In a typical divorce with one or both of the spouses having traditional jobs and earning middle to upper class wages, the calculation of alimony and child support are pretty easy. States have charts or standard percentages that are applied to the income to figure out how much one spouse should pay the other each month.
With high income households, it is not necessarily so easy. This is especially true for ultra high net worth clients. In those cases, the courts will look to the standard of living during the marriage. A forensic accountant will evaluate the cost of the lifestyle of the parties during the marriage (and also the lifestyle of the children) and that analysis will be used by the court in calculating support payments.
For the purpose of calculating alimony, courts consider a variety of factors, and the standard of living established during the marriage is included in those factors. It is important to not only consider the standard of living during the marriage, but also whether the parties are able to maintain a reasonably comparable standard of living following the divorce. In many cases, the same standard of living cannot be maintained because there is not enough income to maintain two households of comparable quality to the marital household.
In some cases, however, it may be possible to maintain the standard of living during the marriage, particularly if the family was living below its means. If the family was not spending all that it earned on the lifestyle, it may be possible to fully fund two comparable households after the divorce.
Attorneys and financial experts sometimes argue that historical expenditures of the family (without any adjustments whatsoever) are the sole basis on which the standard of living should be established. This approach is sometimes upheld by courts, but it often is not a good way to calculate the standard of living because unusual things happen before and after divorce. The only way to properly account for those unusual situations is through adjustments to the historical expenditures.
Standard of living encompasses more than just historical figures. The five most important factors which should affect the calculation of the standard of living include:
- Earned and unearned income
- Funding sources for the lifestyle
- Actual historical expenditures
- Existence of unusual, non-recurring expenses
- Reasonable needs in the future
I will walk through these factors in future posts.