15-May-17
Spousal Support in Michigan
Spousal Support: Formerly called alimony, spousal support is governed by Michigan statute and court rule. As a generalization, spousal support is awarded in the discretion of the trial judge. This decision is premised upon a multi-factor analysis, i.e. a litany of equitable facts, that guide the trial judge and used to justify the amount awarded, or its duration. Some of those facts include considered by the trial judge include: length of marriage; age; health; earning capacity; duty to support others, i.e. children; property awarded to the spouses and the income that property might generate; separate property retained by the spouses; access to other sources of income, e.g. social security; and fault i.e. whose behavior contributed to the breakdown in the marriage. The judicial finding of fault is often the wildcard in evaluating the likelihood of a spousal support award.
Types of Alimony: Spousal support comes in two basic varieties in Michigan: Periodic alimony and alimony–in-gross. There is a third, although it is not called spousal support, and it is rarely used except in unique situations.
- Periodic alimony is essentially modifiable spousal support. A trial judge retains jurisdiction over its award of periodic spousal support, which means that the judge on a motion post-divorce, can terminate, shorten, extend, increase, or decrease the amount of spousal support initially awarded upon a showing of a change in circumstances of either or both former spouses. Usually most payors of periodic spousal support abhor periodic spousal support since their post-divorce risk taking, when rewarded, might have to be shared with their former spouse. Payors usually want to be able to budget for their spousal support obligation without the fear of being dragged back into court and ordered to pay more, or pay more for a longer period of time than was originally ordered by the divorce judge A variant of periodic spousal support is a term sometimes used by divorce judges called rehabilitative spousal support, which is a form of periodic spousal support that is intended to get the former spouse back on his/her feet post-divorce. Thus, rather than award periodic spousal support for an indefinite period of time, the periodic spousal support is awarded for a specific duration, e.g. 60 months, at the end of which it terminates.
There is a lot of confusion, and thus post-judgment litigation when words like permanent spousal support are found in divorce judgments. If the former spouses do not want the divorce judge to be able to modify or extend the spousal support award, i.e. making it fixed, they must add additional language to the judgment of divorce expressly stating that it cannot be modified by the judge and that they are expressly waiving their right to have the judge revisit the spousal support award. In the absence of this magic language [set for in what is called the Staples case] the divorce judge will be deemed to possess the authority to modify, extend, or curtail the periodic spousal support award.
- Alimony-in-Gross is generally viewed as a different and rarer form of spousal support. Instead of an amount set by the divorce judge usually to be paid monthly, alimony-in-gross is usually negotiated by the spouses incident to their divorce settlement. It is a gross amount that is paid over a period of time in installments. The amount to be paid is non-modifiable by the judge, even if there is a change in circumstances after the entry of the judgment of divorce. I recall several alimony-in-gross awards that I negotiated over the years to compensate a former spouse for not receiving a portion of a closely held family business, such as the following:
Husband shall pay directly to Wife, and not through the Friend-of-the-Court, the gross amount of $2,400,000, as alimony-in-gross and not as periodic alimony, such amount to be paid by Husband to Wife in monthly installments of $12,000 a month each, paid on the first day of each calendar month, for a period of 200 consecutive calendar months.
This provision might be used in a situation where one spouse retained the family business in the divorce [with its built-in capital gains liability that will someday have to be recognized] by shifting part of that income tax burden to the spouse who does not receive the business [with its inherent capital gain tax burden] . The negotiated amount paid is intended to keep the recipient spouse in a marginally lower income tax bracket since the payments are taxable as ordinary income to him/her, and intended to come close to the capital gain tax rate that the payor will presumably someday have to face. The alimony-in-gross award can be conditioned on the recipient former’s spouse’s death to assure the income tax consequences that the spouses negotiated.
Also, with an alimony-in-gross award, usually the large gross amount must be secured, often with life insurance on the payor’s life and mortgages, to assure timely payment of each installment over several years. Most periodic alimony awards are enforced with a petition filed with the divorce court that compels the payor to show cause why he/she should not be held in contempt of court for not abiding by the court order to pay periodic spousal support. In rare cases, i.e. a clearly demonstrated bad attitude, the payor can be placed in jail until they bring their support payment obligation current. There is some debate if an alimony-in-gross award can be enforced by resort to the contempt powers of the divorce judge.
- Tax Deductible Payments are a variation of alimony-in-gross, but without statutory or court rule authorization, something that I used infrequently in the past for payors who did not want to get dragged back into court each time that they looked funny at their former spouse.
For a payment of support to be income tax deductible, the income tax Code requires that the payment be contingent on the death of the recipient former spouse. Loosely translated, for the payments to be deductible by the payor, the payments must stop if the recipient dies. Which is why, in order to make the payments deductible, every alimony provisions clearly states ‘payor shall pay to their former spouse the ordered amount each month, contingent however upon that former spouse’s death, at which time this spousal support obligation shall immediately terminate.’ If the judgment provision is silent about terminating on the recipient’s death, then the spousal support obligation is not tax deductible by the payor.
This third version is support exploits the tax Code death contingency, but it refrains from using the terminology spousal support. A provision in a divorce property settlement agreement, but not a consent judgment of divorce, might appear as follows: Husband shall directly pay to Wife, as tax deductible payments to Wife pursuant to IRC 71(b) the amount of $5,000 a month, on the first day of each month, for a period of 60 consecutive months or until Wife’s death prior to the end of the 60 month period. These payments shall be tax deductible by Husband and taxable to Wife.
The goal is to assure the payor the income tax deduction for the payments made. The reasons for not calling it spousal support include: (i) the payment amount is not modifiable in the event of a future change in circumstances- this enables the payor to budget their payments with certainty; and (ii) since it is a property settlement award, and not called spousal support, a trial judge cannot resort to the contempt powers of the court to enforce a tardy payment. Rather, the recipient must initiate a separate civil lawsuit for breach of contract, rather than merely file a petition to hold the payor in contempt of court in the post-divorce of divorce proceedings in front of the same judge who entered the judgment of divorce, which is much cheaper and swifter than filing an entirely separate lawsuit, where the defendant might demand a jury trial, rather than appear before the former divorce judge ‘hat-in-hand’ asking for forgiveness.
In sum, the tax Code only ties the deduction to the survivorship of the recipient; it is not tied to the label spousal support. If there is a lot of hostility between spouses, aka a lack of trust, and the payor never wants to get dragged back into court, then the payor will try to use a tax deductible payment provision in the property settlement agreement and stay as far away from the label spousal support as possible.
Income Tax Deduction: The income tax deduction of the support payments is controlled by the Tax Code, meaning IRC 71(b). As noted above, the tax deduction is premised upon the payment obligation terminating on the recipient spouse’s death (arrearages at the time of death can be collected and still be deductible by the payor.) Sometimes lawyers mix up the contingencies believing that some contingencies assure an income tax deduction when they do not. For example, if the obligation to pay spousal support is contingent on the recipient not remarrying, yet it remains silent on its termination on the recipient former spouse’s death, there is a good chance that the spousal support that is paid is not going to be income tax deductible to the payor. Termination on death is the key to the deduction, regardless of any other conditions that may be imposed on the obligation, such as remarriage, cohabitation, or exceeding some reportable earnings floor.
There is also a tax Code provision that is designed to avoid ‘front-end-loading’ of deductible spousal support payments during the first three years after the divorce judgment is entered. Generally the amount paid cannot be $15,000 a year less than the prior year’s alimony payment, otherwise some of the tax deduction claimed by the payor will be recaptured, meaning less tax deduction will be permitted.
Last Word: Most spousal support obligations are not dischargeable in bankruptcy if the payor later files for bankruptcy. But of a challenge, somewhat, is that the bankruptcy courts are directly to not blindly follow the lables uses in a divorce judgment. Thus, a direction imposed on a former spouse in the form of a court order to pay the mortgage on the dwelling occupied by their former spouse might be treated by the bankruptcy judge as an indirect spousal support obligation which would not be dischargeable. Similarly, a tax deductible payment obligation in a property settlement agreement might be treated by a bankruptcy judge as a financial debt that might be subject to discharge in bankruptcy. Because bankruptcy courts are not obligated to follow language used by state divorce courts, often the intent whether to have an obligation dischargeable in bankruptcy, or not, is added to the judgment of divorce or the property settlement agreement. While that gratuitous language in the divorce settlement documentation is not necessarily binding on the bankruptcy court, it is viewed as a helpful guide to the bankruptcy judge.
More than you wanted to know about spousal support I concede, but better you know some of the ‘tricks of the trade’ lawyers use, and some of the negotiating reasons for choosing one form of spousal support over another.