. 5th 1000), the Court of Appeal reiterated the ruling made in the first opinion (226 Cal.App.4th 167) that parentage can be established by post-birth conduct.  Therefore, even though a sperm donor is legally barred from seeking parentage based upon his biological status as a sperm donor, he is not prevented from seeking parentage if he can establish that he meets the legal requirements of what is called a “presumed parent”, that is someone who has received the child into his home and held the child out as his own.  Similarly, in the case of a known sperm donor who agrees in writing that he will not seek parentage of the child, he can still do so if he can meet the requirements of a presumed parent.  Again, it is because the donor is not seeking parentage based on the fact that the child was conceived with his sperm, but rather based on the relationship that he has with the child-one which the law wishes to protect.  And as the Court of Appeal tells us in the first Jason P.  case, whether the sperm donor is successful is dependent upon whether the legal parent allows the donor to receive the child into home and hold the child out as his own.

To put it simply, you cannot “have your cake and eat it too” in the parentage arena.  If you want to use a known donor because you think that is advantageous to you or to your child, you can do that. But if you do not want the donor to become a legal parent, do not let the donor hold the child out as his own, and do not let him receive the child into his home, regardless of what the contract says. It is that simple.