If you’re thinking of ending your marriage, there’s a lot you need to learn.
The act of divorce is often the largest financial transaction of one’s lifetime.
Your net worth could easily be cut in half, said Jody D’Agostini, a certified divorce financial analyst and certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.
She said it is critical to make the proper decisions and see how your choices impact your future goals.
“Divorce is often a highly emotional process which competes with one’s ability to see the big picture and long-term impacts of financial decisions,” D’Agostini said. “Financial planning is an important part of the process. Numbers do not lie, and you can clearly see the financial outcomes for all your goals before making the final decisions.”
One of the most important issues in a divorce settlement is alimony, a court-ordered obligation in which one spouse provides the other with financial support for a certain period of time.
Here’s what you need to know about alimony in New Jersey.
Is there a formula for alimony?
Unlike child support, which is typically determined by the New Jersey Child Support Guidelines to calculate the minimum amount of child support one party should pay to the other, there is no such formula to determine alimony, said Kimber Gallo, a family law attorney with Skoloff & Wolfe in Livingston.
These include the actual need and ability of the parties to pay, the duration of the marriage or civil union and the age, physical and emotional health of the parties. It also includes the standard of living established in the marriage or civil union and the likelihood that each party can maintain a reasonably comparable standard of living, with neither party having a greater entitlement to that standard of living than the other.
There’s more, including the earning capacities, educational levels, vocational skills, and employability of the parties, the length of absence from the job market of the party seeking maintenance, parental responsibilities for the children and more.
Historically, there has been an unwritten rule – a rule of thumb – for alimony. It said one-third of the difference of the parties’ gross incomes equated to a gross alimony number, said Terryann Bradley, a family law attorney with Laufer, Dalena, Cadicina and Bradley in Morristown.
But if a spouse brings in a lot of cash, the numbers could be different.
If a divorce involves “high earners,” typically greater than $250,000 of income per year, adjustments would be expected to be made, said Kenneth White, a certified matrimonial attorney with Shane and White in Edison.
The idea of the unwritten rule will go out the window as sweeping tax changes take effect in 2019, severely impacting alimony, our experts said.
More on that in a moment.
D’Agostini said the goal of alimony is to allow both parties to continue to live an equal lifestyle after the divorce.
“Since New Jersey is an expensive state to live in, it is often difficult for both parties to maintain the same standard of living that was enjoyed during the marriage, so compromises need to be made,” she said. “The support given is not meant to enrich one party or the other and is a bridge to allow the lower earning – or unemployed – spouse the opportunity to become self-sufficient.”
Remember those 14 factors discussed earlier? They come into play when determining spousal need.
D’Agostini said the parties start by determining the marital standard of living or marital lifestyle.
“It is best to look back at the household expenses over the past year and find the monthly average for each,” she said. “This is the starting point.”
If there are enough resources to maintain the previous lifestyle, she said, then alimony will be awarded to continue it. But often, she said, adjustments will have to be made to accommodate the “new normal” of post-divorce expenses.
There may be additional child care and work-related expenses, as well as the need to employ professionals to perform tasks that were normally done by a spouse, D’Agostini said.
Bradley said under New Jersey Court Rule 5:5-2, once you file a complaint for divorce, a party must, within 35 days, file a Case Information Statement (CIS).
This document provides the court with each party’s income, expenses, assets and liabilities.
“This is a critical document,” Bradley said. “One of the purposes it serves is to set forth the expenses that each party incurs each month. These are the ‘needs.'”
For example, one part of the CIS shows the personal expenses of the parties, listing specifics such as hair care, dry cleaning, clothing, school lunch and restaurants.
Included in this list of expenses and one that is often overlooked is the need for a “savings component,” Bradley said.
“All of these expenses create the marital lifestyle and create the needs that must be reviewed in determining an alimony obligation,” she said.
Gallo said it’s extremely important to be as accurate as possible on the CIS because you’re required to sign the form, certifying that “information contained herein is true” and agreeing that “if any of the foregoing information contained therein is willfully false” the signor is “subject to punishment.”
She recommends you base all monthly expenses on actual expenditures such as those shown on bank and credit card statements and check registers. The asset and liability values should be taken from actual account statements and appraisals, too.
Tax returns and recent pay stubs will also be included, and if your circumstances change, you’ll need to file an amended CIS.
“The Case Information Statement is crucial because it is a litigant’s best chance to provide a financial snapshot of the standard of living enjoyed by the parties during the marriage, as well as how that lifestyle was funded,” Bradley said.
How earnings matter
One big sticking point for many divorcing couples is earnings.
What happens if one spouse does not work? Does that spouse have to get a job?
Bradley said it’s a well-settled principle of law that a court may impute an appropriate amount of income to a spouse in order to determine a support obligation.
Imputation of income means assigning an income to a spouse based on that person’s potential to earn income. This is often determined by considering their prior education, work experience and length of absence from the job market.
“Our case law is clear that every individual has an obligation to contribute to their own support,” Bradley said. “Every individual must make an attempt to contribute to their needs.”
That said, it’s common that one spouse took a leave from work or took a reduced work schedule to raise children. That can have a big impact on the salary that person would earn going forward, and can lead to big fights during a divorce.
Sometimes when determining the appropriate level of imputed income to the non-working or underemployed spouse, the other party may retain a vocational expert to determine the non-working spouse’s earning capacity, Gallo said.
That’s where negotiating comes in.
“In some cases, a court may order rehabilitative alimony to a financially dependent or non-working spouse to allow that party to receive alimony payments from the payor spouse while undergoing training or education that will allow him or her to become more competitive in the job market and eventually become financially self-sufficient,” Gallo said.
Lifetime alimony is no more
Lifetime alimony is alimony that is paid from one spouse to the other for their entire natural life or until the death of the paying spouse, whichever comes first.
But this is no longer on the table for divorce agreements dated after the 2014 Alimony Reform law, D’Agostini said.
“In the past, lifetime alimony was awarded for long-term marriages of about 20 years or more, or in shorter marriages where there were extenuating circumstances,” she said. “Lifetime alimony has been replaced by ‘open durational alimony’ which can be terminated due to a parties’ retirement at their Social Security Full Retirement Age, which is anywhere from age 65 to 67, depending when you were born.”
Open durational alimony is also terminated when the alimony recipient remarries or when either party dies.
“The reform bill also allows the payor to terminate or suspend alimony upon cohabitation by the recipient spouse with another person,” D’Agostini said. “This is often determined if the parties comingle finances, share living expenses or co-own property or other assets.”
The current law says that for marriages of less than 20 years, alimony cannot extend beyond the length of the marriage unless there are “exceptional circumstances,” D’Agostini said.
A three-year marriage, for example, would mean three years of alimony.
For marriages exceeding 20 years, the duration of alimony payments can extend indefinitely, subject to modification.
Common modifications include retirement or if someone loses their job and can’t find a new one for 90 days, she said.
Bradley said the 2014 change was the first time there was a limitation put on the duration of an alimony term.
Previously, she said, the duration of alimony often fell to interpretation of New Jersey case law.
“The legislature has done away with the guessing game and instead has created nearly a formula-like approach to the duration of alimony,” Bradley said. “The length of an alimony term will be directly correlated to the length of the marriage.”
New Jersey is an “equitable distribution” state, which means that property is divided between spouses in a fair and equitable manner.
That doesn’t necessarily mean there’s an equal 50-50 split, Gallo said.
The first step in determining equitable distribution is to identify which assets and liabilities are subject to equitable distribution, she said.
“Marital property is generally defined by New Jersey law as any property acquired by either or both spouses from the date of marriage to the date of the filing of the complaint for divorce,” she said.
This could include, but is not limited to, the marital residence and any other real property, bank and investment accounts, retirement accounts, automobiles, business(es), life insurance policies that have a cash surrender value, deferred compensation and stock options.
Meanwhile, Gallo said, separate property is defined as property that was acquired by either party prior to the marriage or by gift or inheritance from third parties to one spouse during the marriage that has not been commingled, or any property acquired after the filing of the complaint for divorce.
The next step is to value all of the marital property.
“Once the court determines the equitable distribution of the marital assets and liabilities, the court can then determine if the parties will receive interest or dividend income from their share of marital or separate assets which can be utilized by them to help pay or contribute to their lifestyle expenses,” Gallo said.
This unearned income will be considered by the court when awarding alimony, she said.
The assets that a spouse will receive subsequent to a divorce may impact their alimony as it creates a source from which expenses can be paid, Bradley said.
“For instance, if somebody receives $1 million in a brokerage account, the court can impute to a reasonable rate of return of perhaps 4 percent, which then would provide for $40,000 gross annually in additional income from which the spouse can pay expenses,” Bradley said.
Alimony examples to consider
We looked at some hypothetical couples to get an idea of what alimony could be expected.
For a 30-something couple, assuming a short marriage, alimony would not be extended for long, D’Agostini said.
“If the respective incomes are not dramatically different, there would be little or no alimony,” she said. “If there was a great disparity, then there would be alimony, but again, it would be granted for a short period of time.”
If the couple has very young children, the post-divorce budget needs to estimate future child care expenses and how they will be split, she said.
Then imagine a 40-year-old couple with a stay-at-home spouse. This is where the ability to return to the workforce comes into play.
“Often, I see compromises made to accommodate the children, but this can decrease the earning capability of that party,” she said. “Since the length of alimony has been shortened, it is critical to determine what income is needed to replace that loss when the time comes.”
Older couples when one spouse doesn’t work can be a huge challenge.
D’Agostini said a non-working spouse who is part of a 60-something couple may find it especially challenging to return to the workforce.
“Even if the non-working spouse does find a job, the earnings may not be sufficient to maintain his or her pre-divorce lifestyle,” D’Agostini said.
In these cases, she said, it is most important to consider which assets you are receiving from the divorce, and to see how those assets might be invested and grown to be able to provide income when the payor spouse retires.
For example, the non-working spouse may capture some equity from the marital home to supplement retirement savings.
Then there’s Social Security.
“The stay-at-home spouse often has a smaller Social Security income as they didn’t pay into the system for as long and in as great an amount,” D’Agostini said. “They are entitled to the greater of their full benefit or one half of their spouses’ benefit, but again, this is likely a lower amount.”
Tax consequences have changed
The tax consequences of alimony used to be a big bargaining tool in many divorces.
That’s because alimony payments were taxable to the payee, but deductible for the payor.
“This enabled the payor to receive the deduction and thus, ultimately pay less in overall taxes to the Internal Revenue Service,” Bradley said.
But for divorces after Jan. 1, 2019, alimony will no longer be deductible.
Any agreements prior to that date will not be impacted.
White said with the new changes, he expects to see family law attorneys and judges to spend the next six to 12 months trying to come up with a new rule of thumb.
“In recognition of the fact that alimony will no longer be a federally taxable event, I personally expect the rule of thumb to be modified down from 33 percent of the difference to a figure between 20 and 25 percent of the parties’ gross annual income,” he said.
How prenups fit in
A prenuptial agreement is a document signed before a marriage, and it details all kinds of financial considerations should the couple eventually divorce.
“We have prenuptial agreements that waive alimony in its entirety for both sides and we have prenuptial agreements that create a formula approach to alimony,” Bradley said. “People want certainty in the face of the uncertainty that divorce creates.”
Just remember that premarital agreements can be challenged by one spouse for a number of reasons and can ultimately be set aside by the court, Gallo said, so she recommends you consult with an experienced family law practitioner prior to entering into a premarital agreement.
What about further alimony reform?
The alimony reform bill was a big step for those who opposed lifetime alimony. But will there be more changes?
Bradley said many in New Jersey believe that the calculation of alimony should be similar to how child support is calculated – with a formula.
While this may be easier, Bradley said it may be very short-sighted because each case brings with it specific facts and unique scenarios.
“To suggest that an alimony formula be applied to each and every case is like trying to put a circle in a square,” she said. “One of the reasons our state is unique and provides for much more insightful support awards is the fact that our statute requires the consideration of 14 factors to fashion an alimony award.”
“It provides a party with the ability that their case is unique and there should be something other than a rote formula to determine their alimony destiny,” she said.
White said he doesn’t expect to see any major changes to alimony laws in the near future.
“The primary groups/individuals who has been seeking reform leading up to the 2014 amendments were primarily seeking to end ‘permanent’ alimony,'” he said.
Another major change was an effort to make it easier to terminate alimony if the dependent spouse is cohabiting with another individual, as opposed to that dependent spouse getting remarried, he said.
“As it took decades to secure these changes, with many hearings and lots of debate, it is unlikely that we will see any new major developments in the law concerning alimony in the next 10 or more years,” he said.
Other issues to consider
Before you dive into a divorce, consider some common errors made by couples.
D’Agostini said keeping the marital home is often a big mistake.
“If the numbers support it, then by all means, keep the home,” she said. “But if the home inhibits you from financially moving forward, to save as needed, and to have the financial means to create your new, post-divorce life, then consider other living arrangements that you could call home.”
She said any divorcing person should undertake serious financial planning to help find a living arrangement you can afford.
“It is much more important to be able to educate your children, provide for your eventual retirement, and to afford experiences that will create memories for you and your family,” she said.
In a divorce, you are your biggest asset, D’Agostini said.
“For those that do not have the same income earning capabilities, it is a time to consider ways to enhance their employability and income to make sure these lines up with their future needs,” she said. “Alimony eventually ends.”