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Negotiating alimony during a divorce

Rosemary Frank Divorce Financial Expert, TN State Supreme Court Listed, Rule 31 Family Mediator Rosemary Frank, MBA, CDFA, CFDP, CFDS
Negotiating alimony during a divorce

The concept of alimony has its roots in old English law whereby a husband was ordered to provide support for a wife after divorce, usually for life. Those were times when women were not allowed to own property, could not earn a living, and would otherwise become dependent upon the government for support. A lot has changed since then. As women have become more self-sufficient, reliance upon alimony has correspondingly lessened. In addition, alimony is no longer a gender issue, but an issue for the less resourceful spouse, husband or wife.

The laws governing alimony vary from state to state. However, the general concepts are that alimony will be available to the less advantaged spouse according to their need and only to the extent that the more advantaged spouse is able to contribute the support of the ex-spouse. This is customarily summarized as “need and the ability to contribute to that need.” Not much is absolute: neither the amount of alimony, nor the length of time it will be paid and received. Alimony is not an entitlement, but part of a negotiated Marital Dissolution Agreement (MDA) and may be impacted by other aspects of the MDA.


Do

Do know your income

As simple as this may seem, it may not be. Income comes in many shapes and sizes. Because all negotiations will be done on a monthly basis, you must know your monthly income. If you get paid every other week, do not fall into the trap of multiplying your paycheck times two for monthly income. Because you get paid 26 times per year, not 24, your monthly income is equal to more than two paychecks. Get financial help if you don’t understand this. Then you need to be able to distinguish between gross and net income. It is all the more helpful to actually understand all that is on your income tax return. That is the complete story of your income. Your income will, in part, determine the outcome of alimony negotiations.

If you or your spouse operates a business, even a small business as a second income, the business records will need to be examined to determine if one of you has hidden income in the form of personal benefits indirectly derived from the business, or taken as legitimate deductions, but may non-the-less be considered “imputed income.”

Employers have become very creative in how they compensate employees with things such as Executive Savings Plans, Stock Options, Stock Appreciation Units, Restricted Stock, etc. These need to be understood as income, subject to vesting schedules, along with their taxable status.

Remember, income and personal expenses are the determinants of each spouse’s needs and ability to meet those needs, and ability to help meet the needs of the other.

Do include all personal expenses

As a prelude to the alimony negotiations, each spouse will be required to provide a comprehensive list of post-divorce personal living expenses. In order to estimate these, one must first have a thorough understanding of their marital living expenses and project from there how things may be the same and/or different for various expense items. This usually becomes one of the most challenging tasks of the divorce process.

Each party must be sure to include every foreseeable expense and do so with realistic accuracy. The expenses for the spouse who anticipates receiving alimony must be complete because this will become the requested or needed alimony amount. If the need is underestimated, simple living expenses will not be able to be met, bills may not be paid and financial ruin may result, if not a serious reduction in standard of living. Expenses of the prospective alimony payer must be complete in order to demonstrate what is required for their own needs and thereby show what remains available to pay in alimony. Again, errors can be potentially devastating.

Including the obvious reoccurring expenses like mortgage, utilities, and food are usually easy, and sometimes not. Utilities vary by season, so last month’s bill may not be typical. Food expenditures are usually in excess of the major trips to the supermarket one may make. Even more elusive are such infrequent, but very real, expenses like insurance premiums, auto maintenance, home repairs, travel, pet care, medical expenses, etc. A thorough inventory of all expenditures for the past year or more is required.

Be realistic. Your expenses, or the reasonableness of their continuance, may likely be challenged during negotiations. If it becomes a difficult negotiation, a Divorce Financial Analyst may be called upon to complete a lifestyle analysis of the marital lifestyle.

Do look to the future

Be sure you agree to something that you can live with for the long term, or at least for the duration of the alimony. The payer needs to have future income at a level that can sustain the payments. The payee needs to consider the fact that inflation alone will cause current expenses to increase in price, but alimony will likely not have similar increases. A reduction in standard of living may be the only resolution to this future reality.

Among the many factors influencing alimony are the ages of the parties, together with their health, and some estimate of their working years and retirement situations. There is an element of planning involved that will require you to understand what is ahead. Anticipate that these issues will enter into the negotiations and be prepared with some concept of what your retirement will look like as well as your ex-spouse’s so you can respond appropriately.

Do have a capable attorney

There are no do-overs in divorce, so you have to get it right the first time. Choose an attorney who specializes in family law. When considering hiring an attorney, ask how much of their practice is devoted to divorce cases. I suggest that seventy-five percent or more would constitute a specialty, or at least the level of specialization that would serve you best. Compare this to selecting the best physician for what ails you. Would you choose a general practitioner or a cardiologist to do brain surgery?

Your attorney will be your negotiator. Even if you and your spouse think you “have it all figured out” (How many times have I heard that?) you do not necessarily know what the law allows and provides for each of you. Put in a legal context, you may need to start from scratch and let a professional negotiator do the negotiating. This is not the time to cut your teeth on a new skill. Even if have experience negotiating in other areas, it is unlikely that you negotiate alimony every day for a living.

Do consult a divorce financial specialist

Personal finance has become more complicated than ever before. Even if you think your situation is “simple,” our tax regulations indicate quite the contrary, especially in situations of divorce. Additionally, your divorce attorney will be the first to tell you that they are not a financial expert and not a resource for financial and/or tax advice. As a result, a relatively new specialty has emerged among financial professionals to serve your needs. Specifically, a Certified Divorce Financial Analyst has a unique combination of training fundamentals that focus on the intersection of financial planning, taxation, and basic legal principles, with respect to divorce.

When selecting your divorce financial practitioner, verify that, first and foremost, they are a bonafide financial professional, not just someone who decided to make a career change and do divorce math. Financial professionals have public records, available for your viewing, with the Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC) and/or your state Securities Commission. Secondly, verify that they have passed all tests associated with the certifications they claim and remain in good standing with all continuing education requirements to maintain their certifications.

A third area to evaluate is their experience: How long have they been a divorce financial practitioner? How many cases have they worked on? How might they have distinguished themselves as a divorce practitioner with awards or recognitions? Has the local legal community embraced them as a credible expert? Ask for references and/or evidence of such.


Don't

Do not expect to be completely satisfied

By definition, a negotiation implies that you and your spouse are starting out at very different positions and seeking a point of compromise. Do not dig you heals in and refuse to compromise. It only follows that the point of agreement is going to be something other than what either of you preferred as your initial position. In other words, neither of you have exactly what you wanted and neither will be completely satisfied.

Healthy negotiations involve gains and losses by each party. For everything you may give up, be sure to receive something else in return. Failure to do so will most certainly lead to dissatisfaction with the outcome and prolonged regret. On the other hand, mutually beneficial trade-offs throughout the negotiations may not give you everything you wanted, but the process will have been satisfying with the best possible outcome.

The negotiation may be considered successful if the goal of reaching consensus was reached.

Do not think of alimony as punishment

Alimony is about the future, not punishment for the past. From a financial perspective, there is no place for “who did what to whom” or “why we need this divorce in the first place” in the alimony negotiations. If the grounds for your divorce and your attorney’s strategy includes proving “fault” that would seem to be a separate issue. Keeping the issues separate may be a challenge, but that’s why they are called “separate issues”.

Alimony is based upon what the unmet needs of the disadvantaged spouse are estimated to be, and the ability of the other spouse to help meet those needs. While there are a number of factors which influence the determination of those needs, like the marital lifestyle, anticipated post-divorce lifestyle, income and expenses of each party, health of each party, etc., these factors vary by state and your divorce attorney will advise you accordingly.

Do not assume everything will be “OK”

Nothing will be “OK” unless you negotiate for it now, specify it in writing and have it approved by the court. Negotiate for possible future events and contingencies, even death.

If you are the anticipated payer of alimony, consider your future ability to pay what you agree to. With your attorney’s assistance, give yourself recourse in the event of job loss or illness, or any other material change in your circumstances. In most states, your obligation will cease with your death, so your estate will have no obligations. Your death, however, will not eliminate your ex-spouse’s need for support.

If you are the prospective recipient of alimony, you will want to protect yourself from loss of support due to any of the above events. Any future interruption and/or reduction in alimony may be mitigated by additional assets in the division of marital property at this time. This introduces entirely new elements into the alimony negotiations and requires an understanding of marital property division laws. As protection against loss of alimony die the death of your ex-spouse, you may want to negotiate for a life insurance policy on the payer’s life with you as the beneficiary. The insurance policy proceeds will replace the future alimony payments that were left unpaid.

Do not consider this a do-it-yourself project

Divorce is the perfect storm where complicated legal issues intersect with special tax rules and exceptions to tax rules that you thought you knew for sure. Add to that, the emotional turmoil that is to be expected. It is a reality that normally intelligent people simply do not think clearly during divorce. Brain freeze is common. This is not a time to take on a complex process, which you may have never even experienced, and think you can do it without professional assistance.

It bears mentioning that all alimony is not created equal. You will need to specify what type you are agreeing to, such as: Transitional, Rehabilitative, in solido (sometimes with variations), or in futuro. Each type has its own set of guidelines and rules under which it will be enforced. These are not negotiable, as they are the law.

Do not think any financial person can help

Your CPA’s phone number may be handy or you may have a financial planner who watches over your investments, but that does not mean they know very much about the financial issue of divorce. Assuming so would be like thinking that a plumber could replace a collapsed roof because it all has something to do with the house.

Divorce finance is a specialty area in which practitioners have specialized training and experience in financial planning, the special tax rules and exceptions to customary rules that apply in divorce, and basic concepts of family law. This is a unique combination of expertise that you will require. The most prominent certification earned by divorce financial practitioners is that of Certified Divorce Financial Analyst (CDFA).

As you negotiate for alimony, there are a host of tax traps that need to be avoided. Failure to do so could result in excessive taxes and/or penalties in years to come. One of the exceptions in circumstances of divorce is that there is no limit to the look back period available to the IRS for identifying such situations. Do not assume that your attorney will be familiar with the Internal Revenue Code. He or she has already most likely included a statement in their engagement letter advising you that they are not responsible for providing tax advice. Unless your CPA has also developed a specialty in the finances of divorce, they will most likely give you the “usual” answers to your questions, not the exceptions and special rules for divorce.


Summary
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A woman in the midst of a divorce proceeding once said “Marriage is about love. Divorce is about money.” This is so true. Alimony is one of the key money matters that must be negotiated and settled so that each ex-spouse may maintain a respectable lifestyle as close as possible to what they shared as a couple.

Alimony has been the butt of many jokes, although it is no laughing matter. Let the jokes be made at someone else’s expense, not yours. Diligent negotiations will eventually lead to reasonableness and allow each of you to go on with your separate lives. Be grateful that you are able to negotiate and maintain some control over your situation. Failure to come to some resolution will require that you each give up your power and submit your situation to the court to decide. It is quite likely that you will be less satisfied with what gets handed back to you than you were with the possibilities that were considered during negotiations. Successful negotiations will nearly always be preferred in the long run.
 


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Rosemary FrankDivorce Financial Expert, TN State Supreme Court Listed, Rule 31 Family Mediator

Rosemary Frank, MBA, CDFA™ CDFP®CDFS is a financial services professional with a specialty in the finances of divorce. She advises clients who are divorcing, and their attorneys, on the long term financial impact and consequences of proposed div...

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