Did you know that a payor of spousal support who has reached normal retirement age (age 65) cannot be compelled to continue working simply to pay spousal support at the current level?
Did you know that if he or she retires, a support order may be terminated, reduced, or even reversed?
In other words, if you actually retire (at age 65 or older), you may not have to continue to pay spousal support, or you may be able to reduce your payment. In some cases, if you retire, you may be eligible to begin receiving spousal support from your former spouse (a “flip” of spousal support obligations).
To understand these concepts you first need to familiarize yourself with California’s rules on imputing income: income can be “imputed” by the court to a parent or spouse where they could be earning more income than they are currently, but are not doing so, or where they could earn a better rate of return on an investment.
Support can be based not on what you choose to earn, or invest in, but what you reasonably could earn, or invest in. For example, if you currently work as a self-employed therapist, but could work for a hospital and earn far more than you do as a self-employed person, the court can calculate the support you pay, or the support you receive, as if you worked for the hospital. The court would “impute” this higher income to you in the calculation.
This is called “imputing an earning capacity.”
Likewise, if you have a substantial sum of money in a checking account, and earning limited interest, but you could invest those monies in a prudent, non-risky investment vehicle, and earn a 4% rate of return, the court may “impute” the investment income to you in the support calculation.
However, with regards to imputing potential income from employment, there is a powerful limit to the court’s ability to do so: it is legal error to impute an earning capacity to an age-65 retired obligor based on his or her earnings when employed. This principle was laid out in case known as Marriage of Reynolds (1998) 63 CA4th 1373, 1378-1379, and further developed in subsequent cases.
This concept is important to understand not only if you are a payor of spousal support, but also if you are a recipient of spousal support: a payor’s retirement may reduce the amount of support you receive, or eliminate it, and must be factored into your financial planning. If you are a recipient of support, it is also vital to assess whether you may not only lose support, but potentially may have to begin paying it.
Buying Business Interest From Your Spouse
Did you know that in a divorce, you could “buy-out” your spouse’s interest in a business interest, and subsequently have to pay spousal support to that same spouse based on your income from the same business?
Did you know that you could “buy-out” your spouse’s interest in a retirement account, such as a pension, and subsequently have to pay spousal support to that same spouse based on your monthly retirement benefit?
This phenomenon is colloquially referred to in the California Family Law legal community as “double-dipping.”
If your spouse has a community property interest in a retirement account, the “buy-out” amount—the money needed to compensate your spouse for their interest in the retirement account—is calculated based on the potential future monthly benefits the account will likely provide. When you pay your spouse for that asset, they are being fully compensated for their loss of their portion of that retirement income.
Despite this, the same spouse can then request spousal support based on that very retirement income stream if their own monthly income is less than the retirement benefit you are receiving.
Likewise, If your spouse has a community property interest in business that you manage, the “buy-out” amount—the money needed to compensate your spouse for their interest in the business—includes a calculation of the future monthly income that business will likely provide.
Again, despite this, the same spouse can then request spousal support based on the income that the business generates, if their own monthly income is less than the business income you are receiving.
Thus, the term “double-dipping.” To some, it seems unfair to the spouse who has paid to acquire 100 percent of a business or asset, and who then must pay support based, in part, on the income stream generated by that very same business or asset.
“Double-dipping” is supported by substantial legal authority in California. In Marriage of White, 192 Cal. App. 3d 1022 (1987) at 1027, the court confirmed that “[i]t is possible, without committing the error of ‘double counting’ to treat a pension as marital property, award it entirely to the earner spouse (with off-setting award of marital property to the non-earner spouse) and then to take the earner spouse’s receipt of pension benefits into account in determining whether there should be any alimony award to either spouse.'” (In re Marriage of White, 192 Cal. App. 3d 1022 (1987) at 1027 (quoting Blumberg, Intangible Assets: Recognition and Valuation, at pp. 23-15, 23-16)). The authority allowing “double-dipping” is further developed by other case authority.
As such, when engaged in financial planning, it is vital to take into account that after a spouse has been bought out of an income-generating community property business or asset the court may base spousal support on the future income stream generated by that asset. Parties can enter into agreements that neutralize the “double-dip” trap, but absent a carefully-drafted stipulation between the parties, it remains a very real danger in divorce litigation.