Spousal support and child support can be calculated using a number of different factors. The relative importance of the factors may be laid out in local rules, but often the factors are simply listed and defined with little other guidance. Considerations may include:
- The actual earnings of each person, including wages, investment income, and other sources of income
- The earning capacities of each party, both independently and relatively
- Future earning capacities of the parties
- The value of the assets divided, and the ability of those assets to produce income
- The cash flow of each party
- The length of the marriage or relationship
- The ages of the individuals
- The needs of the spouses or parties, and the needs of the children
- The ability of the parties to pay support
- The standard of living (or lifestyle) established during the marriage
- Impairment of earning capacity due to devoting time to domestic duties, delaying education or employment, and the like
- Contributions to the other party’s education, training, or career
- Income taxes that will be incurred by each party
- Short-term and long-term expenses expected to be incurred
Most of these factors have a great deal of “gray area.” Reasonable people can disagree on how to calculate them or how significant a role they should play in the calculation of support. Issues surrounding the factors may involve:
- Actual earnings – What should be included or excluded from this calculation? Are there certain types of earnings that are non-recurring or so uncertain as to make it unfair to include them in a calculation of ongoing earnings?
- Earning capacity – What is the spouse’s true capacity? What if the spouse cannot find employment within his or her area of expertise? What if the spouse no longer wishes to work in the area of expertise? What if the spouse needs or wants to work less than full time?
- Value of assets divided – The parties may disagree on the value of assets being divided, as well as how much income will be derived from those assets in the future. They may also disagree on whether a spouse should sell an asset to generate funds.
- Cash flow – Cash received from work and business activities is not necessarily the same thing as income from those activities. How heavily should the cash flow be considered? And is it more or less indicative of the need for support or the ability to pay than some other factor?
- Needs of parties – What is truly “needed” by the parties following the divorce? Should the post-divorce lifestyle include all of the things that were enjoyed during the marriage? Were portions of the lifestyle “excessive,” and therefore should not be considered a true need?
- Ability to pay – Which items of income or cash flow should be included when calculating a spouse’s ability to pay? Should certain funds or earnings be excluded, as they are necessary to starting or growing a business venture? If so, should the future earnings from that business venture be included in support calculations at a later date? Should a spouse be allowed to save certain funds, rather than have them considered income on which support is calculated?
- Standard of living – Jurisdictions vary regarding how standard of living is defined. There is also controversy about whether a calculation of marital standard of living should exclude certain items that are considered extraordinary or non-recurring.
- Impairment of earning capacity – How impaired is the earning capacity? How can we fairly estimate what the earning capacity could have been without the impairment, or what it will be in the future?
- Contributions – How do we value and weight the contributions of one party to the other party’s career?
- Short-term and long-term expenses – Which expenses should be considered, and how heavily should they be weighted? Should any expenses be excluded because they are discretionary?
Post-divorce budgets play a huge role in determining support. One of the most basic uses of a lifestyle analysis is creating those budgets. By analyzing historical expenditures of the parties, a more precise budget for future expenses can be created. This is not simply a matter of tabulating historical spending. Certain adjustments may need to be made to past expenses to include or eliminate certain items.
For example, consider a case in which the parties were living rent-free in a residence during the marriage. Following the separation, one or both of the parties may need to pay for housing, and this must be added to the budget. Conversely, consider a case in which the parties had a large expense for an anniversary party for themselves. Since they will be divorced, this expense will not occur again in the future, so it might be removed from the budget.
A financial professional such as a forensic accountant can be invaluable in evaluating the issues surrounding support calculations. The forensic accountant can identify the issues and make recommendations as to how to treat the items of income or expense in the calculations. While the calculations will be heavily influenced by local laws, there is almost always some latitude afforded by those laws, and the forensic accountant can guide the family lawyer in determining how to complete the calculations and present them to the court.
Tracy L. Coenen, CPA, CFF is a forensic accountant and fraud investigator with Sequence Inc. She specializes in cases of embezzlement, financial statement fraud, white collar crime, securities fraud, and family law. She can be reached at 312.498.3661 or [email protected]