Finances in Divorce: Cash Flow

Cash flow is the third of the central issues in a divorce. To understand cash flow, you must get a concrete understanding of what it costs to live your life now and how you are paying those bills. You must also think about what it will cost to live your lives when you’re living separately—if you’re not already—and then how those bills will be paid, whether there will be a cash flow plan between the two of you and, once there is, how we characterize that plan.  The way we characterize cash flow between former spouses really makes the difference in terms of the tax implications for the family.  It helps for couples to consider their cash flow even more than their rights to child support and spousal support or spousal maintenance, which is otherwise known as alimony in New York.

Cash flow is so crucial because it shapes the way that the family handles a very real economic problem upon separation—it’s far more expensive to live separately than it is to live together. The family must suddenly address an immense issue; they must figure out how to pay their bills when they are living separately.  If the couple can join together in a problem-solving manner, then we can reach a better resolution than we could if we were just looking at it as rights and obligations.  By framing the core of divorce from a much more forward-looking approach than a backward-looking approach, the family can act in a far more productive—rather than destructive—way.

Engaging with this outlook, you have to consider a lot of questions regarding your past, present, and potential future finances. What does it cost to live your life?  What is the cost while you and your spouse are living together?  What will that look like when you are living separately?  How are your bills being paid now?  How will they likely be paid later?  What is the income that’s available to the family now, will it cover the bills once the family is living in two homes and, if not, what are we going to do about that?  Are we going to reduce expenses, increase income, and how is it likely to change over time?  You must consider if there will be cash flow between the two parties, how it will be characterized, what the impact of that will be and how will it change over time. This potential for change requires considering trigger points over the course of your lives, such as children going to college or children becoming emancipated.

When engaging with future cash flow questions, you must consider that child support and maintenance must be characterized in separate monetary processes for cash purposes. While these two areas might seem like they go hand in hand, they are categorized very differently in the eyes of the state. Child support is non-deductible to the payer and non-includable in taxable income to the recipient, but maintenance, again that’s what we call alimony in New York, is deductible to the payer and includable in the recipient’s income for tax purposes.

Why would we also want to look at them differently?  Why would anyone who might be — and I’m putting this in quotes, “entitled” to receive child support choose to get a higher amount of maintenance and a lower amount of child support rather than what you’re entitled to just after tax cash flow?  The reason is that one party will often be in a lower tax bracket when filling out a separate tax return.  Subsequently, if we can find a way to minimize the taxes that a family unit has to pay and increase the amount of money for them to keep, then that might cover some or all of the differences in the gap between the living together situation and the living apart scenario. Although you might still lose some of the economy of scale of living by separating into two households, it’s possible to make some of that up through child support and maintenance.

These tax implications are crucial to finding a way to keep the most money you can and minimizing the taxes that you pay. However, it is not something that will be worked out in your best interest in a court setting. It is your professional’s responsibility to figure out how to sort through the caveats of this system in such a way that it doesn’t result in a problematic economic situation for your family.

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