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Monday, July 18, 2016

Alimony or Unallocated Support: What's the Difference?

Guest Post from Jennifer Hawthorne*

When contemplating a divorce, one of the first questions most parties to a divorce ask themselves is “how will I support myself during and after the divorce?” Determining how much support can or should be paid by the higher income earner to the lower income earner can often be one of the most contentious issues in a divorce. Both parties often feel like they just will not have enough income to support themselves and their children. This uncertainty can be unsettling. 

In many cases trying to find the right balance of support can lead the parties to do a tax analysis that compares the benefits of agreeing to a child support order, an alimony order, or some combination of both, sometimes called unallocated (family) support.  Often times the tax analysis will show that moving away from child support even though there are unemancipated children will leave more money in the hands of both parties. This happens because alimony and unallocated support are taxable to the recipient and tax-deductible to the payor.

Child support on the other hand is taxable to the payor and tax free to the recipient. When one spouse earns a significantly larger income than the other spouse, it can be beneficial to shift a portion of the tax burden to the lower income earner, which then lowers the tax the family owes to the Internal Revenue Service (IRS) thus allowing more money to stay in the family, benefiting both parties and the parties’ children.

Alimony and unallocated support can save some families money 
by shifting income to a lower tax bracket.

You may be thinking, “but isn’t child support presumptive?” Will a court approve a separation agreement that does not have child support? Generally, if the parties have negotiated an out-of-court separation agreement through mediation, the Collaborative Law process, or lawyer-to-lawyer negotiations, the judge will accept a complete waiver of child support as long there is language explaining that the waiver of child support was a factor in determining and agreeing to the alimony or unallocated support order.

In fact, even in the absence of this language, in a recent case decided by the Supreme Judicial Court, Duff-Kareores v. Kareores, the justices presumed that because there were unemancipated children but no language discussing child support in the parties’ separation agreement, the alimony order included child support. In other words, even though the parties called the support order alimony, the court decided that it was really some form of unallocated support. 

That leaves the question, if alimony is presumed to include child support when there are unemancipated children, why not just call it unallocated support?

One benefit to calling the support order alimony is that there is a statutory framework and case law that can be used to help parties (or a judge) figure out the details of the order. For example, by statute, alimony is based on the recipient’s need and the payor’s ability to pay. In figuring out the amount of support paid, a court would look at the need of the recipient or the order can be based on 30%-35% of the difference in the parties’ incomes. This can give parties a starting place for their negotiations. There are also statutory durational limits to alimony based on the length of the marriage. There are clear rules for what income should be included when calculating alimony. There is case law discussing the modification standard for alimony. In other words calling the support order alimony can provide clarity.

Clarity - advantage Alimony: Alimony 1 v. Unallocated Support 0

Of course, in some instances, this statutory framework may cause more harm than good. For example, depending on the length of the parties’ marriage, the payor’s age, and the age of the children, calling the support alimony and using the statutory framework to determine the durational limit may cause the support order to end while the children still need financial support. Likewise, if alimony or unallocated support is reduced or terminates within the same 6 months or 1 year of emancipation (depending on how often reductions occur), the IRS can turn around and say the support was really child support.  This is called alimony recapture and it also applies to unallocated support. If this happens, the benefit to having chosen alimony or unallocated support over child support can disappear when the payor is assessed penalties and fines.

Recapture - Tie: Alimony 1 v. Unallocated Support 0

In order to avoid these pitfalls, parties may agree it is better to create their own rules around when and how the support order can be modified and if and when it terminates.  In other words, calling the support unallocated support may provide more autonomy for the parties to craft a support order that works best for the parties.

Flexibility - advantage Unallocated Support: Alimony 1 v. Unallocated Support 1

If parties choose this option, they must be very careful when drafting the language because there is no predicting how a court will interpret that order if they need to go before a judge for modification.  Flexibility can create uncertainty unless the terms of unallocated support and potential modification in the future are very clearly defined.

Future Uncertainty - advantage Alimony:  Alimony 2 v. Unallocated Support 1

Another reason to call the support order alimony rather than unallocated support occurs when the higher income earner is also the custodial parent. If the higher income earner is the custodial parent, an unallocated order would not include child support.  In a recent Appeals Court case, Rosenwasser v. Rosenwasser, the parties’ separation agreement called the support order unallocated support because it included child support and alimony while the lower income earning spouse (the mother) was also the custodial parent.

The unallocated support order included a base order and a percentage of income over the base amount.  However, when the support payor (the father) became the custodial parent and filed for a modification of the support order (along with a request to move to florida), the court used a similar formula (base and percentage) to calculate alimony despite the fact that the father was no longer paying child support.  The Rosenwasser decision focuses primarily on the removal issue, but the court's use of an unallocated support agreement to inform a pure alimony calculation is informative and shows how future application of unallocated support language can be unpredictable.  On the other hand, it's unclear that the court would have handled this any differently if the original order had been called alimony.

More Future Uncertainty - tie:  Alimony 2 v. Unallocated Support 1

Finally, and this may be the biggest deciding factor for some parties in deciding whether to call support alimony or unallocated support, the idea of alimony itself just does not sit well with everyone. While parties are usually comfortable with the idea of continuing to support their children following a divorce, many people are not comfortable with the idea of paying support to their spouse. It can conjure images of the ex-spouse shopping or taking lavish vacations or owning a roomy home while the payor spouse works diligently to earn an income, skips vacations, and lives in a smaller home. Whether this would be reality or not, if parties find themselves deadlocked in a mediation or negotiation over support because the term alimony is toxic to one party, one way to move forward toward an agreement may be to change the name to unallocated support. Maybe calling the support order unallocated support or family support will take away the sting and allow the parties to resolve their divorce amicably, while still taking advantage of the tax benefits.

The Title Dilemma - advantage Unallocated Support:  Alimony 2 v. Unallocated Support 2

Whatever the parties decide to call the support payments, the parties should work with their divorce practitioners including their mediator, respective attorneys and/or financial neutral to determine what support makes the most sense for their family.  The recent Appeals Court and SJC cases also suggest that parties should take particular care in drafting Agreements that involve alimony or unallocated support to ensure that their intentions are clear.  

*Jennifer Hawthorne is a Mediator and Collaborative Law attorney who runs her own practice in Framingham. Jennifer's practice includes family law mediation, divorce representation, and estate planning. Click here to visit her website.

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