Unit 2 – Financial Consequences of DivorceProf. Paul Courtright

Unit 2 – Financial Consequences of DivorceFor this week’s Seminar, we’ll discuss the financial consequences of a divorce, including an overview of a court's determination of whether an alimony award is appropriate and how a court distributes the marital assets upon divorce in equitable distribution and community property states.

No fault divorceNo-fault divorce refers to our current system of

no-fault divorce, where the courts must first dissolve the marriage.

After the marriage is dissolved, the court will then render orders regarding alimony, property division, child support, child custody, and attorney’s fees.

No-fault divorce means that in order for the court to dissolve a marriage, one of the parties only has to allege that the marriage has broken down and that there is no hope of reconciliation; the marriage is irretrievably broken.

What is alimony?Alimony refers to when a court in a divorce

case may order one ex-spouse to pay the other ex-spouse alimony.

Alimony consists of court-ordered payments for the support of one's ex-spouse.

Alimony can be awarded in fault divorces as well as in no-fault divorces.

What is alimony?Before 1970, the only way a person could get a divorce

was to prove that the other spouse was at fault for causing the deterioration of the marriage.

If a party could not prove one of the fault grounds, then the court would not grant a divorce.

This led many couples who really wanted a divorce to commit perjury in order to convince the court that one of them was at fault.

Such fault had to be proven and had to be based on specific fault grounds such as adultery, desertion, mental cruelty, physical cruelty, incarceration, institutionalization for mental illness, or habitual intemperance.

What is alimony?If the wife brought the action for divorce and

was able to prove that the husband was at fault, then the husband would have to pay alimony. If the husband brought the action for divorce and was able to prove that the wife was at fault, then the husband would not have to pay alimony. Until 1979, wives were not ordered to pay alimony, even if they were the party at fault.

What is alimony?The U.S. Supreme Court changed this in

1979, when it ruled in Orr v. Orr that a state statute that imposed the obligation on the husband alone to pay alimony was unconstitutional because it violated the Equal Protection Clause of the Fourteenth Amendment to the United States Constitution.

What is alimony?States soon recognized after the Orr case that fault

should not have to be proven in order for parties to obtain a divorce, so states enacted no-fault divorce statutes. California led the way by passing the first no-fault divorce

statute in 1969, and the other states soon followed. Most divorces today are granted on no-fault grounds. To obtain a no-fault divorce, one party must allege that

the marriage has broken down and that there is no hope of reconciliation. The no-fault ground may be referred to as irreconcilable

differences, incompatibility, irretrievable breakdown, or irremediable breakdown, depending on the jurisdiction.

In many jurisdictions, even if it is a no-fault divorce, the court can consider the fault of one of the parties in determining alimony and property division.

Property division v. AlimonyCourts prefer to order property division rather than

alimony because dividing the property allows the ex-spouses to go their separate ways. Why?Alimony is a continuing tie between the ex-spouses.

Even though courts prefer to award property division rather than alimony, the courts recognize that in certain circumstances, there is a need for alimony.

The most common situation in which alimony would be awarded would be when the parties have been in a long-term marriage (over 10 years), and when one spouse has given up career opportunities to be at home with the children.

Another situation in which alimony would be awarded is when one spouse is ill or disabled, and is not able to work.

Determination of AlimonyThe spouses in a divorce case can agree on

the amount of alimony to be paid, and this will be specified in a separation agreement.

The spouses could also agree to waive alimony, meaning that neither spouse will seek alimony in the divorce case.

If the spouses are unable to reach an agreement regarding alimony, then the court will decide if alimony is required, and if so, how much should be paid.

Determination of AlimonyThe determination of alimony is within the

discretion of the court, meaning that the judge's determination of alimony will not be reversed by an appeals court unless it is found that the judge abused his or her discretion.

State statutes set forth the factors to be used by family court judges to determine whether alimony is appropriate, and if so, what amount of alimony is appropriate.

In some states case law, rather than statutes, is the determining factor.

Determination of AlimonyTo determine the amount of alimony, the family court

judge examines the payor spouse's ability to pay versus the payee spouse's financial needs.

Some spouses will attempt to hide their assets or will intentionally reduce their income by cutting down their hours or by quitting a part-time job, or by getting a job in which they are paid in cash "under the table."

In these situations, the payee spouse must use discovery devices to prove that the payor spouse is capable of paying more than he or she portrays.

Also, the payee spouse should check to see if the payor spouse has made any loans to family members or to friends in an attempt to reduce his or her net worth.

Determining alimony – the current trendThe trend is for family courts to no longer award alimony or to

award it only for a short period of time -- just enough time for the payee spouse to be able to secure employment to support herself or himself. In today's world, most women are able to enter the workforce to

support themselves. However, there are still situations in which family courts will

order alimony for a longer term, such as when the payee spouse has custody of young children and cannot work full time. Because the cost of daycare is so high, the court may decide to award

alimony so that the payee spouse can stay home with the children until the children can go to school. Then the payee spouse can enter the workforce and the court would then terminate the alimony.

If one spouse has stayed at home with the children for many years and therefore is unable to readily enter the workforce, alimony is also appropriate.

Alimony may also be selected if the payee spouse is unable to work because of a serious illness or a disability.

Types of alimonyPendente Lite Alimony Pendente lite is the Latin term for "pending

litigation." Pendente lite alimony is temporary alimony that is ordered if the court determines that one spouse needs financial support pending the divorce trial. Before a court can award pendente lite alimony, the other spouse must be given the opportunity to be heard in court as to why he or she should not have to pay such alimony.

Types of alimonyPermanent Alimony Permanent alimony is alimony paid by one spouse to

the other spouse on a periodic basis and terminates only upon the death, remarriage, or cohabitation of the other spouse.

Permanent alimony is not awarded very often in these days, because most women are either already in the workforce or are able to work and become self-sufficient.

Permanent alimony would only be likely in the case of a long-term marriage in which the stay at home spouse is unable to work due to age, illness, or disability.

Types of alimonyRehabilitative Alimony A spouse pays rehabilitative alimony for a limited time so the

payee spouse can pursue an education or training necessary to work and become self-sufficient. Courts usually award rehabilitative alimony nowadays.

Reimbursement Alimony Reimbursement alimony is alimony ordered by a court to

compensate the spouse who has enabled the other spouse to obtain an advanced degree or a professional license. Some courts consider an advanced degree or professional license as a marital asset and subject to property division, but other courts award alimony to reimburse the spouse who enabled the other's education. Reimbursement alimony is set at an amount designed to fully compensate the spouse who assisted the other one, so such alimony is usually not modifiable and does not terminate until the spouse is fully reimbursed.

Modification of the alimony awardTo change or modify the alimony award, the

party seeking the modification must petition the court to modify the original order.

In order to obtain a modification, the party seeking the modification must show that a substantial change of circumstances has taken place since the original order.

Even if the parties have specified in a separation agreement that alimony is not to be modified, the court will still order a modification if it is the only way to prevent the payee spouse from going on welfare.

Modification of the alimony awardAt the divorce proceeding, parties who are not then

seeking alimony often request nominal alimony so that they can later seek a modification in case of a need for alimony.

Nominal alimony is just a minimal amount, such as one dollar a year ordered to be paid as alimony.

If any alimony is awarded, the party can later seek a modification, asking the court to increase this amount if there has been a substantial change of circumstances.

However, if no alimony award is made prior to the final divorce judgment, then there is nothing that the court can modify, so the party will never be entitled to alimony.

Modification of the alimony awardEscalation clauses and cost-of-living clauses are

clauses put into separation agreements that allow for increases in alimony without the parties having to go back to court to seek a modification.

An escalation clause in a separation agreement provides for an increase in the amount of alimony in the event of an increase in the payor spouse's income.

A cost-of-living clause in a separation agreement provides for an increase in the amount of alimony to account for the increase in the cost of living.

Modification of the alimony awardAlimony can either be agreed upon by the

parties in a separation agreement, or it can be ordered to be paid by the court. In a separation agreement, the parties should address the modifiability of the alimony.

However, the court will not enforce a modification provision that would result in one spouse having to go on public assistance.

Permanent alimony can be modified if there is a "substantial change of circumstances."

Modification of the alimony awardRemarriage and alimony:

The remarriage of the payee spouse automatically terminates permanent alimony in some states.

In others, the payor spouse must go to court to terminate the alimony in such a remarriage situation.

In some states, the cohabitation of the payee spouse has the same effect as remarriage, and alimony can be terminated.

Rehabilitative alimony and lump-sum alimony awards are usually not modifiable.

Modification of the alimony awardCOBRA (Consolidated Omnibus Budget Reconciliation

Act) is a federal act that allows a nonemployee spouse to continue his or her health insurance coverage that is provided by the spouse's employer for a period of 3 years after the divorce, as long as the nonemployee spouse continues paying the insurance premium.

One of the parents will be responsible to provide health insurance for the children.

In some states, the court granting the divorce can require one ex-spouse to continue providing health insurance coverage for the other spouse.

Termination of AlimonyAlimony usually ends when the payee spouse

remarries -- in some states, termination is automatic, but in other states, the payor spouse must petition the court to terminate the alimony.

In some states, the cohabitation of the payee spouse will also terminate alimony.

Alimony also ends upon the death of either party, unless it is otherwise stated in the settlement agreement or in the divorce decree.

Lump-sum alimony paid in installments and property division awards do not end upon the death of the payor spouse.

Enforcement of Court-Ordered PaymentsIf the payor spouse does not pay alimony as

required by a court order, the payee spouse can bring a civil contempt action against the payor spouse.

If the payor spouse is unable to prove that payments have been made, the court will order the payor spouse to comply with the court order and to pay arrearages.

The payee spouse may demand attorney's fees, and the payee spouse will prevail if the payor spouse is found to be in willful contempt.

Valuation of assetsThe marital property must be valuated before the court

can determine how to divide the property. For real estate, automobiles, and personal property, the

goal is to determine the fair market value of the property. If the parties disagree on the value of an asset, an expert

should be brought in to value it, and perhaps testify in court.

For certain assets such as a pension or a business, the parties will need to find an actuary or economist.

In such cases, both sides may have experts presenting different values, and the judge will decide which is more reasonable.

Equitable Distribution v. Community PropertyMost states are equitable distribution states, which

means that after dissolution of marriage, they distribute the marital property based on fairness and not just by which spouse has the title.

In equitable distribution states the courts try to award the marital property in proportion to the contributions made by each party to the acquisition of the marital property. So the emphasis is on fair distribution, which may or may not be an equal distribution. The equitable distribution statutes in each state list factors for the court to consider in determining how to fairly and equitably distribute the marital assets.

Equitable Distribution v. Community PropertyIn the nine community property states (Arizona,

California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), property acquired during the marriage is equally divided between the spouses.

In community property states each spouse has a one-half interest in all marital property, which is called community property in such states.

The community property states assume that both the husband and wife contribute equally to the accumulation of the marital assets, as well as to the accumulation of the marital debts, and that the marital assets and marital debts should be divided on a 50/50 basis upon divorce.

Dissipation of marital assets; wasteIf the court finds that one of the

spouses has dissipated (depleted) marital assets, the court may require this spouse to compensate the other spouse for the waste.

Unit 2 SummaryDivorce brings a host of financial

consequences with it, from division of property to tax liability issues, to alimony for support and maintenance, and other issues.

Divorce is a complex area of law in which the attorney needs to advise the client fully of the long-term financial consequences the divorce will bring.

Unit 2 ConclusionQuestions on Unit 2 material? Remember to complete all Assignments for Unit 2

Discussion (See Discussion Board Posting Requirements)Quiz

Next Seminar on Unit 3 re: Custody DeterminationsDiscussionSeminarAssignmentQuiz

Have a great week!