Alimony vs Spousal Maintenance
Alimony is the common term used in reference to post-divorce payments from one former spouse to the other. In some states there are several forms of alimony; i.e., temporary alimony, rehabilitative alimony, permanent alimony, etc. Let’s take a look at Alimony vs Spousal Maintenance in Frisco, McKinney, and Dallas, TX.
Post-Divorce Payment Obligation
In Texas, there is only one possible form of post-divorce payment obligation – “spousal maintenance”. If a party to a divorce meets the qualifications set forth in the Texas Family Code, the judge can enter orders for spousal maintenance.
Contractual Alimony
“Contractual alimony” is entirely different from spousal maintenance. The Internal Revenue Code outlines the requirements for contractual alimony payments. As evidenced by the label, contractual alimony must come about through an agreement of the divorcing parties – it cannot be ordered by a Texas court.
Spousal Maintenance
Until recently, Texas was the only state without some form of post-divorce spousal support statute. The term commonly used to refer to post-divorce payments is “alimony” but the Family Code refers to those payments as “spousal maintenance.”
Rehabilitative Alimony
The spousal maintenance is similar to what other states refer to as “rehabilitative alimony”. It is limited in duration and amount with the intention being for the support to continue only for the period necessary for the former spouse to acquire education and employment that will allow him/her to become financially self-sufficient. Since that is the underlying purpose for the payments, there are rather narrow parameters for eligibility.
Eligibility Standards for Alimony vs Spousal Maintenance
The eligibility requirements for spousal maintenance are:
- A marriage of 10 years or more that ends in divorce with one party lacking sufficient property to provide for that person’s minimum reasonable need and
- The person is unable to support himself/herself due to a physical or mental incapacity
- Is unable to be employed outside the home due to caring for a child with a mental or physical incapacity or
- Lacks the earning capacity to support himself/herself.
- Family violence was committed by the other spouse.
Stay At Home Mothers
As a practical matter, the persons most often qualifying for spousal maintenance are the “stay at home mothers” who have been out of the workforce for a considerable period of time in order to raise children. Changes in business structures and advances in technology (particularly in the field of computer software) can present huge obstacles for the spouse who has been away from the business world.
A person may forfeit the right to seek spousal maintenance unless he/she is diligent in pursuing education, training and employment during the time the divorce is pending. That means following the “I won’t go to work so my spouse will have to pay more alimony” avenue is disastrous.
Limitations
In disability cases, the payments can be ordered to continue for as long as the disability continues. In those situations, the judge will probably order that there be periodic reviews of the facts to determine whether the disabling condition is still in existence.
Under the latest Texas statute, the amount and duration of payments that the judge may order have been significantly changed. If the parties were married between ten and twenty years, the spousal maintenance payments could run for up to five years. If the marriage lasted between twenty and thirty years, the payments could be extended for up to seven years. If the divorce took place after more than thirty years, the payments could span up to ten years. Further, the potential amount of the payments was increased from $2,500 per month to $5,000 per month.
Although the Texas spousal maintenance law remains very conservative when compared to the laws of other states, the revised law gives the judge more latitude to assist a former spouse who would otherwise be in dire financial straits after the divorce. (see Spousal Maintenance – Recent Changes in Texas Divorce Law)
Contractual Alimony
The structure of contractual alimony is defined within the Internal Revenue Code. Contractual alimony, as the name implies, can be placed into effect only if the parties agree to its terms. The courts in Texas can and will approve divorce settlement terms that include contractual alimony provisions, but the only form of post-divorce payments by a former spouse the court can order without an agreement of the parties is spousal maintenance.
Limitations
Contractual alimony payments must cease upon the death of the receiving party. There are some rules concerning disqualification if payments are heavily weighted on the front end of the time period or are clearly used as a substitute for child support; however, aside from those limitations, the parties are free to fashion the terms of the agreement.
What Is The Advantage Of Alimony?
In many situations, one spouse has a considerably greater earning capacity that does the other spouse and that disparity will continue after the divorce. Under the U.S. graduated income tax system, the higher wage earner is taxed at a higher percentage rate than is the lower wage earner. Contractual alimony is tax deductible for the paying party and is to be included as income for the receiving party. That means the cash along with the income tax liability associated with the payment is shifted from the person with higher earnings to the one with lower earnings.
Contractual Alimony
Contractual alimony is a very helpful settlement tool in cases of this nature because the net effect of the transfer of income and taxes creates a benefit for both parties at the expense of the IRS. For example, if the alimony payment is made by a person in the 35% tax bracket to a person in the 20% tax bracket, the IRS loses the 15% differential in tax liability. Through the deduction of the alimony by the paying party, the net cost of $1.00 paid is actually $.65 whereas the inclusion of the same $1.00 as taxable income on the receiving party’s tax return costs that person $.20 while benefitting that person with spendable income of $.80. Both parties benefit at the expense of the IRS – no one ever complains about the loss to the IRS.
Defining The Terms Of Alimony Payments
Contractual alimony is not limited by the kind of restrictions that are applicable to spousal maintenance. The period of time during which the payments are made, the amount of the payments, terms by which the payments will increase or decrease, the procedures for making the payments and all other provisions of the agreement related to alimony are devised by the parties and their attorneys. In other words, the entire structure of the alimony agreement is built from the ground up to suit the particular needs of the parties involved in the divorce.
Situations In Which Alimony May Be A Useful Tool
As stated above, the “stay at home mom” situation frequently arises in divorce cases. Quite often the father/husband earns a significant income and mother/wife will reenter the workforce at a significantly lower wage level. In some cases, the mortgage payments on the house are relatively large or the children are enrolled in private schools or an automobile needs to be purchased for a child or some other expenditure is necessary for the former spouse and children to maintain a reasonable life style after the divorce. Contractual alimony is a very helpful tool in resolving cash flow dilemmas of that nature.
Spousal Maintenance Statute
Under the spousal maintenance statute, the potential relief for the newly employed mother/wife are very limited – perhaps, to the point of being virtually no assistance at all. That is not the case with contractual alimony. For example, an alimony figure can be set to assist mother/wife in paying the mortgage or cover expenses related to the children. If the alimony is intended to cover private school tuition, the payments can be made directly to the educational institution.
Alimony Rules
Obviously, father/husband needs some incentive to make contractual alimony payments and will expect something in return for the cash. By including provisions in the agreement that the alimony payments will be discontinued if wife/mother and the children move out of the house, husband/father can be assured of where his children will reside. If the agreement states that the alimony is to be paid directly to the private school, father/husband knows that the child will continue to be enrolled in a particular institution.
Provisions can be incorporated to lower the alimony payments if the income of the paying party decreases or vice versa. Termination provisions can be included to halt payments upon the remarriage of the receiving party.
Bottom line – the terms of contractual alimony payments can be tailored to fit the circumstances of the parties.