“Strategy” may not be the first word that comes to mind when contemplating an award of permanent periodic alimony for one’s client. After all, the statutory factors governing a spouse’s entitlement to alimony seem clearly defined. A practitioner would be excused in believing that the pursuit of alimony begins and ends with the careful gathering and presentation of relevant facts supporting those statutory factors.
Nonetheless, strategy considerations should come into play when pursuing alimony. Understanding human nature and tailoring one’s factual presentation and focus to the strengths of the client’s case and to the individual predilections of the trial judge can make a world of difference in the duration and amount of an alimony award. In addition, creativity with respect to tax considerations, sources of alimony payments and the use of lump sum awards in lieu of periodic payments potentially can settle alimony on better terms than through trial.
Following are some of the litigation strategies that a spouse seeking alimony should consider. A practitioner would be well advised to keep these strategies in mind from the outset of an action.
Know Your Judge
In an area such as alimony, where a judge’s discretion is king, a practitioner should endeavor to learn as much as possible about the trial judge’s predilections toward alimony awards. Relative durations of permanent periodic alimony, amounts paid, and willingness to entertain a lump sum award in lieu of a periodic award number among the judicial propensities which the practitioner should investigate.
Sources of knowledge:
- The practitioner’s own experience with the particular trial judge
- Other attorneys’ experience with the particular trial judge
- Internet search
Consider Length of Marriage
The duration of a marriage is a statutorily-specified factor to be considered in determining an alimony award. Obviously, the longer the marriage, the more likely that a court will award permanent periodic alimony. Shorter marriages, on the other hand, typically predispose a court to award rehabilitative alimony for a limited time period, or perhaps even no alimony. The practitioner should evaluate the strength of the client’s position with respect to this statutory factor and tailor his or her presentation to the court accordingly:
- Lead with and focus on duration for very long marriages
- Downplay duration and focus on other statutory factors for shorter marriages
- If possible, demonstrate difficulty or impossibility of gainful employment after shorter marriage
Valuation Strategies for the Closely Held Business
In determining whether to award alimony, and the amount of an award, a trial court must consider the financial resources of the parties. The financial resources and ability to pay of a spouse owning a closely held business raises unique issues for the attorney seeking alimony, however. Ordinarily, the business will have to be valued for purposes of equitable division of marital assets, as well as analyzing the income to be attributed to the owner/employee spouse for purposes of alimony. A forensic accountant will be required for both purposes.
With respect to alimony, the expert’s analysis must avoid “double dipping.” That is, the forensic accountant cannot count the owner/employee’s income from the business twice, both for purpose of valuing the business and for the purpose of determining the resources available to pay alimony. The expert can avoid double dipping by deducting from the valuation of the business a reasonable salary expense for the owner/employee spouse and using that reasonable salary expense solely in the calculation of the spouse’s income in furtherance of an alimony award.
The expert should utilize a reasonable salary for a person employed in the spouse’s industry/profession, rather than applying the actual salary paid to the spouse. Doing so allows the expert to properly account for any increase or decrease in the company’s retained earnings achieved through payment of an abnormally lower or higher salary to the owner/employee spouse. In addition to deducting a reasonable salary expense, the expert likely will need to deduct from the valuation of the business any individual goodwill possessed by the owner/employee spouse. Just as with salary, the expert should calculate a value for individual goodwill as a component of the resources available to pay alimony; and the practitioner should argue for inclusion of the owner/employee spouse’s excess income attributable to personal goodwill in the determination of alimony.
Lump Sum Alimony as an Alternative to Permanent Alimony
One strategy for the spouse seeking alimony concerns whether to pursue lump sum alimony rather than permanent periodic alimony. Courts construe lump sum alimony as a form of final property settlement (similar to making a determination of ownership of property where title is disputed). In contrast, permanent periodic alimony represents an allowance out of one party’s estate made for the support of the other party when living separately. Both alimony and property settlement are distinguishable from equitable property division, in which assets acquired by the parties during the marriage are allocated based on the parties’ respective equitable interests in those assets. While a court generally may not award separate property of one spouse to another as part of equitable division, the court may do so by means of an alimony award, whether lump sum or permanent periodic alimony.
While permanent periodic alimony is awarded over a period of months, lump sum alimony can be awarded in a single payment or over a period of months. If a decree states an exact amount of each alimony payment and the exact number of payments to be made without other limitations, conditions (e.g., payment until death or remarriage), or statements of intent, the obligation will be deemed one for lump sum alimony.
A lump sum alimony award may offer a number of key advantages over a permanent periodic alimony award. A lump sum award does not terminate on death of a party or remarriage of the receiving party. Nor may a lump sum alimony award be modified subsequently. Payments of lump sum alimony probably are not deductible by the payor or treated as income to the payee for tax purposes (in contrast to installment payments of permanent periodic alimony, which are deductible to the payor and taxable as income to the payee). In addition, if intended as an award for the support or maintenance of a former spouse, lump sum alimony will remain non-dischargeable in bankruptcy for the paying spouse -- just as a permanent periodic alimony award would be -- despite the lump sum award’s construction as a form of property settlement.
Strategies for the Stay-at-Home Spouse
When representing an unemployed or underemployed spouse in an action against a successfully employed spouse, both the amount and time-frame of permanent periodic alimony often become battlegrounds. The younger the stay-at-home spouse, the more likely that the gainfully employed spouse will argue for a lesser alimony payment to be made over a short rehabilitative period.
Successfully positioning the stay-at-home spouse for a larger and longer alimony award entails:
- Generally presenting client as a reasonable petitioner
- Addressing all statutory factors governing amount and duration of alimony, and supporting with evidence
- Utilizing published job market tables and/or expert testimony to show amount which client reasonably could be expected to earn and time period required to reach that income
- Possibly hiring employment expert to testify as to: limited job market possibilities for someone with client’s work experience and educational background; client’s probable low compensation level(s); a substantial time-frame needed for client to secure reasonable employment; and client’s limited potential income and limited growth in income possibilities
- Having financial expert run conservative future projections which, hopefully, will nonetheless demonstrate substantial divergence in wealth for parties; expert should use conservative interest rate in projections
- Creating a bulletproof budget based on real expenditures; consider having financial expert prepare a spending analysis for client covering the past two years to support budget and claim of actual need
- Having financial expert utilize projections of potential income or cash flow to client from hypothetical 50% equitable division of marital assets (including retirement assets) to show inadequacy of income and continuing need for alimony
Strategies for Two-Income Households
When both spouses are employed, the practitioner seeking alimony faces a hurdle of proving need despite employment. The same strategies utilized for a stay-at-home spouse should be employed, but emphasizing disparity in both need and ability.
Strategies Where a Working Spouse Nears Retirement Age
When a client seeks alimony from a spouse nearing retirement age, the practitioner faces a challenge regarding the length of potential alimony. The opposing spouse may argue his or her intention to retire shortly, with an expected reduction of income. The paying spouse consequently may request a termination of any alimony award at the age of retirement and/or for a reduced alimony award in anticipation of his or her looming retirement.
To combat such requests, the practitioner seeking alimony in the first instance could press for an alimony award based on current need and ability to pay, and projected need and ability based on a presumption of continuing employment beyond retirement age. The opposing spouse naturally would have a right to modify his or her alimony obligation upon actual retirement and a consequent change in ability to pay.
The practitioner can better support the foregoing strategy by demonstrating the unlikelihood of the opposing spouse’s retirement and/or the unlikelihood of diminished income upon retirement, based on the following factors:
- The extent to which the opposing spouse receives passive income which would continue beyond retirement (e.g., real estate rental income, pyramid distributorship business income, etc.)
- The extent to which the opposing spouse’s business requires his/her personal services and direct participation to maintain income levels, as opposed to businesses where other employees operate the company and generate cash flow for passive owner
- The stress level and travel requirements attendant to opposing spouse’s employment In addition, although difficult to successfully obtain, the practitioner should consider third-party discovery of the parties’ friends and co-workers to confirm any admissions by the opposing spouse regarding intent to continue working beyond retirement age.
If the practitioner can demonstrate that the opposing spouse will more likely continue his or her employment and/or earnings until death, then the practitioner can seek an alimony award with a duration based on the opposing spouse’s life expectancy. The practitioner should support the life expectancy claim with actuarial tables and expert testimony.
Recapture of Alimony
The Internal Revenue Service has described its alimony recapture rule and its implication as follows:
If your alimony payments decrease or end during the first 3 calendar years, you may be subject to the recapture rule. If you are subject to this rule, you have to include in income in the third year part of the alimony payments you previously deducted. Your spouse can deduct in the third year part of the alimony payments he or she previously included in income.
The 3-year period starts with the first calendar year you make a payment qualifying as alimony under a decree of divorce or separate maintenance or a written separation agreement. Do not include any time in which payments were being made under temporary support orders. The second and third years are the next 2 calendar years, whether or not payments are made during those years.
The reasons for a reduction or end of alimony payments that can require a recapture include:
- A change in your divorce or separation instrument,
- A failure to make timely payments,
- A reduction in your ability to provide support, or
- A reduction in your spouse's support needs.
When to apply the recapture rule
You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year.
When you figure a decrease in alimony, do not include the following amounts.
- Payments made under a temporary support order.
- Payments required over a period of at least 3 calendar years that vary because they are a fixed part of your income from a business or property, or from compensation for employment or self-employment.
- Payments that decrease because of the death of either spouse or the remarriage of the spouse receiving the payments before the end of the third year.
Figuring the recapture
You can use Worksheet 1 in Publication 504 to figure recaptured alimony.
Including the recapture in income
If you must include a recapture amount in income, show it on Form 1040, line 11 (“Alimony received”). Cross out “received” and enter “recapture.” On the dotted line next to the amount, enter your spouse's last name and SSN or ITIN.
Deducting the recapture
If you can deduct a recapture amount, show it on Form 1040, line 31a (“Alimony paid”). Cross out “paid” and enter “recapture.” In the space provided, enter your spouse's SSN or ITIN.
While the Recapture Rule technically offers the spouse receiving alimony a potential benefit (i.e., deduction of amounts formerly treated as income), its parameters and impact nonetheless should be taken into account by the practitioner seeking alimony under a property settlement agreement. The paying spouse and his/her counsel will not appreciate a proposal of terms for alimony which would necessitate recapture in the third year, and the mere offer of such terms may taint the perceived reasonableness of any further settlement offers made by the practitioner seeking alimony.
A divorce decree -- including one incorporating an approved property settlement agreement – can contain terms which render it a qualified domestic relations order (QDRO) under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the Code). A QDRO meeting the requisites of ERISA and the Code in part allows a court to assign a participant spouse’s interest in a retirement plan to the non-participant spouse.
A QDRO provides a basic strategic advantage for the spouse seeking alimony, since the participant spouse’s benefits in a retirement plan can constitute an additional source for payment of periodic alimony. For participant spouses entitled to receive benefits under a retirement plan, a QDRO can require splitting of the actual benefit payments made so that the alternate payee (the spouse receiving alimony) obtains part of each benefit payment. Additionally, for participant spouses who have not yet reached retirement age or satisfied the requisites for receipt of retirement benefits, a QDRO will allow early withdrawals from the retirement account without payment of the 10% penalty which otherwise would apply.