Written by, Attorney Douglas C. Gardner
As a divorce lawyer in Arizona, practicing in Maricopa and Pinal County, and throughout the state of Arizona, I am often confronted with financial issues in complex cases involving the categorization of payments from one party to another. While often the party receiving the funds is primarily concerned with only the dollar amount he or she will receive, and the party paying the funds is primarily concerned with only the amount he or she will be paying each month, there are additional considerations that each side should seriously consider. Often the parties and experienced attorneys can carefully craft an agreement that is mutually beneficial to both parties by classifying how funds will be paid, as child support, spousal support, payment of attorneys’ fees, and as a property equalization payment or business buyout.
In considering the various forms of payment that can be made by one party to another in a divorce case, divorcing parties need to remember that $1 for spousal support is different than $1 of child support, which is different than $1 paid for attorneys fees, and these are all different than $1 for a property equalization payment or business buyout. The primary differences are tax issues, modifiability, the effect on other payments, and dischargeability in bankruptcy.
Child support is taxable to the paying party, and paid with post tax dollars. The receiving party will receive the child support tax free, and is not required to pay taxes on this as income. Accordingly, paying $1 of child support requires the paying party to earn $1.30 or some other amount in order to first pay 30% or the appropriate amount of taxes and have the $1 remaining. Child support can be modified at any time based upon an increase or decrease in either party’s income, a change in the cost of medical insurance, the emancipation of children, and for various other reasons. Child support cannot be discharged in bankruptcy if things really go south, but as indicated above, if things get too bad, the paying party can ask the Court to reduce what he or she owes moving forward. Care must be taken to modify child support quickly, as arrearages once built up cannot be discharged or modified and must be paid.
Spousal support provides a tax break to the paying party. When the paying party pays $1 in spousal support, this comes off the paying party’s income before determining the taxable income. The receiving party would then need to claim this as income and pay applicable income taxes. This is often beneficial to the parties, as the receiving party will generally pay at a lower tax rate than the paying party. Spousal support is generally modifiable, and terminates upon the death of either party or upon the receiving party remarrying. Similar to child support, the modification can be based upon a change in financial circumstances. By agreement or contract, the parties can agree to an amount for spousal support that would be non-modifiable, which prevents either party from asking the court to increase or decrease the amount or the duration. Even non-modifiable spousal support will terminate upon either party’s death or the receiving party’s remarriage (unless specifically agreed to be non-terminable also). Non-modifiable spousal support is a double edged sword, meaning it can protect the paying party from the receiving party asking to increase or extend the support, but may also prevent the paying party from reducing or pre-maturely ending the support if the paying party’s finances decline dramatically. Spousal support cannot be discharged in bankruptcy, making the risk of non-modifiable spousal support even more risky, as there is no court to which the paying party can seek to get out of the obligation even if he or she becomes disabled or has other serious financial difficulties. One other advantage of spousal support to the paying party is that it reduces the paying party’s income and increases the receiving party’s income in the child support calculations, which reduces the child support obligation.
A property equalization payment or business buyout will not be included in the receiving party’s income for calculating child support, and should have no effect on child support amounts. Additionally, the paying party will not receive any tax break or reduction in taxable income as they would from spousal support. The paying party must pay equalization payments with after tax dollars. The receiving party receives this income tax free. A business buyout or equalization payment is not modifiable once entered and the time for appeal has concluded, and the obligation continues regardless of the receiving party’s death (the paying party would still owe the ex-spouse’s heirs), the paying party’s death (the receiving party would have a claim against the paying party’s estate) or the receiving party’s remarriage. Money owed to a former spouse may, however, be discharged in a Chapter 13 bankruptcy (which requires payments to your creditors for 3-5 years) if the necessary qualifications are met. This may be important if the paying party experiences any severe financial decline and can no longer afford to pay the equalization amount.
The final method for transferring money from one party to another in a divorce or family law case relates to the payment of attorneys fees. The Court can order (or the parties can agree) to have one party pay all or a part of the other party’s fees. In Arizona, generally both parties are required to pay their own attorneys fees and costs. The court can, however, consider the financial positions of the parties and the reasonableness of the positions taken by the parties, and order one party to pay all or a part of the other party’s fees. Attorney fees are paid with after tax income, have no impact on child support calculations, and cannot be modifies once the time for appeal has expired. Attorneys fees can in many cases be discharged in a Chapter 13 bankruptcy, but not in all cases.
If you are going through a divorce and need legal advise regarding financial issues such as attorneys fees, child support, spousal support, and a business buyout or other property equalization, please call us today!