Divorcing in a Covid/Post-Covid Era: Part II - Spousal Maintenance & Child Support

Divorcing in a COVID/Post-Covid Era - A Three Part Series

In the first part of our series, we discussed strategies for dealing with custody issues during uncertain times, reviewed how to approach the tension between pandemic safety and potential exposure risks with custody exchanges, decisions regarding in-person schooling, relocation requests, and more. Now, we share tips on resolving child support and spousal maintenance issues when reductions and loss of income are serious factors. 

Stay-tuned for our next article where we'll focus on how divorcing in a COVID/Post-COVID era  may impact the division of marital  property.

For many, the economic impact of the pandemic at the household level has complicated the issues couples face when they are looking to separate or divorce - especially those driven by income such as child support and spousal maintenance. When one or both parties in a divorce is unexpectedly under- or unemployed, the calculations for determining support and maintenance often depend on a deep dive of the facts and circumstances involving the reduction or loss of employment, the expense of two households versus one, the earning capacity of each of the parties, changing childcare needs and more. 

These income-driven concerns are a lightning rod for creative and flexible solutions built to accommodate the likelihood that the facts and circumstances could change well before those obligations are fully met. In other words, the solution to the issue today may look a lot different than it would have “pre-pandemic.” 

Here are some tips to keep in mind as you navigate issues such as child support and spousal maintenance in the midst of fluctuating income levels and economic uncertainty. 

Tip #1: Draft a flexible separation/divorce agreement

A flexible separation or divorce agreement is a great way to agree to temporary solutions that accommodate your current situation, while at the same time coming up with terms and a mechanism for recalculating issues like child support or spousal maintenance when the situation changes. 

For example, Judy and John are married with one child and would like to physically separate. Unfortunately, Judy lost her job during the pandemic and has largely been responsible for their child’s remote learning and consequential loss of daycare. Everyone, especially Judy, is eager for Judy to get back to work so that they can more easily afford two separate households, but that could take a while and no one really knows how long. While Judy remains unemployed, John’s income can just barely cover his child support and spousal maintenance obligations, as long as the two parties cut back on household expenses and continue to live on an austerity budget. It’s not an ideal nor equitable long-term solution. 

Drafting an agreement that addresses the couple’s current financial situation, acknowledges their unique circumstances (plus the fact that those circumstances are expected to change), and includes a time-frame or identifies “triggering events” whereby the couple agrees to recalculate child support and spousal maintenance is a great approach for a couple in the scenario described above. Flexible, smart drafting can be the solution that allows a couple to separate now and not be tied to terms that are difficult to modify when circumstances change. 

Tip #2: Agree to mediate issues that can be revisited later

One thing that goes hand-in-hand with flexible drafting and provisions to revisit material issues down the line is an attendant agreement to mediate those issues if, at that designated time or upon the designated triggering event, you are not able to privately agree to the new terms on your own. Without a provision to mediate (or utilize another form of alternative dispute resolution), what would typically happen is the aggrieved party would have to file a petition in court to enforce or modify the written agreement. 

Rather than enduring the pain and expense of court filings, agreeing to mediate is an excellent way for both parties to benefit from an experienced neutral who can facilitate the process of reaching an agreement in less time and less money. In mediation, both parties can present their positions, offer evidence, have an attorney present and decide themselves which is the best solution for them and their children. It is an incredible way to give parties ownership of the process from front to back.  

Tip #3: Swap “alimony” for a larger share of marital property

In some cases where a couple is experiencing financial hardship from an income and cash-flow perspective (such as in Judy and John’s example above), but there are sufficient marital assets available, couples can circumvent the issue of spousal maintenance with an offsetting distribution of marital property (note: child support obligations generally cannot be waived). 

Imagine if, over the course of their marriage, Judy and John had accumulated a significant investment portfolio that could be accessed without a tax penalty for early withdrawal (as compared to common restrictions applied to retirement assets). Given that income and cash flows are extremely tight for Judy and John right now, they may agree that John’s spousal support obligation can be waived with a proportionate and offsetting distribution of the investment portfolio to Judy, which she can use now to cover her living expenses.

Tip #4: Do not ignore the tax effect of creative solutions

Tax implications are incredibly important in any context where finances and assets are being divided. There are federal, state and local tax issues that come into play in a separation or divorce, including the taxability/deductibility of spousal maintenance, the tax basis of different asset classes (i.e. real estate, salaried income versus executive and incentive-based compensation, investment assets, etc.) and transfer taxes on sales to third parties. 

In Judy and John’s case, above, the option of swapping spousal maintenance for an offsetting distribution of marital property appears, on its face, like an obvious solution. However, Judy and John must take care to understand the ordinary and capital gain income tax implications on those withdrawals from the investment portfolio. The fair market value of the portfolio is not the same as cash-in-hand, and unless the tax effect is calculated beforehand as part of the terms of the agreement, Judy could be stuck with significantly less than what she bargained for. The same analysis applies to offsetting distributions of real estate and future income streams, such as bonus and executive compensation.

If you are considering a divorce or separation during this time and you’re not sure how your current financial situation may impact your outcome, please contact us to discuss your situation: consultation@artesezandri.com.