Clean Break

Of all the conversations I have with clients as we progress through The Fairway Process, the one about spousal support (a.k.a alimony) spurs the most accusations and arouses the most anger—not always, but a vast majority of the time.

I hear a variety of objections from the prospective payers of spousal support, most of them expressed far more colorfully than the examples I offer below:

“I supported him while he went back to school, started his own business, and then went belly-up. Now I’ve got to support him? That’s a joke.”

“So she raised the kids. How hard is that? They’re in school seven hours a day. What was stopping her from getting a job?”

“She talks about all her sacrifices. She spends her mornings playing tennis and her afternoons at the spa. Some sacrifices!”

“I’ve busted my buns for 20-some years and now he gets half my assets and spousal support? It just never ends!”

I understand that in times of stress, people are often at their worst. I never judge because I’ve been there too. And I usually let them vent because once they get all the anger off their chests, I can usually bring them around to seeing the fairness in paying some spousal support because it is fair.

[KEY INSIGHTS ]

In Canada, early 2005 brought about new spousal support guidelines. They were put forth by a committee who worked together to see if they could establish guidelines like those used for child support. These guidelines, which you can find on the Internet with relative ease, are exactly that—guidelines. They have not yet been enacted into law.

These spousal support guidelines dictate a range of monthly payments based on several factors, including:

• each spouse’s income

• the duration of the marriage

• the number of dependants, and the amount of child support being paid

There has been much discussion regarding the fairness of these guidelines, and while some judges use them, others do not. In any case, they appear to remain a long way from becoming law.

While I like the idea of standardization and do find these guidelines useful, I also believe in the prudent application of common sense, fairness, and keen financial acumen.

Through my experiences with the traditional system of divorce—both personally during my own divorce and vicariously through clients who have come to Fairway Divorce Solutions after the traditional system failed them—I have a good understanding of how spousal support is addressed in the world of position bargaining. Almost invariably, the opposing lawyers start at opposite ends of the range provided for spousal support payments and come to court prepared to fight to the bitter end with a vast and varied arsenal of arguments supporting their respective client’s position.

In The Fairway Process, we respect that each party will probably start in much the same way, digging in his or her heels at opposite ends of the spousal support spectrum. We then help them to understand and agree that the fairest outcome usually resides somewhere between the two extremes. (Not to be confused with “somewhere in the middle,” the place that mediation tends to move toward.)

Let’s now see where the Cunninghams stand on the question of spousal support, shall we?

In their case, there is a substantial difference between Adam’s and Carolyn’s income.

For the last few years, Adam has earned around $275,000. A big increase in the future is unlikely.

Carolyn, by contrast, has made about $35,000 a year over the last few years, but she agrees that this number is a bit low: She could have taken more money out of the company, but chose not to.

Looking forward, she will be working more, so $60,000 seems very fair as a projected income for Carolyn, one they are both comfortable using.

Based on their incomes and the number of years they’ve been together, the government’s spousal support guidelines prescribe a range of $0 to $5,000, which takes into account the fact that he’ll be paying child support. Clearly, zero is simply not fair, but $5,000 may be a bit steep.

Upon hearing these numbers, Adam is completely overwhelmed and feels like skipping town.

“Are you out of your mind?” he asks me. “You told me this process was fair. I’m not prepared to pay that woman even a penny more. I’ve already told you I’m quitting my job. I’m sure the tennis pro makes a good living—let him support her.”

I let him vent, and in fairly short order he calms down. Kind of.

“Okay, Karen. How much do I actually have to pay?”

I explain the numbers. “To be as fair as possible, I applied the latest government guidelines. If we take them literally, you’re looking at up to $5,000 a month, probably for a period of eight years since you and Carolyn were married for so long.”

I see the color start to rise in his face, and I’m quick to preempt another angry outburst. “But they’re only guidelines, Adam. They’re not written in stone, and they leave us lots of room to maneuver.

“Since Carolyn has a company that’s making good money, we can be a little creative here. I see a few different ways of going about it.

“One is a lump-sum payment. We offer a present value of some future payments to be paid out today—signed, sealed, and delivered with no opportunity for Carolyn to come back for more.

“Or we can offer a monthly amount that is either fixed over a term or fixed and declined over a term.

“Or you can pay her monthly for a couple of years, at which time the situation can be held up to a review. We can specify periodic reviews in your final agreement.”

I have found that most people like predictability and gravitate toward plans that will give them a sense of certainty. To these people, fixed payments over longer terms or a lump sum up front tend to be attractive options.

In cases where a spouse’s future income is going to change substantially, either up or down, fixed long-term agreements don’t make much sense and may not be fair to one of the parties. This might be the case if a spouse owns a start-up business that’s just about to take off.

It might also be unfair to establish spousal support today based on historic incomes when a family has sacrificed in the past for the potential future. (Let’s say, for example, that the husband has worked doubly hard to support the family while his wife attended medical school, from which she graduated just shortly before the divorce.) In such cases, if spousal support is deemed fair, it is best set for a couple of years and then reevaluated.

In cases where income is not likely to move a lot, I prefer fixed and finalized payments that cannot be altered in the future for any reason.

I often get the question, “What if she (or he) remarries? Can I stop paying?”

My answer is usually no unless the supported wife is a lifetime sugar-daddy pursuer, in which case ending the payments might be fair. Otherwise, I find the argument weak. I like clean deals that allow for clean breaks. What ifs tend to muddy the waters.

While Adam is convinced that the spousal support numbers are far too high even if we settle on something closer to the middle of the range, Carolyn wonders how she can possibly live off so little.

“He encouraged my lifestyle while we were married. I don’t see why I should have to suffer now.”

(What’s so great about The Fairway Process is that neither side ever hears the other side’s venting!)

Some back-and-forth dialog eventually softens their attitudes as they both begin to see that life after divorce can be rich even with less cash—another paradox that paves the way to marvelous new beginnings. Naturally, though, Carolyn is concerned about paying her mortgage. She is now beginning to see how her insistence on keeping the house is going to cost her in cash flow and lifestyle.

“Maybe I should look at downsizing after all,” she tells me. “I mean, do I really need such a big house? I’m sure I could get a decent condo or a smaller house here in the same neighborhood for a whole lot less.”

[KEY INSIGHTS]

The most empowered way to move through divorce is to ensure you are not attached to specific outcomes. If you are, you may be shutting out other (and perhaps better) alternatives.

From day one Carolyn was attached to keeping the house. Had it made no sense financially, I would have told her so and recommended a sale, but in this case it was doable, though not without some sacrifices.

Only now is Carolyn beginning to see the lifestyle changes keeping the house will entail. Now that she sees what keeping it will mean, she’s suddenly much less attached to it.

After all, what fun is it to be stuck behind four walls with no play money, no matter how big and beautiful those walls happen to be?

As we proceed with discussions about spousal support, we uncover even more opportunities to get creative.

For instance, Carolyn owes Adam an equalization payment of $119,000, and she’s open to exploring the possibility of dissolving that debt in return for a lump sum spousal support payment. (This would save her from refinancing her mortgage and incurring all the additional interest that comes with a sizable mortgage hike.)

The best way to approach this idea is to calculate how the equalization amount compares to the future value of the monthly payments. Are you ready for a little more math?

The present value of the equalization debt is $119,000. If we divide that amount into eight years’ (or 96 months’) worth of payments and apply an annual interest rate of 6 percent to determine future value, we end up with $1,550 per month.

In simplest terms, then, we can say that a lump-sum payment of $119,000 is equivalent to $1,550 per month for eight years at 6 percent. But we must also consider the tax implications. The $119,000 equalization amount comprises after-tax dollars. But spousal support payments are pretax dollars, deductible to the payer and taxable to the payee. In order to net $1,550 a month, Carolyn’s payments would need to be “grossed up” to around $2,300 a month. This, then, represents the true value of the equalization payment—eight years’ worth of $2,300-per-month payments.

Adam is happy with the lump-sum scenario. He really doesn’t need the cash right now, especially since he plans on renting for a while. And Carolyn is thrilled that she might not have to increase her mortgage as cash flow was enough of a concern already.

It’s settled, then: In lieu of monthly payments, Adam will forgo his equalization payment, and everything’s even steven. (While the range in the guidelines was $0 to $5,000, they were both okay with $2,300 per month being paid to nullify the equalization payment of $119,000.)

As the financial negotiations end, both Adam and Carolyn see that when it comes to divorce, two halves is always less than one whole. Dividing a household costs money, no matter how you slice it.

As for The Fairway Process, I was right. There were ups and downs and anger and tears, but at the end of it all, they feel they were treated fairly.

And having seen so many friends take the traditional route through divorce, they are astounded by how much they still have between them.

I know what each of them is thinking now: “Will the negotiations over the kids have a fair outcome too?”