Source: https://partinlawfirm.com/2018/08/
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August 2018 – The Partin Law Firm
The 2018 Amendment to Virginia Code § 20-109
Provides No Assistance in Answering the Question
Long term marriages often result in spousal support awards that continue indefinitely. Long term marriages also mean that the spouses are closer to retirement age. Before retiring, the spouse paying support usually wants to know that they can afford to retire, which means that they want to determine before they retire whether they will be required to continue paying spousal support, and if so, how much. For reasons discussed below, it has been impossible for a family law practitioner to advise a client. During the 2018 Session, the Virginia General Assembly amended the statute governing modification of spousal support, Virginia Code § 20-109. Unfortunately, the amendment is of no help in answering the question.
The Basics of Modification of Spousal Support
The first question is whether the spousal support award can be modified by the court. If the spousal support was determined by agreement of the parties, the spousal support award is not modifiable unless the agreement expressly says that it is modifiable. If the award was made by the court it is modifiable.
To request modification, either party may assert that there has been a material change in circumstances since the date of the award AND that the change in circumstances warrants a change in the ordered amount of support. A material change that warrants modification of support is one that affects the financial needs of the receiving spouse or that affects the ability of the paying spouse to pay. However, a material change that reduces the ability of the payor spouse to pay support cannot be due to that spouse’s voluntary act. For example, a payor who loses his job because he was insubordinate to his superior cannot use the resulting reduction in income to justify a reduction in his support obligation.
A spouse seeking support or continued support is not required to deplete their assets to qualify for support or to relieve the other spouse of the obligation of support. However, in recent case law, the contrary assertion has been held not true – while the receiving spouse may not be required to exhaust their assets to support themselves, the paying spouse may be required to expend assets (as opposed to earnings or income) to pay spousal support.
Application of the Basics to Retirement of the Paying Spouse
When the basic statutory and case law regarding modification of spousal support has been applied by trial courts to situations where the paying spouse has retired, the result has been substantial obstacles to relief for the retiring spouse. Trial courts have held that the paying spouse has voluntarily retired and therefore refused to even consider whether changes in incomes warranted a change in spousal support. Of courts that have considered modification due to retirement, some have refused to reduce the paying spouse’s obligation, holding that the paying spouse can pay from “other sources.” In other words, the court refused to lower or terminate the support obligation because the payor spouse could make payments from assets rather than from income.
The 2018 Amendment to Va. Code § 20-109
Effective July 1, 2018, Virginia Code section 20-109 provides that “the payor spouse’s attainment of full retirement age shall be considered a material change in circumstances.” The statute defines full retirement age as the age at which the payor spouse is eligible to receive full retirement benefits under the Social Security Act, which differs based on the year in which the payor spouse was born.
The 2018 Amendment also adds new Subsection F which sets forth six factors that the court must consider (in addition to the “normal” factors set forth in Va. Code § 20-107.1) when considering a request for modification of spousal support based on retirement of the payor spouse.
The required considerations are:
Whether retirement was contemplated by the court and specifically considered by the court when the spousal support was awarded;
Whether the retirement would result in a change in the income of ether the payor or the payee spouse;
The duration and amount of spousal support already paid; and,
The assets or property interest of each of the parties during the period from the date of the support order and up to the date of the hearing on modification or termination.
Only with time will we learn how courts will apply the amendment to spousal support cases. As with many statutory amendments, there are more questions than answers from the amendment itself. What is clear is that only retirement at full retirement age is deemed to be a material change in circumstances. What about mandatory retirement prior to full retirement age? Is that a material change in circumstances?
The court is required to consider whether the retirement, even at full retirement age, is mandatory or voluntary? Can court still refuse to modify spousal support because the reduction of the income of the payor spouse at full retirement age is a voluntary reduction?
What of the required consideration of “the duration and amount of spousal support already paid”? If everything else is equal, is the payor spouse who was divorce 20 years prior to retirement age more likely to obtain a reduction in the amount of spousal support than the payor spouse who was divorce five years prior to retirement? Is there a “lifetime maximum” of spousal support?
Of what import is the last factor listed, the assets and property interest of the parties from the date of the support order to the date of the hearing? The amendment does not change the case law holding that the spouse who wants to continue support cannot be required to use assets to support themselves or that the spouse who has to pay support may be require to use assets to do so. The court is required to consider the assets and property interests from the date of the support order to the hearing, but does not require the court to consider the financial decisions made by the parties for the same time period. What of the payor spouse who is a spendthrift and saves diligently for retirement while the payee spouse is much less frugal and spends above his or her means such that at the final hearing, the payor spouse has substantially more assets than the payee spouse? Will the payor spouse be required to use the assets acquired since the support order was made to continue to pay support to the wasteful payee spouse? What if both parties save and acquire substantial assets during the interim period? The payee spouse cannot be required to use their assets to support themselves but the payor spouse can be required to use assets to pay support.
The 2018 Amendment to Va. Code § 20-109 was a step in the right direction, but provides no real solution or guidance for practitioners or retiring former spouses. The General Assembly needs to weigh in and either make assets off limits for spousal support purposes except to the extent that they generate income or make expending assets for support a consideration for both former spouses. Otherwise, the playing field remains unlevel when the payor spouse retires, whether it is at full retirement age or earlier, regardless of whether the retirement is mandatory or voluntary.
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act, Public Law 115-97 (“the Act”). Among the changes to the tax code made by the Act were significant changes to the deductions available to taxpayers. For divorcing taxpayers and those divorcing in the future, a significant change was the repeal of the deduction for payment of spousal support for orders and agreements after December 31, 2018. As discussed below, this is a major sea change for divorcing couples and will result in less money for the now-divided family.
Tax Treatment of Spousal Support Under Current Law
Currently, unless divorcing spouses agree otherwise, alimony or spousal support paid from one spouse to another pursuant to a marital agreement or court order is deductible from the income of the paying spouse and taxable as ordinary income to the receiving spouse. In almost all cases, the payor spouse is in a higher tax bracket than the receiving spouse, so the result of shifting income from one to the other is a reduction in the amount of taxes paid on the amount of the alimony.
An example illustrates the point. Assume that ex-husband pays $10,000 per month in spousal support and is in the 35% tax bracket. Ex-wife makes little earned income and even with the spousal support is in the 24% bracket. If the alimony were taxed as income to ex-husband, the tax on $10,000 would be $3,500 each month. When taxed at ex-wife’s rate, the tax on $10,000 per month is $2,400 per month. The difference is $1,100 per month or $13,200 (this example assumes that the alimony deduction does not reduce the payor’s tax rate. If that happens, then tax effect includes not only the deduction of the spousal support but also the difference in rates for the remainder of the payor spouse’s income).
Where does that money go? It goes to the family in some fashion. Very rarely is it possible for a family that is primarily dependent on one high wage earner to go from one household to two and not have a reduction in the lifestyle for one or both of the post-divorce households. When alimony is deductible, it softens this blow somewhat because, as shown above, by shifting $120,000 of income from the payor spouse to the receiving spouse, an additional $13,200 per year becomes available to the family.
After 2018, The IRS Gets More Money
If the couple in our example above do not divorce until after December 31, 2018, the $13,200 goes to the IRS, effectively reducing the financial pie that can be divided between the parties, whether by agreement or by court order. The payor spouse has to pay the taxes, meaning that less money is available to pay to the receiving spouse in the form of alimony. Who will ultimately suffer the financial burden depends on the parties’ agreement or on the court’s decision. For many divorcing spouses, a couple hundred dollars a month makes a huge difference.
How to Deal with the Change in Negotiation or Trial
Just as the Act results in a sea change on the deductibility of alimony, it will also result in a sea change in how spousal support is negotiated and presented to the trial court in a divorce case. On a frequent basis under the current scheme where spousal support is deductible, counsel for the receiving spouse will present evidence of their client’s need for financial support to maintain the lifestyle established during the marriage, and will then demonstrate (to the other side or to the court) that to actually receive that amount, the needed amount has to be “grossed up” to account for taxes.
Usually, the receiving spouse’s representative will go further and also demonstrate the “savings” to the payor spouse to convince the payor spouse or the court that the impact of paying, to use the example above, $10,000 a month in spousal support is actually less for the payor spouse. In the case of the example above, the actual cost to the payor spouse is $7,500 since they would have to pay $3,500 in taxes on the $10,000 if they did not pay the alimony. Under this example, the payor spouse pays $7,500 net and the receiving spouse receives $8,600 net.
After December 31, 2018, the representative for the payor spouse will want to convince the other spouse or the court that their client simply cannot afford to pay the requested amount of spousal support because the alimony is not deductible and to pay the requested amount in after tax dollars is simply not possible if the payor is to maintain their other financial obligations.
Going back again to our example, when alimony is deductible, paying $10,000 per month “costs” the payor $7,500 while the receiving spouse receives $8,600. When alimony is no longer deductible, for a payor spouse in the 35% tax bracket to pay $8,600 per month will “cost” the payor $13,231 [$13,231 X .35 = $4,630.85. $13,231 – 4,630.85 = $8,600.14]. So, for the receiving spouse to obtain the same benefit will cost the paying spouse $3,231 more income each month or $38,772 per year.
These examples ignore state income taxes. If, as many states do, the state income tax begins with federal adjusted gross income, the effect of repealing deductibility of spousal support is even greater.
If possible, couples proceeding through divorce should try to resolve spousal support prior to the end of this year. For agreements and decrees entered prior to December 31, 2018, the deductibility of spousal support will be grandfathered in and remain deductible for the foreseeable future.
Virginia statutes regarding divorce provide for “no-fault” divorce based on spouses living separate and apart for the time period set forth in the Va. Code § 20-91 – one year unless they do not have minor children in common and have a written agreement resolving all other issues, in which case six months separation is sufficient. Fault grounds for divorce in Virginia include adultery, desertion, conviction of a felony, cruelty, causing reasonable apprehension of bodily hurt, and desertion. Regardless of the grounds for divorce, a party may request an award of pendente lite or temporary support prior to the divorce being made final and/or an award of permanent support upon entry of the Final Decree of Divorce. What impact will marital fault have on the Court’s decision regarding temporary spousal support or permanent spousal support?
Temporary spousal support may be ordered by a Circuit Court in a divorce action or by a Juvenile and Domestic Relations District Court (“JDR Court”) upon petition of a spouse after the parties separate. Virginia Code § 16.1-241(L) provides the statutory authority for a JDR Court to order spousal support and also provides that any order entered by the JDR Court is not res judicata (binding) on the circuit court. Since the Circuit Court can, in its final decree provide for permanent alimony, the spousal support ordered by the JDR Court is by definition temporary. Virginia Code § 16.1-278.17:1 provides that for cases where the parties combined gross monthly income is $10,000 or less, the presumptive amount of spousal support shall be determined by the JDR Court by deducting 58% of the payee spouse’s gross monthly income (in cases where the parties have minor children in common) from 28% of the payor’s gross monthly income. When there are no minor children in common, the presumptive amount of alimony is the difference between 30% of the payor’s gross monthly income and 50% of the payee spouse’s gross monthly income. The court may deviate from the presumptive amount “for good cause shown, including any relevant evidence relating to the parties’ current financial circumstances that indicates the presumptive amount is inappropriate.” Va. Code § 16.1-278.17:1(D). Thus, the JDR Court’s award of spousal support is not affected by fault but only by financial evidence.
Similarly, fault is not a factor that should be considered by a Circuit Court in making an award of pendente lite alimony. The statutory authorization for a Circuit Court to makes a temporary award of spousal support is found in Virginia Code § 20-103. That statute provides the court with the power to “compel a spouse to pay any sums necessary for the maintenance and support of the petitioning spouse.” Va. Code § 20-103(A). Pendente lite orders “shall have no presumptive effect and shall not be determinative when adjudicating the underlying cause.” Va. Code § 20-103(E). The statute does not address or refer to fault, only to the “sums necessary for the maintenance and support of the petitioning spouse.” Accordingly, courts interpreting the statute have held that fault is not a consideration when a court is determining temporary alimony.
Whether in a JDR Court or a Circuit Court, fault is not an appropriate consideration when temporary spousal support is determined.
Effect of Marital Fault on Obtaining an Award of Permanent Spousal Support
Only the Circuit Court has authority to award permanent (meaning not temporary) spousal support pursuant to Virginia Code § 20-107.1. That statute requires the Circuit Court to consider, when determining whether to award support for a spouse, “the circumstances and factors which contributed to the dissolution of the marriage, specifically including adultery and any other ground for divorce under the provisions of subdivision A (3) or (6) of § 20-91 or § 20-95.” Subdivision (3) is conviction of a felony subsequent to the marriage and subdivision (6) is cruelty or desertion. The statute treats adultery differently from other fault grounds for divorce.
Whether the divorce is entered on the grounds of adultery or not, “no permanent maintenance and support shall be awarded from any spouse if there exits in such spouse’s favor a ground of divorce under the provisions of subdivision A (1) of § 20-91.” Code § 20-91(A)(1) is divorce based on adultery. Although adultery is a bar to obtaining a permanent award of spousal support, the General Assembly also provided a narrow exception to the bar. A divorce court may still make an award of permanent alimony “if the court determines from clear and convincing evidence, that a denial of support and maintenance would constitute a manifest injustice, based upon the respective degrees of fault during the marriage and the relative economic circumstances of the parties.”
Thus, adultery is a bar to spousal support subject to the limited escape clause, and other fault grounds for divorce are to be considered by the Circuit Court in determining whether to award alimony at all. Once the court has determined to award alimony, does fault bear on the amount of spousal support awarded?
Fault and the Amount of Permanent Spousal Support
Per Virginia Code § 20-107.1(E), the court shall consider the following factors “in determining the nature, amount and duration of an award”:
The last factor provides the court with the statutory authority to consider marital fault in determining the amount of spousal support to be paid. The court shall consider “the circumstances and factors that contributed to the dissolution, specifically including any ground for divorce,” as may be “necessary to consider the equities between the parties. Thus, fault is a consideration for the trial court when determining not only whether to award alimony but also, once the court has determined that it will award alimony, it must consider fault in determining the amount. How marital fault might affect the amount of the awarded spousal support is too complex and fact specific to discuss here, but suffice it to say that every case is different and the amount of spousal support is within the discretion of the trial court.