Divorce: Principal Financial Considerations

The financial issues of divorce can be complicated. A divorcing spouse can be overwhelmed by the sheer complexity of some of the issues: Who pays what taxes, who pays how much when if one partner is buying the other’s interest in the home, who pays for child care. There are a myriad of financial issues facing the divorcing couple. Adding to the complexity is that in any divorce – except for the most wealthy – the costs of the divorce itself use up a substantial amount of the spouses assets.

To simplify matters, it is best to think about the financial issues of divorce as falling into three categories: (1) the separation of the property acquired during marriage, (2) the ongoing support of the non-wage earning or lower-wage earning spouse, and (3) the ongoing support of the minor children. Different states have different rules on these three main categories, depending on the legal traditions of those states. There are two main legal traditions in the United States that govern these financial issues: the equitable distribution (or common law) tradition and the community property tradition. Nine states of the U.S. follow the community property model; the remainder are equitable distribution states. The nine community property states are mainly those that have a Spanish or French law history, and those states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. The legal rules of a state apply to these financial considerations, unless the divorcing spouses agree otherwise, except for child support. In other words, the laws permit the spouses to agree to any separation of their financial lives that they mutually agree upon, but if they cannot agree the law will impose a set of default rules that a judge can order so that the parties can separate their financial lives.

Separation of Property

Equitable distribution states divide the spouse’s property “equitably.” Judges in these jurisdictions have broad discretion to fairly divide the property. These judges consider many elements in their decisions: the fairness of the property separation, the post-divorce financial condition of the spouses, and the economic and non-economic contributions of the spouses to the marriage. Equitable distribution – the law in 41 states – creates a fair amount of uncertainty in divorce outcomes.

Community property states provide that all property acquired during the marriage is owned by the community (both spouses own the property). Courts in these states separate community property so that each spouse gets equal value in the division of marital assets. That does not mean everything is divided 50-50, but that the total value received by each spouse is ½ of the value of the community property. Of course, the spouses in these states can agree to a different outcome, but why would they unless one spouse perhaps wants a divorce faster than the other, or agreeing to something unequal might perhaps save a lot of attorneys’ fees fighting over some item of property. Property acquired before the marriage (or during the marriage by gift or inheritance) is separate property of the spouse that owned such property before the marriage or received the gift or inheritance, and the same holds true for debts. Marital debts are divided equally, but separate property debts are the responsibility of the debtor. If one spouse’s pre-marriage debts were paid for during the marriage with marital property, then that spouse has to reimburse the marital property estate for paying off that debt. Similarly, if separate property was used to pay community property debts, then the payor spouse is entitled to reimbursement. The major problem with community property rules is that most spouses do not keep records and paperwork over the period of a long marriage. Sometimes the records cannot be reconstructed. Thus, equitable distribution division suffers from lack of clear guidelines, while community property division suffers from the usual poor record-keeping of the spouses over a long marriage. For short marriages, community property is a clear process with determinable outcomes in advance.

Spousal Support — Alimony

All states require some spousal support – also called alimony or spousal maintenance. Texas is the most restrictive and only allows spousal support (called spousal maintenance in Texas) for a minimal period of time and only in a small amount – usually enough to keep the spouse and children off welfare. The amount and duration of spousal support varies by state, but the idea is to allow the non-wage earning spouse to get back on his or her feet; however, for marriages of long duration, spousal support can continue indefinitely. Some states have default rules that apply in the absence of extenuating circumstances. For example, in California, for a marriage of less than 10 years, the default rule is that support lasts for one-half the length of the marriage. For marriages of longer than 10 years, support would last until the court determines it is no longer appropriate. In these circumstances, the paying spouse can petition the court for a reduction in support over time because the other spouse is supposed to become independent at some point. In most states, there are a litany of factors a court considers in setting support. In California there is a computer program – called the Dissomaster (named after the “Disso”-lution of the marriage) – that generates support numbers based on a number of inputs such as income, taxes, mortgage deductions, tax exemptions, and the like. If the divorced spouses are living apart, the spousal support payments are usually tax deductible to the paying spouse and includable as income for the receiving spouse.

Child Support

Financial support for minor children – known as child support – is based on a number of factors including who has custody of the children and the wage earning capacity of the respective spouses. In many cases, custody is shared between the ex-spouses so the only relevant factor is the wage earning capability of the respective ex-spouses. Child support is typically required until the child reaches an age of majority – 18 years old in most states. Some states require support through the later of age 19, or age 18 and graduation from high school. There is no requirement of either spouse to pay for college, although the spouses can agree to such an arrangement. Child support is not deductible by the paying spouse, and also not includible in the income of the receiving spouse.

Child support can vary over the lives of the children. If one spouse begins to earn more income or the paying spouse suffers a decline in income, then either spouse can petition the court for a change in the amount of child support. Even if the parties agree to a certain amount of child support, either spouse can change his or her mind and petition the court for a change in child support at any time. California uses the Dissomaster to determine the amount of child support.

Other Financial Considerations in Divorce

As outlined above, there is a legal structure that is imposed on the financial issues in divorce. There are however, a number of financial considerations that arise post-divorce that are simply divorce’s unfortunate realities. The first major consideration is that the spouses are both usually poorer after a divorce – their main cost, housing, has usually doubled or close to doubled after divorce. This presents a major burden on the spouses. In addition, they have separated their furniture and belongings, and so they will want to replace items that they did not receive in the divorce: new furniture, dishes, a bed, etc. Also, one spouse usually also must purchase health insurance or begin paying for some insurance through his or her employer, and finally, the spouses will likely have to find additional child care because both spouses will usually be working full-time or more than full-time to manage the financial demands of being divorced.

The financial consequences of divorce are often dramatic and sad. Many families have to sell their family home, uproot their lives, take the children from their neighborhoods, and downsize their standard of living. It is usually an unfortunate situation with challenging financial consequences, and one can only hope that it is for the good of the family in the end.