COVID-19 Beneficial to high-income earners filing for divorce
Author: Sharon D. Liko
Published: May 1, 2020.
This may be a good time for high-income earners to file for divorce for the following reasons:
If you are an executive whose income consists of a base salary, and a significant bonus or commission, due to the economic repercussions of Covid-19, deals may not be closing and/or are being held in abeyance. This may result in a significant reduction in your income. Worse yet, your company may be contemplating layoffs, and you could be without a job.
- Reduced maintenance- Since the amount you make is directly related to the amount of maintenance you will pay, if you have suffered a decrease in income, getting divorced now would necessarily result in a reduction in the amount of maintenance, if any, that you would be required to pay. If you wait until the economy recovers and your income improves, the amount of your maintenance obligation will increase. Prior to the tax changes in 2018, maintenance was deductible by the payor dollar for dollar from gross income, and taxable to the payee. The 2018 tax changes abolished this deduction and maintenance payments are no longer deductible for state or federal income tax purposes. Although the maintenance statute builds in a 25% credit to the amount of your obligation to help offset the tax changes, if your tax bracket is over 25%, you get no relief on the marginal tax dollar. Thus, an order for a lower maintenance amount now will benefit you in the future when your income goes back to its pre-Covid-19 levels.
- Reduced child support- Since child support is based on the combined gross incomes of both parties amongst other considerations, the less money you make, the lower your child support obligation will be.
- Real Estate- If you want to stay in the marital home, keep a rental property, mountain home or ski condo, the property will need to be appraised. Your spouse will be entitled to a share of the marital equity. As this Pandemic continues, it is likely that the value of real estate will fall, and the property may be appraised at a substantially reduced value. The ability to “buy” real estate at bargain-basement prices, and hold it until after the Pandemic is over and the market recovers to its pre-pandemic levels could prove to be an excellent investment.
- Mortgage Interest Rates- Interest rates are very low making it a good time to refinance. It may be possible to refinance property at a lower interest rate, take cash out to pay your spouse her share of the marital equity, and keep your mortgage payment the same.
- Stocks, Mutual Funds, Investments- If you are going to cash out stocks, mutual funds or other investments to pay your spouse her share of the marital equity, now is a good time. Although the value of your investments has probably fallen, correspondingly, the amount subject to capital gains tax will be less.
- Business Valuations- If you own your own business or are a partner in a business, the business has to be valued so the Court can determine the marital equity subject to division. If your business is suffering right now due to the fall-out from Covid 19, its value has probably gone down as well. If you have a business that you think will recover and wish to keep, now is a good time to get it valued for the purpose of a divorce. The less your business is worth, the less you will owe to your spouse for her share.
Similarly, if you have a business that you do not think will recover, you may choose to try to sell it or dissolve it entirely. If it is sold, the value of your business will be dictated by the market. Therefore, you do not risk a battle of the experts where her expert may try to value the business at a multiple of its real worth. If it is dissolved, there may be value in selling the remaining assets. If the remaining assets such as equipment, machinery, or inventory are sold, the value will again be dictated by the market. If you are unable to sell the remaining assets, the risk that your wife can convince a judge of their worth and assign their asset value to you as part of your share of the marital estate will be minimal.