If there is a demonstrated need by one spouse and a demonstrated ability to pay relative to the other spouse, a divorce court will likely make an order for spousal support payable to the spouse in need. The determination of the amount, duration, and other terms of the spousal support order can be very complex.
Temporary Spousal Support
Spousal support paid prior to the entry of the Judgment is characterized as temporary spousal support or pendent lite spousal support. This spousal support is designed to maintain the status quo of the parties where possible. The amount of temporary spousal support is often determined by the utilization of a state mandated formula accessed through the use of a computer software program (DissoMaster or X-Spouse).
Temporary spousal support may be tax deductible to the payor-spouse and taxable to the payee-spouse if the parties are not living in the same residence and if they do not file joint tax returns. Voluntary spousal support payments are not tax deductible unless they are documented in a written agreement or a court order.
Temporary spousal support may be ordered retroactively back to the filing date of the Request for Order (RFO) seeking a spousal support order. Generally, the payor-spouse is credited with payments made to the payee-spouse or for that spouse’s benefit against any temporary spousal support order.
The court must consider any history of domestic violence in making a spousal support order.
Modification Temporary Orders
Case law exists that states that there need not be a change in circumstances to modify a temporary spousal support order. However, most courts require a change in circumstances before modifying an order unless the action is a termination of spousal support based on domestic violence. Spousal support cannot be modified retroactively.
A court may order a spouse to take part in a vocational examination to prove ability to earn. These examinations may be relevant to temporary spousal support but are generally utilized in the context of long term spousal support which is also known as permanent spousal support or post-judgment spousal support.
Elements in the Order
Long term spousal support has a number of elements:
- Award of the spousal support;
- Substantive stepdown;
- Jurisdictional stepdown; and
- Reservation of jurisdiction
The award of long term spousal support is based on the factors set forth in Family Code §4320 as opposed to being based on the “status quo.” The court cannot set long term spousal support using the formula used in setting temporary spousal support by itself. Family Code §4320 sets forth specific factors that the court shall consider:
4320. In ordering spousal support under this part, the court shall consider all of the following circumstances:
- The extent to which the earning capacity of each party is sufficient to maintain the standard of living established during the marriage, taking into account all of the following:
- The marketable skills of the supported party; the job market for those skills; the time and expenses required for the supported party to acquire those skills; and the possible need for retraining or education to acquire other, more marketable skills or employment.
- The extent to which the supported party’s present or future earning capacity is impaired by periods of unemployment that were incurred during the marriage to permit the supported party to devote time to domestic duties.
- The extent to which the supported party contributed to the attainment of an education, training, a career position, or a license by the supporting party.
- The ability of the supporting party to pay spousal support, taking into account the supporting party's earning capacity, earned and unearned income, assets, and standard of living.
- The needs of each party based on the standard of living established during the marriage.
- The obligations and assets, including the separate property, of each party.
- The duration of the marriage.
- The ability of the supported party to engage in gainful employment without unduly interfering with the interests of dependent children in the custody of the party.
- The age and health of the parties.
- Documented evidence, including a plea of nolo contendere, of any history of domestic violence, as defined in Section 6211, between the parties or perpetrated by either party against either party's child, including, but not limited to, consideration of emotional distress resulting from domestic violence perpetrated against the supported party by the supporting party, and consideration of any history of violence against the supporting party by the supported party.
- The immediate and specific tax consequences to each party.
- The balance of the hardships to each party.
- The goal that the supported party shall be self-supporting within a reasonable period of time. Except in the case of a marriage of long duration as described in Section 4336, a "reasonable period of time" for purposes of this section generally shall be one-half the length of the marriage. However, nothing in this section is intended to limit the court's discretion to order support for a greater or lesser length of time, based on any of the other factors listed in this section, Section 4336, and the circumstances of the parties.
- The criminal conviction of an abusive spouse shall be considered in making a reduction or elimination of a spousal support award in accordance with Section 4324.5 or 4325.
- Any other factors the court determines are just and equitable.
It is the goal of the State of California, for supported spouses to become self-supporting within a reasonable period of time. In marriages of less than ten years, “reasonable” is defined as one-half the length of the marriage. A long term marriage is a marriage of ten years or more in duration.
Marital Standard of Living
The marital standard of living is important relative to the determination of spousal support but it is just one of the factors. It is neither a ceiling nor a floor for the amount of spousal support. The marital standard of living can be looked at as a benchmark. The court can define the marital standard of living specifically with a dollar level or generally in terms like “middle standard of living.”
If the payor receives commissions, stock options and/or bonuses, the spousal support order may be structured with a base spousal support payment and a supplement spousal support payment, payable if and when the additional income is received. The supplemental spousal support payments are referred to as “Ostler-Smith” payments.
A Judgment that provides for a future reduction in the amount of spousal support is a “substantive stepdown.” The Judgment may stepdown the amount of spousal support payable by the payor-spouse only if the evidence supports a finding of a reduced need on the date of the future spousal support stepdown.
A Judgment that reduces spousal support to zero at some point in the future is a jurisdictional stepdown order. Such an order must be supported by evidence that supports a finding that the payee-spouse will not have a need for spousal support on the date of the stepdown to zero.
Modification – Long Term Order
A spousal support order may be modified upward or downward if there has been a change in circumstances. All orders are modifiable unless they were made non-modifiable by a stipulation of the parties. A court cannot make a spousal support order non-modifiable without the consent of the parties. New mate income is not a source of spousal support. There is a rebuttable presumption of reduced need for spousal support if a payee-souse is cohabiting with a person in a romantic relationship.
Proceeds Received from Sale of Stock in Business Were Not Included as Income for Support Purposes
The Court reversed an order that included cash and the value of stock that the husband received from the sale of his interest in the sale of a business, as income for child support purposes
Husband worked for PRSI, a company which his adult children from a former marriage established. At some point, his adult children gifted him 51% of the stock of PRSI. PRSI was sold to and merged with USSI. He received compensation for the sale of his stock in the form of USSI stock and cash to be paid over time. The stock was subject to SEC restrictions on transfer. As part of the merger, he received an employment contract with a salary and entered into a covenant not to compete for a certain period of time. (Id. at pp. 1364-1366.) USSI was acquired by and merged into a new company, First Advantage. Husbands shares of USSI were converted into new company shares with the same SEC restrictions. Husband also continued to work for the new company. (Id. at p. 1368.) There were a number of issues in the case: arrears in child support, modification of child support upward, custody, etc.
Martin Wertleib was Husband’s expert. Wertleib’s analysis included the cash from the sale of PRSI and an assumed anticipated return on the investment (once the stock became available for sale under the SEC rules) to determine Husband’s gross income. The trial court rejected this analysis and instead treated all proceeds from Husband’s sale of the business as income (cash installments when received and the market value of the stock as it became available for sale, whether or not it was actually sold. (Id. at p. 1372.)
Husband argued on appeal that the court erred in treating the proceeds from the sale as income rather than capital gain. The Court of Appeal referenced the following several cases for the propositions set forth below: “Generally, the types of income specified in the statute consist of money that the support obligor actually receives, and do not include unrealized increases in the value of assets. (In re Marriage of Henry (2005) 126 Cal.App.4th 111, 119, 23 Cal.Rptr.3d 707 [“If the Legislature had intended that the unrealized increase in the value of an asset should be considered income, it would have said so.”].) This is consistent with “[t]he traditional understanding of ‘income’ [as] the gain or recurrent benefit that is derived from labor, business, or property [citation], or from any other investment of capital [citation].” (In re Marriage of Scheppers, supra, 86 Cal.App.4th at p. 650, 103 Cal.Rptr.2d 529.) Put another way, “[s]upport payments usually are paid from present earnings, not liquidation of preexisting assets.” (Mejia v. Reed (2003) 31 Cal.4th 657, 670, 3 Cal.Rptr.3d 390, 74 P.3d 166; cf. In re Marriage of Scheppers, supra, 86 Cal.App.4th at p. 651, 103 Cal.Rptr.2d 529 [“ ‘Income is the key *1373 factor in our system, not capital or net worth.’ ”]; In re Marriage of Reynolds (1998) 63 Cal.App.4th 1373, 1380, 74 Cal.Rptr.2d 636 [“Only investment income, not investment principal, should be available to pay spousal support....”].)” (Id. at pp. 1372-1373.)
The Court of Appeal however, acknowledged that assets are not entirely irrelevant in determining income, and cited to an example of where the support payor invests his/her funds in non-income producing assets, a trial court can impute income to the assets, which is the approach Wertleib took in his analysis. (Id. at pp. 1373-1374.) The trial court in Pearlstein, however, treated the unrealized gain in Husband’s stock as if it were shares of stock options that one may receive as part of a compensation package for past, present or future work. The Court of Appeal found the trial court misunderstood the difference between a stock option obtained as compensation and shares of stock acquired as part of the proceeds from the sale of equity in a business. It held the unliquidated stock received for equity is the same as other kinds of acquired nonliquid assets that are not normally considered income for support purposes. (Id. at pp. 1374-1375.)
The Court of Appeal concluded that the market value of the unsold shares received by Husband in connection with the sale of the business are generally not income for child support purposes. Further, It held: “Moreover, to the extent that [Husband] sold the shares only for the purpose or reinvesting them in income-producing assets, the resulting gain also was not income, but merely the replacement of one capital investment with another. (Cf. In re Marriage of Kuppinger, supra, 48 Cal.App.3d at pp. 634–635, 120 Cal.Rptr. 654 [rejecting argument that income should be imputed to supported spouse based on asserted obligation to invest in income-producing assets, where funds derived from sale of one non-income-producing asset had been reinvested in another].)” (Id. at pp. 1375-1376.) If Husband sold the stock and spent the proceeds, as opposed to reinvesting them, the court could treat the realized gain as income and also the court could attribute a reasonable rate of investment on the value of the stock available for sale (which is what Wertleib suggested).
In connection with Husband’s argument that the trial court also erred in treating the cash he received from the sale as income, the Court of Appeal held: “We agree with Irwin that the cash he received from the sale was also a capital asset, because it was the proceeds from the liquidation of a capital asset. Nonetheless, there is a distinction between the case and the stock, in that the cash represents realized rather than unrealized capital gain. With respect to the treatment of realized capital gain as income, the governing principles are somewhat different. To the extent that a support obligor has spent funds derived by liquidating his or her capital, rather than reinvesting them, the trial court acts within his discretion in considering the funds expended to be income for support purposes.” (Id. at p. 1376.)
The Court of Appeal remanded, stating the trial court may treat sales funds Husband expended as opposed to reinvested, as income, but otherwise the stock and cash must be treated as capital assets, and the court’s discretion is limited to imputing an income stream to the assets for support purposes. (Id. at p. 1377.)
In re Marriage of Pearlstein (2006) 137 Cal. App. 4th 1361