Tag Archives: support

CA Appellate Court Caps Bonus Spousal Support Payment Based on Change of Circumstances and Reasonable Expectations of Parties

Usually, a person who has been ordered to pay spousal support does not run to court seeking a reduction in support after she or he has just received a large raise — the risk being the court could order an increase in support because of the increase in the payor’s income. But in the recent case of T.C. V. D.C. a wife who was paying support to her former husband sought a court ordered reduction in spousal support after she landed a new job with much greater earnings.

Wife’s Salary Skyrockets and She Wants the Court to Reduce the Amount of Support She Must Pay?

Why would the high earning wife take this risk? Wife took this risk because she was paying her ex-husband a base support payment every month tied to her base salary, plus she was paying her ex-husband a percentage of all income that exceeded her base income — and, unfortunately for Wife, the parties’ Marital Settlement Agreement had no cap on the amount of bonus support that she paid to Husband. Think about it: Originally, Wife was paying base support to Husband of less than $1,000 plus she was paying him 10% of her excess/bonus income. At the time of the Marital Settlement Agreement, Wife’s projected “excess” annual earnings (i.e. her annual bonuses) totaled $9,900, meaning Husband would receive an additional $990 annually as an additional “bonus support” payment. Wife agreed to pay this bonus amount even though Husband acknowledged in the Marital Settlement Agreement that the BASE amount of support met his needs and his expenses at the time of the divorce were reflective of the parties’ marital standard of living. Therefore, the bonus payment was gravy as it exceeded his needs as well as the marital standard of living.

Fast forwarded a couple of years later, Wife found a great new job and her “excess earnings” were dramatically higher — $250,000 higher than before! Translation: Per the terms of the Marital Settlement Agreement, Wife’s annual bonus support payment went from $990 to $25,000!

When the Wife filed her request to reduce her support payment, Husband argued that per the terms of their Marital Settlement Agreement wife could not escape the 10% bonus payment no matter how high Wife’s excess earnings were. In layperson’s terms, Husband argued “a deal is a deal.” In legal terms, Husband argued, that there was “no change in circumstance” because at the time the parties reached their original support agreement there was an expectation that Wife’s earnings would increase.

At trial, the court found in favor of Wife. The trial court found that there was a change in circumstance and the trial court then capped the bonus payment to $990/year as that was the bonus amount Wife paid at the time of the Marital Settlement Agreement.

Husband appealed, and the appellate court agreed with the trial court that there was a change in circumstance which warranted a modification of Wife’s support obligation. The court reasoned that although at the time the parties entered into their original agreement they had contemplated an increase in Wife’s earnings, they had not contemplated such a dramatic increase in Wife’s earnings. Huge win for Wife, right? Not so fast. The appellate court went on to state that the $990 annual cap was inappropriate because the Marital Settlement Agreement stated that the base amount of support paid met husband’s needs and the parties’ standard of living. Therefore, the parties had agreed to a support payment that exceeded the parties’ marital standard of living by inclusion of the bonus provision.

Why Bonus Provisions in Marital Settlement Agreements Should Always Include Caps from the Payor’s Perspective

Generally, the payor of support wants their Marital Settlement Agreements to include a statement that the support paid meets the supported parties’ needs and the parties’ marital standard of living. Establishing the marital standard of living and husband’s needs is good practice as those agreed upon facts generally limit a supported spouse’s ability to seek a significant increase of support in the future. Fortunately for Wife, the Marital Settlement Agreement in T.C. v. D.C. included such a provision. But in this case, the problem was not the marital standard of living, it was the gravy – Wife’s agreement to pay bonus support meant she was willing to pay husband support that exceeded the parties’ marital standard of living. Therefore, when drafting Marital Settlement Agreements, if there is a bonus support provision, the support payor should insist to a cap on the amount of bonus support paid.

Ultimately, the net result of T.C. V. D.C. is Husband was not capped at the original $990 annual bonus, but the court can establish some reasonable cap, based on the parties’ expectations at the time they entered their marital settlement agreement.

The fiscal cliff deal and its impact on child support and spousal support

The amount of taxes an individual pays is one of the significant factors impacting the amount of support paid.   As a result of the fiscal cliff deal, aka the “American Taxpayer Relief Act of 2012” (“The Act”),  a high earner who pays support under an existing support obligation may be paying too much in support if the support order was made before December 31, 2012.

In general, higher taxes will reduce a payor’s support obligation, but tax deductions including breaks tax payers receive for mortgage interest, property tax and charitable contributions increase a payor’s support obligation.   The concept here is that if a person receives some tax break, he or she has more net spendable income (i.e. less money goes to taxes and more money is in her or his pocket) to pay support.

Under The Act, higher earners will be in higher tax brackets, plus they may lose some value in their itemized deductions as a result of the re-emergence of the “Pease Limitation,” which is a limitation on itemized deductions.  Pease was phased out years ago — but now is back in play with The Act.  This limit kicks in and begins limiting itemized deductions once an individual’s gross income hits the “applicable amount.”   The “applicable amount” for single filers is $250,000 and for joint filers it is $300,000.  All income over the “applicable amount” reduces your tax deduction by 3%.  For example if you file as an individual and declare an adjusted gross income of $500,000, then you are $250,000 over your “applicable amount” which means you lose 3% of $250,000 – or $7,500 of your total itemized deductions.  In other words, that $7,500 is no longer sheltered from taxes and if your support order was created prior to December 31, 2012, the calculation used most likely is incorrect – i.e. the calculation incorrectly assumes that the $7,500 is sheltered from taxes – and hence the support order is too high.

There’s more.  In addition to the Pease Limitation, The Act restores prior Personal Exemption Phase-Outs (“PEP”).  Under PEP, individuals with adjusted gross incomes over the “applicable amount” can no longer claim their full personal exemption.  For 2012, the personal exemption was $3,800.  Under The Act, for every $2,500 an individual’s income surpasses the “applicable amount”, then the individual’s exemption is reduced by 2%.  For higher earning individuals who pay support, this phase out means greater taxes which mean a pre-existing support order is probably too high.

Of course, the Pease limitation and PEP phase-out apply to all tax payers, including not only parties paying support, but parties receiving support.  The tax effects of the Act on BOTH parties must be reviewed to determine the correct level of support.