A Negotiation Tool for Spousal Maintenance

Temporary spousal maintenance, according to DRL ' 236 (B)(5-a)(c)(1), can easily be calculated in most cases by visiting the calculator on the NYCourts.gov website. Temporary Spousal Maintenance Guidelines Calculator: http://bit.ly/1aOFNRZ'(accessed October 2013). By simply converting the temporary maintenance payment to final maintenance, the formulas may leave the payor with significantly less after-tax income than the payee, or vice-versa. Careful attention to the details of the case must be taken to ensure that the children's needs are met, and that each spouse has enough after-tax income to pay for his/her own living expenses.'

This specific issue was addressed by the Hon. Jeffrey Sunshine in the case of Scott M. v. Ilona M., 2011 NY Slip Op 21026 (Sup. Ct., Kings Cty.); “Judge Deviates from Formula Under New Divorce Laws,” D. Wise, NYLJ, Feb. 1, 2011. In that case, the husband's gross income was approximately $155,000 and the wife's income was $34,000. Applying the temporary maintenance guidelines, in addition to a deduction for child support, would have left the husband with approximately $40,000 in disposable income to meet his living expenses, and the wife and child would have been left with $78,000 to meet their living expenses. Justice Jeffrey Sunshine, exercising the judicial discretion permitted by the rules, reduced the prescribed calculation of temporary maintenance by one-third, so that the husband could “meet his pre-divorce household expenses and taking into account the parties' expenses, child care costs, and net available resources.”

The new law provides such flexibility in awarding temporary maintenance based upon consideration of certain factors, including the standard of living of the parties, the care of the children or stepchildren, in addition to others.”'

Temporary spousal maintenance calculations provide a data point for final maintenance negotiations, but the formulas are not meant to be applied to final maintenance.'

Final Spousal Maintenance

Now, let's analyze certain final maintenance scenarios, to provide an understanding of how that determination can have significant long-term financial impacts on both ex-spouses.'

Once agreement has been reached regarding the equitable distribution of the marital assets, spousal maintenance may be considered. Spousal maintenance is meant to help rehabilitate an ex-spouse who will not have sufficient assets or income to support his or her lifestyle, and will therefore need time to become financially self-sufficient, if possible.'

The determination of the amount and duration of final spousal maintenance is a critical component of a divorcing couple's financial well-being. However, many divorcing couples do not have the detailed personal budgets or firm grasp on personal expenses necessary to make informed decisions regarding the fairness of final maintenance. In many cases, final maintenance is arrived at through intense negotiation and, possibly, as part of a global financial settlement. The final resolution may not be informed by facts and reasonable assumptions about the future, but rather driven by emotion, gut-sense or quid pro quo. However, reasonable and equitable settlements may result when experienced attorneys represent each respective spouse and, in addition to providing informed guidance, analyze relevant case decisions and consult with financial experts.'

The Need-Ability Exercise

One way to help ground final maintenance in reality is to not only analyze historical information from statements of net worth, but to create financial forecasts of each spouse's income, expenses and net worth. This exercise will generally be done for settlement purposes, and it will help determine the amount and duration of the spousal maintenance obligation/entitlement. The types of forecasts presented in this article are well suited for alternative dispute resolution methods, such as mediation and collaborative divorce.'

The following steps are included in a 'Need-Ability Exercise':

1. Settle the equitable distribution of marital assets and liabilities. Develop assumptions as to investment rates of return on liquid investments, real estate, and retirement assets, etc. At the very least, there should be agreement on a range of settlement options on equitable distribution.
2. Create an expense budget/forecast for each spouse based upon his or her needs post-divorce. This should be a long-term expense budget, possibly decades long, with an adjustment for inflation each year. Include expenses for occupational training/education.
3. Create an expense budget/forecast for the children, if any. Ideally, the spouses should jointly develop this budget. This forecast will be the basis for the determination of child support.
4. Develop a forecast for each spouse's income, which is independent of any spousal maintenance. This income may be low in the first couple of years as the non-monied spouse receives additional education to re-enter the workforce. Once that occurs, his or her income should increase. Also include income from defined benefit pensions and Social Security during retirement.'
5. Once each spouse's expenses, income and net worth have been established, the non-monied spouse's monetary needs will be obvious, and the monied spouse's ability to pay spousal maintenance will be assessed.'
6. Iterate. Revisit budgets, income forecasts, and assumptions. Estimate the low and high ends of the range of spousal maintenance, which will be the basis for negotiations. Be transparent with facts, assumptions and intentions during negotiations. The exercise is as much about creating a dialogue concerning the future intentions of the spouses as it is about “crunching the numbers.”'

This Need-Ability Exercise can be performed on a simple or detailed basis.' In some cases, a simple exercise involving a forecast of one to five years is all that is needed; however, many engagements require detailed forecasts through a person's life expectancy.”

Example: Mr. and Ms. Smith's Divorce

The following detailed example of the need-ability exercise is the hypothetical divorce of Mr. and Ms. Smith, who have two children.

When Ms. Smith gave birth to their first child, the Smiths decided that she would leave her full-time job as a manager at an international corporation to be home with their child. Leaving her job greatly affected Ms. Smith's career path and future earning potential. Ten years later, at age 38, Ms. Smith thinks that she can reenter the workforce in a full-time capacity and earn approximately $35,000 in her first year. Mr. Smith's income as a general manager of a beverage distributor primarily supported the financial needs of the family over the past 10 years.'

Mr. Smith proposed the following division of marital assets and liabilities, which they both ultimately agreed to.

Mr. Smith proposed paying Ms. Smith taxable spousal maintenance of $60,000 for a period of three years, and to base child-support payments on the New York Child Support Standards Act. Mr. Smith's annual income was approximately $210,000 on the planning date. Mr. Smith estimated that his annual expenses would be $114,000, and Ms. Smith estimated that her annual expenses would be $79,000 (exclusive of mortgage payments).

Mr. Smith expects that he may not have any discretionary income remaining after paying spousal maintenance to Ms. Smith. However, he thinks that it is fair to pay her the $60,000 in spousal maintenance for three years, even though the spousal support may be overly burdensome on him in the short term. Ms. Smith agrees that Mr. Smith cannot afford to pay her much more than what he is offering, but she is not sure that even with the maintenance payments and working full time, she will be able to retire at age 65, at which point she will begin collecting Social Security payments.'

In a situation like this, Mr. and Ms. Smith's income, expenses, and net worth should be forecasted into the future and presented to them to aid all parties in negotiations. The projections are based on various assumptions, such as growth rates for retirement assets, income, and expenses. The assumptions should be grounded in professional research and common sense. The forecasted balance of liquid net worth (i.e., working capital) and retirement assets should be the primary focus when attempting to determine if a person is financially solvent. Figure 2, below, shows the forecast of Mr. and Ms. Smith's working capital and retirement assets through Ms. Smith's age of 77, based upon Mr. Smith's settlement proposal.

As shown in the Figure 1 below, during the three years that Mr. Smith is paying maintenance to Ms. Smith, his working capital and retirement asset balance declines, since his income is not sufficient to meet his forecasted expenses. Once he makes his final maintenance payment, his net worth increases for the remainder of his life expectancy, which is age 77.5. Ms. Smith's working capital and retirement asset balance remains steady for the first few years while she receives maintenance payments, but then the balance decreases to zero by age 47, at which time she would most likely need to sell her house and live on the proceeds.

Following a review of multiple scenarios that were used for negotiations, Mr. and Ms. Smith arrived at a settlement agreement, as depicted in Figure 3, below: In this settlement agreement, rather than pay $60,000 per year for three years, Mr. Smith will pay Ms. Smith $40,000 per year for seven years.

During the negotiation process, Ms. Smith decided that she will need to modify her lifestyle, and also sell the marital residence to downsize to a less expensive house. The settled amount and duration of spousal maintenance helps Ms. Smith become reasonably self-sufficient, and Mr. Smith agrees that it is not overly burdensome on him in the short or long term.

Conclusion

The formulaic approach in New York's temporary spousal maintenance guidelines may provide reasonable results for many divorcing couples; however, blindly applying the formula to final maintenance may result in unworkable rigid results. Justice Sunshine identified a situation where the formula was inappropriate, and he clearly articulated a workable solution that was an exception to the formula.

The “Need-Ability Exercise” should be undertaken so that negotiations are taking place based on facts and reasonable assumptions as to the future. It also facilitates discussions as to future earning potential, child support needs and anticipated lifestyle changes. If performed correctly, the process will help the professionals and spouses curb emotions and focus on the realities the couple must face.

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Scott M. DeMarco, MBA, CBA, CVA, CDFA, CPVA ([email protected]), is a Partner with BST Valuation and Litigation Advisors, LLC. He is a member of the Institute of Business Appraisers and Institute for Divorce Financial Analysts.'

The temporary spousal maintenance law that became effective in New York State on Oct. 12, 2010, provides formulas for calculating temporary maintenance guidelines. While these relatively new formulas determine temporary maintenance amounts until the final resolution of the divorce, final maintenance (i.e., maintenance resulting from a divorce decree) has long-lasting effects on both parties. There is no one correct answer to the question how to determine the amount of final maintenance.

If the intent of both parties is to settle the dispute, reasonable income and expense forecasts must be made so that both parties understand the range of potential outcomes of a particular maintenance amount and duration. Knowing the range of likely outcomes based upon a particular amount and duration of spousal maintenance provides a framework for negotiations. Forecasting each spouse's financial future is an exercise in determining the “need” of the non-monied spouse, and the “ability to pay” of the monied spouse. We will call this forecasting process a “Need-Ability Exercise.”

Temporary Maintenance

Temporary spousal maintenance, according to DRL ' 236 (B)(5-a)(c)(1), can easily be calculated in most cases by visiting the calculator on the NYCourts.gov website. Temporary Spousal Maintenance Guidelines Calculator: http://bit.ly/1aOFNRZ'(accessed October 2013). By simply converting the temporary maintenance payment to final maintenance, the formulas may leave the payor with significantly less after-tax income than the payee, or vice-versa. Careful attention to the details of the case must be taken to ensure that the children's needs are met, and that each spouse has enough after-tax income to pay for his/her own living expenses.'

This specific issue was addressed by the Hon. Jeffrey Sunshine in the case of Scott M. v. Ilona M. , 2011 NY Slip Op 21026 (Sup. Ct., Kings Cty.); “Judge Deviates from Formula Under New Divorce Laws,” D. Wise, NYLJ , Feb. 1, 2011. In that case, the husband's gross income was approximately $155,000 and the wife's income was $34,000. Applying the temporary maintenance guidelines, in addition to a deduction for child support, would have left the husband with approximately $40,000 in disposable income to meet his living expenses, and the wife and child would have been left with $78,000 to meet their living expenses. Justice Jeffrey Sunshine, exercising the judicial discretion permitted by the rules, reduced the prescribed calculation of temporary maintenance by one-third, so that the husband could “meet his pre-divorce household expenses and taking into account the parties' expenses, child care costs, and net available resources.”

The new law provides such flexibility in awarding temporary maintenance based upon consideration of certain factors, including the standard of living of the parties, the care of the children or stepchildren, in addition to others.”'

Temporary spousal maintenance calculations provide a data point for final maintenance negotiations, but the formulas are not meant to be applied to final maintenance.'

Final Spousal Maintenance

Now, let's analyze certain final maintenance scenarios, to provide an understanding of how that determination can have significant long-term financial impacts on both ex-spouses.'

Once agreement has been reached regarding the equitable distribution of the marital assets, spousal maintenance may be considered. Spousal maintenance is meant to help rehabilitate an ex-spouse who will not have sufficient assets or income to support his or her lifestyle, and will therefore need time to become financially self-sufficient, if possible.'

The determination of the amount and duration of final spousal maintenance is a critical component of a divorcing couple's financial well-being. However, many divorcing couples do not have the detailed personal budgets or firm grasp on personal expenses necessary to make informed decisions regarding the fairness of final maintenance. In many cases, final maintenance is arrived at through intense negotiation and, possibly, as part of a global financial settlement. The final resolution may not be informed by facts and reasonable assumptions about the future, but rather driven by emotion, gut-sense or quid pro quo. However, reasonable and equitable settlements may result when experienced attorneys represent each respective spouse and, in addition to providing informed guidance, analyze relevant case decisions and consult with financial experts.'

The Need-Ability Exercise

One way to help ground final maintenance in reality is to not only analyze historical information from statements of net worth, but to create financial forecasts of each spouse's income, expenses and net worth. This exercise will generally be done for settlement purposes, and it will help determine the amount and duration of the spousal maintenance obligation/entitlement. The types of forecasts presented in this article are well suited for alternative dispute resolution methods, such as mediation and collaborative divorce.'

The following steps are included in a 'Need-Ability Exercise':

1. Settle the equitable distribution of marital assets and liabilities. Develop assumptions as to investment rates of return on liquid investments, real estate, and retirement assets, etc. At the very least, there should be agreement on a range of settlement options on equitable distribution.
2. Create an expense budget/forecast for each spouse based upon his or her needs post-divorce. This should be a long-term expense budget, possibly decades long, with an adjustment for inflation each year. Include expenses for occupational training/education.
3. Create an expense budget/forecast for the children, if any. Ideally, the spouses should jointly develop this budget. This forecast will be the basis for the determination of child support.
4. Develop a forecast for each spouse's income, which is independent of any spousal maintenance. This income may be low in the first couple of years as the non-monied spouse receives additional education to re-enter the workforce. Once that occurs, his or her income should increase. Also include income from defined benefit pensions and Social Security during retirement.'
5. Once each spouse's expenses, income and net worth have been established, the non-monied spouse's monetary needs will be obvious, and the monied spouse's ability to pay spousal maintenance will be assessed.'
6. Iterate. Revisit budgets, income forecasts, and assumptions. Estimate the low and high ends of the range of spousal maintenance, which will be the basis for negotiations. Be transparent with facts, assumptions and intentions during negotiations. The exercise is as much about creating a dialogue concerning the future intentions of the spouses as it is about “crunching the numbers.”'

This Need-Ability Exercise can be performed on a simple or detailed basis.' In some cases, a simple exercise involving a forecast of one to five years is all that is needed; however, many engagements require detailed forecasts through a person's life expectancy.”

Example: Mr. and Ms. Smith's Divorce

The following detailed example of the need-ability exercise is the hypothetical divorce of Mr. and Ms. Smith, who have two children.

When Ms. Smith gave birth to their first child, the Smiths decided that she would leave her full-time job as a manager at an international corporation to be home with their child. Leaving her job greatly affected Ms. Smith's career path and future earning potential. Ten years later, at age 38, Ms. Smith thinks that she can reenter the workforce in a full-time capacity and earn approximately $35,000 in her first year. Mr. Smith's income as a general manager of a beverage distributor primarily supported the financial needs of the family over the past 10 years.'

Mr. Smith proposed the following division of marital assets and liabilities, which they both ultimately agreed to.

Mr. Smith proposed paying Ms. Smith taxable spousal maintenance of $60,000 for a period of three years, and to base child-support payments on the New York Child Support Standards Act. Mr. Smith's annual income was approximately $210,000 on the planning date. Mr. Smith estimated that his annual expenses would be $114,000, and Ms. Smith estimated that her annual expenses would be $79,000 (exclusive of mortgage payments).

Mr. Smith expects that he may not have any discretionary income remaining after paying spousal maintenance to Ms. Smith. However, he thinks that it is fair to pay her the $60,000 in spousal maintenance for three years, even though the spousal support may be overly burdensome on him in the short term. Ms. Smith agrees that Mr. Smith cannot afford to pay her much more than what he is offering, but she is not sure that even with the maintenance payments and working full time, she will be able to retire at age 65, at which point she will begin collecting Social Security payments.'

In a situation like this, Mr. and Ms. Smith's income, expenses, and net worth should be forecasted into the future and presented to them to aid all parties in negotiations. The projections are based on various assumptions, such as growth rates for retirement assets, income, and expenses. The assumptions should be grounded in professional research and common sense. The forecasted balance of liquid net worth (i.e., working capital) and retirement assets should be the primary focus when attempting to determine if a person is financially solvent. Figure 2, below, shows the forecast of Mr. and Ms. Smith's working capital and retirement assets through Ms. Smith's age of 77, based upon Mr. Smith's settlement proposal.

As shown in the Figure 1 below, during the three years that Mr. Smith is paying maintenance to Ms. Smith, his working capital and retirement asset balance declines, since his income is not sufficient to meet his forecasted expenses. Once he makes his final maintenance payment, his net worth increases for the remainder of his life expectancy, which is age 77.5. Ms. Smith's working capital and retirement asset balance remains steady for the first few years while she receives maintenance payments, but then the balance decreases to zero by age 47, at which time she would most likely need to sell her house and live on the proceeds.

Following a review of multiple scenarios that were used for negotiations, Mr. and Ms. Smith arrived at a settlement agreement, as depicted in Figure 3, below: In this settlement agreement, rather than pay $60,000 per year for three years, Mr. Smith will pay Ms. Smith $40,000 per year for seven years.

During the negotiation process, Ms. Smith decided that she will need to modify her lifestyle, and also sell the marital residence to downsize to a less expensive house. The settled amount and duration of spousal maintenance helps Ms. Smith become reasonably self-sufficient, and Mr. Smith agrees that it is not overly burdensome on him in the short or long term.

Conclusion

The formulaic approach in New York's temporary spousal maintenance guidelines may provide reasonable results for many divorcing couples; however, blindly applying the formula to final maintenance may result in unworkable rigid results. Justice Sunshine identified a situation where the formula was inappropriate, and he clearly articulated a workable solution that was an exception to the formula.

The “Need-Ability Exercise” should be undertaken so that negotiations are taking place based on facts and reasonable assumptions as to the future. It also facilitates discussions as to future earning potential, child support needs and anticipated lifestyle changes. If performed correctly, the process will help the professionals and spouses curb emotions and focus on the realities the couple must face.

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'

Scott M. DeMarco, MBA, CBA, CVA, CDFA, CPVA ([email protected]), is a Partner with BST Valuation and Litigation Advisors, LLC. He is a member of the Institute of Business Appraisers and Institute for Divorce Financial Analysts.'