The Proper Way to Determine Spousal Maintenance

There has been much discussion, even recent proposed legislation (See New York State Assembly Bill A10446), over whether Domestic Relations Law (DRL) ' 236(B)(6)(a), the statute defining the basis and supporting factors for determining spousal maintenance awards in New York, is difficult to apply and should be replaced with a statute that uses a formula to calculate both the amount and duration of maintenance.

Domestic Relations Law ' 236(B)(6)(a)

According to the current statute, maintenance awards should be based on the following considerations: 1) the pre-divorce standard of living of the parties; and 2) their respective needs and paying abilities. As stated in DRL ' 236(B)(6)(a):

Except where the parties have entered into an agreement pursuant to subdivision three of this part providing for maintenance, in any matrimonial action the court may order temporary maintenance or maintenance in such amount as justice requires, having regard for the standard of living of the parties established during the marriage, whether the party in whose favor maintenance is granted lacks sufficient property or income to provide for his or her reasonable needs and whether the other party has sufficient property or income to provide for the reasonable needs of the other and the circumstances of the case and of the respective parties ' . In determining the amount and duration of maintenance the court shall consider:

Criticism of the Existing Statute

Criticism of the statute as it now stands has centered largely on seeming inconsistencies in the amounts and durations of maintenance awards in apparently similar cases. The perception is that such awards may be unfair or inequitable. The apparent lack of predictability caused by such inconsistencies suggests that the existing guidelines may be difficult to apply, making the statute a potential impediment to reaching settlement agreements. These problems are compounded by the difficulty and expense associated with revisiting and altering unworkable support levels post-divorce.

It has been argued that using a formula to calculate maintenance would be faster, simpler, less expensive, more consistent and predictable and easier to administer. This has been the impetus for the aforementioned proposed legislation.

While these arguments appear to be compelling, Alton L. Abramowitz, in a recently published series of articles in this newsletter, has eloquently pointed out major flaws in the proposed legislation. (See “Reconstructing Alimony and Spousal Maintenance,” “New York's Post-Marital Compensation Guidelines” and “Changing the Post-Marriage Compensation Guidelines” in the September, October and November 2008 issues of New York Family Law Monthly.)

In this article, we discuss the following questions:

• What is the cause of the apparent inconsistencies in the application of the current statute?
• Is the statute too difficult to reasonably or accurately apply?
• Is the proposed legislation, despite its own set of flaws, a better solution because its determinations are more consistent, predictable and easier to apply?

Personal Economic Forecasting

Economic forecasting has proven to be a reliable and powerful tool for gaining insights into personal finance issues. It has helped millions of people gain clear understandings of their current financial positions and cash flow, plan for college or retirement, take control over and manage their personal finances, identify and mitigate potential financial risks and constraints, set reasonable long-term financial goals for themselves and predictably work toward achieving them.

Divorce financial planning, a relatively new financial planning area of specialization that applies the principles and methods of personal financial planning, including economic forecasting, to the divorce process, has benefited clients greatly, providing valuable insights into the long-term consequences of alternative outcomes. It has helped divorce financial planners analyze the needs and paying abilities of the divorcing parties in different post-divorce contexts and helped clients anticipate and avoid potential problems and develop insights into the workability of alternative settlement scenarios. Economic forecasting has been successfully utilized in tens of thousands of divorce cases throughout the country and assisted courts in arriving at context-dependent equitable distribution and spousal maintenance awards dependent upon the unique facts of each case. It is a valuable tool for helping divorcing parties negotiate workable and equitable out-of-court settlements, thus avoiding the vagaries of going to court.

The following case study illustrates how economic forecasting, a tool that is routinely used in the personal financial planning process, can provide insights into needs and paying abilities and their context-dependence.

For purposes of clarity, I have defined alternative contexts as alternative ways in which property and debt could be divided and alternative ways of sharing or distributing income and expenses. Budgets based on pre-divorce standard of living would, for example, be associated with different needs and paying abilities than budgets contained in so-called “bare-bones” contexts. I call attention to these variables because needs and paying abilities and the marital standard of living form the basis of the current statute. Tax consequences, the rehabilitative concept of maintenance and many of the other supporting factors in the current statute can also be taken into consideration in the economic forecasting process.

In the following case study, the facts are:

• The husband and wife have been married for many years and have two pre'college-age children living at home;
• The husband earns substantially more than the wife;
• The wife left college many years ago but plans to go back to finish her degree, which should increase her future earning potential;
• The wife plans to continue working at her current job while attending school; the couple jointly own a home that has grown substantially in value during their marriage and has a large unrealized capital gain, and there is about $100,000 remaining on the mortgage;
• The husband has accumulated a significant amount of retirement assets over the years;
• The wife has only a small amount of retirement assets, not sufficient for her to retire on; and
• The couple have about $100,000 in investment assets.

The Husband's Proposition

The husband has proposed to help the wife go back to school by paying her college costs. He will also pay maintenance of $3000 per month while she is in school. He will pay child support based on the statutory guidelines until the children become emancipated or, if full-time college students, reach age 22. He agrees to divide the marital estate equally.

The wife is concerned about whether she will be able to maintain a decent standard of living for herself and the children after the divorce. She would like to keep the house. She is also concerned about whether she will have enough money to retire on.

Economic forecasts of the husband's proposal are shown in the figures in the chart below (spreadsheets containing the supporting data are not shown). In this scenario, the wife keeps the house and associated mortgage, her retirement assets and a small portion of her husband's retirement assets. The husband keeps the majority of his retirement assets and the joint investment assets. Basic assumptions regarding taxes, cost of living, changes in income and expenses, and appreciation rates of retirement and other assets are also made. Their budgets are based on verified historical expenses in a Lifestyle Analysis or contained in their respective Statements of Net Worth.

The second chart below, labeled Net Worth, incorporates these assumptions and projects changes in Net Worth as a function of the wife's age. Likewise, the figure labeled Working Capital projects changes in the parties' respective Working Capital. The expenses used in the analysis, as illustrated in the charts, are based on the historical data contained in substantiated Statements of Net Worth, i.e., are reflective of the standard of living established during the marriage. Superimposed on this is the husband's proposal to pay the wife child and spousal support, with the wife assuming complete ownership of the house and its associated obligations in exchange for a portion of her rights to her husband's pension. The specific values displayed in the figures are not as significant as the trends. The calculated values become less predictable over time, as underlying parameters continue to evolve. Nevertheless, trends, especially in the early years, are highly predictable under a given set of economic circumstances.

As shown, the husband's Net Worth and Working Capital increase consistently and substantially in this scenario. This is largely due to his high salary, which greatly exceeds his expenses. In contrast, the wife's Net Worth and Working Capital begin decreasing immediately and continue to decline. The underlying data show that her expenses far exceed her income. She cannot afford to maintain the house. She has no initial Working Capital, her husband having kept all of the investment assets. The figures shown assume she begins drawing on her retirement assets, paying associated income taxes and penalties, and the equity in her home, her only other asset. These are merely stopgap measures and further weaken her financial position.

The figures (and spreadsheets) clearly indicate that this proposal is affordable to the husband and in keeping with the husband's paying abilities. However, it also clearly shows that the wife does not have sufficient income to pay her expenses in this scenario, and the proposal is therefore incompatible with the wife's needs. Since pre-divorce standard of living and the respective needs and paying abilities of the parties form the basis for the statute, these economic forecasts of the long-term financial consequences of the husband's proposal provide important insights to the court concerning his proposal.

Conclusion

In next month's issue, we'll look at some alternative equitable distribution scenarios and discuss how outcomes under the current statute, DRL ' 236(B)(6)(a), could be made more consistent and predictable if courts were routinely presented with economic forecasting analyses.

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Carl M. Palatnik, CFP', CDFA', a member of this newsletter's Board of Editors, is founding president and executive vice president of the Association of Divorce Financial Planners (www.divorceandfinance.org) and President of DivorceInteractive.com, an Internet divorce portal. He can be reached at [email protected] or at 516-747-2259.

There has been much discussion, even recent proposed legislation (See New York State Assembly Bill A10446), over whether Domestic Relations Law (DRL) ' 236(B)(6)(a), the statute defining the basis and supporting factors for determining spousal maintenance awards in New York, is difficult to apply and should be replaced with a statute that uses a formula to calculate both the amount and duration of maintenance.

Domestic Relations Law ' 236(B)(6)(a)

According to the current statute, maintenance awards should be based on the following considerations: 1) the pre-divorce standard of living of the parties; and 2) their respective needs and paying abilities. As stated in DRL ' 236(B)(6)(a):

Except where the parties have entered into an agreement pursuant to subdivision three of this part providing for maintenance, in any matrimonial action the court may order temporary maintenance or maintenance in such amount as justice requires, having regard for the standard of living of the parties established during the marriage, whether the party in whose favor maintenance is granted lacks sufficient property or income to provide for his or her reasonable needs and whether the other party has sufficient property or income to provide for the reasonable needs of the other and the circumstances of the case and of the respective parties ' . In determining the amount and duration of maintenance the court shall consider:

Criticism of the Existing Statute

Criticism of the statute as it now stands has centered largely on seeming inconsistencies in the amounts and durations of maintenance awards in apparently similar cases. The perception is that such awards may be unfair or inequitable. The apparent lack of predictability caused by such inconsistencies suggests that the existing guidelines may be difficult to apply, making the statute a potential impediment to reaching settlement agreements. These problems are compounded by the difficulty and expense associated with revisiting and altering unworkable support levels post-divorce.

It has been argued that using a formula to calculate maintenance would be faster, simpler, less expensive, more consistent and predictable and easier to administer. This has been the impetus for the aforementioned proposed legislation.

While these arguments appear to be compelling, Alton L. Abramowitz, in a recently published series of articles in this newsletter, has eloquently pointed out major flaws in the proposed legislation. (See “Reconstructing Alimony and Spousal Maintenance,” “New York's Post-Marital Compensation Guidelines” and “Changing the Post-Marriage Compensation Guidelines” in the September, October and November 2008 issues of New York Family Law Monthly.)

In this article, we discuss the following questions:

• What is the cause of the apparent inconsistencies in the application of the current statute?
• Is the statute too difficult to reasonably or accurately apply?
• Is the proposed legislation, despite its own set of flaws, a better solution because its determinations are more consistent, predictable and easier to apply?

Personal Economic Forecasting

Economic forecasting has proven to be a reliable and powerful tool for gaining insights into personal finance issues. It has helped millions of people gain clear understandings of their current financial positions and cash flow, plan for college or retirement, take control over and manage their personal finances, identify and mitigate potential financial risks and constraints, set reasonable long-term financial goals for themselves and predictably work toward achieving them.

Divorce financial planning, a relatively new financial planning area of specialization that applies the principles and methods of personal financial planning, including economic forecasting, to the divorce process, has benefited clients greatly, providing valuable insights into the long-term consequences of alternative outcomes. It has helped divorce financial planners analyze the needs and paying abilities of the divorcing parties in different post-divorce contexts and helped clients anticipate and avoid potential problems and develop insights into the workability of alternative settlement scenarios. Economic forecasting has been successfully utilized in tens of thousands of divorce cases throughout the country and assisted courts in arriving at context-dependent equitable distribution and spousal maintenance awards dependent upon the unique facts of each case. It is a valuable tool for helping divorcing parties negotiate workable and equitable out-of-court settlements, thus avoiding the vagaries of going to court.

The following case study illustrates how economic forecasting, a tool that is routinely used in the personal financial planning process, can provide insights into needs and paying abilities and their context-dependence.

For purposes of clarity, I have defined alternative contexts as alternative ways in which property and debt could be divided and alternative ways of sharing or distributing income and expenses. Budgets based on pre-divorce standard of living would, for example, be associated with different needs and paying abilities than budgets contained in so-called “bare-bones” contexts. I call attention to these variables because needs and paying abilities and the marital standard of living form the basis of the current statute. Tax consequences, the rehabilitative concept of maintenance and many of the other supporting factors in the current statute can also be taken into consideration in the economic forecasting process.

In the following case study, the facts are:

• The husband and wife have been married for many years and have two pre'college-age children living at home;
• The husband earns substantially more than the wife;
• The wife left college many years ago but plans to go back to finish her degree, which should increase her future earning potential;
• The wife plans to continue working at her current job while attending school; the couple jointly own a home that has grown substantially in value during their marriage and has a large unrealized capital gain, and there is about $100,000 remaining on the mortgage;
• The husband has accumulated a significant amount of retirement assets over the years;
• The wife has only a small amount of retirement assets, not sufficient for her to retire on; and
• The couple have about $100,000 in investment assets.

The Husband's Proposition

The husband has proposed to help the wife go back to school by paying her college costs. He will also pay maintenance of $3000 per month while she is in school. He will pay child support based on the statutory guidelines until the children become emancipated or, if full-time college students, reach age 22. He agrees to divide the marital estate equally.

The wife is concerned about whether she will be able to maintain a decent standard of living for herself and the children after the divorce. She would like to keep the house. She is also concerned about whether she will have enough money to retire on.

Economic forecasts of the husband's proposal are shown in the figures in the chart below (spreadsheets containing the supporting data are not shown). In this scenario, the wife keeps the house and associated mortgage, her retirement assets and a small portion of her husband's retirement assets. The husband keeps the majority of his retirement assets and the joint investment assets. Basic assumptions regarding taxes, cost of living, changes in income and expenses, and appreciation rates of retirement and other assets are also made. Their budgets are based on verified historical expenses in a Lifestyle Analysis or contained in their respective Statements of Net Worth.

The second chart below, labeled Net Worth, incorporates these assumptions and projects changes in Net Worth as a function of the wife's age. Likewise, the figure labeled Working Capital projects changes in the parties' respective Working Capital. The expenses used in the analysis, as illustrated in the charts, are based on the historical data contained in substantiated Statements of Net Worth, i.e., are reflective of the standard of living established during the marriage. Superimposed on this is the husband's proposal to pay the wife child and spousal support, with the wife assuming complete ownership of the house and its associated obligations in exchange for a portion of her rights to her husband's pension. The specific values displayed in the figures are not as significant as the trends. The calculated values become less predictable over time, as underlying parameters continue to evolve. Nevertheless, trends, especially in the early years, are highly predictable under a given set of economic circumstances.

As shown, the husband's Net Worth and Working Capital increase consistently and substantially in this scenario. This is largely due to his high salary, which greatly exceeds his expenses. In contrast, the wife's Net Worth and Working Capital begin decreasing immediately and continue to decline. The underlying data show that her expenses far exceed her income. She cannot afford to maintain the house. She has no initial Working Capital, her husband having kept all of the investment assets. The figures shown assume she begins drawing on her retirement assets, paying associated income taxes and penalties, and the equity in her home, her only other asset. These are merely stopgap measures and further weaken her financial position.

The figures (and spreadsheets) clearly indicate that this proposal is affordable to the husband and in keeping with the husband's paying abilities. However, it also clearly shows that the wife does not have sufficient income to pay her expenses in this scenario, and the proposal is therefore incompatible with the wife's needs. Since pre-divorce standard of living and the respective needs and paying abilities of the parties form the basis for the statute, these economic forecasts of the long-term financial consequences of the husband's proposal provide important insights to the court concerning his proposal.

Conclusion

In next month's issue, we'll look at some alternative equitable distribution scenarios and discuss how outcomes under the current statute, DRL ' 236(B)(6)(a), could be made more consistent and predictable if courts were routinely presented with economic forecasting analyses.

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Carl M. Palatnik, CFP', CDFA', a member of this newsletter's Board of Editors, is founding president and executive vice president of the Association of Divorce Financial Planners (www.divorceandfinance.org) and President of DivorceInteractive.com, an Internet divorce portal. He can be reached at [email protected] or at 516-747-2259.