(973) 403-9200
By Charles F. Vuotto, Jr. and Brian G. Paul
The Tax Cuts and Jobs Act (TCJA) is the most significant tax legislation in the last few decades, generating much discussion both in and outside the context of family law. With the change in the tax laws, family law professionals including but not limited to lawyers, accountants and perhaps some judges are straining to convert the prior perceived “rule of thumb” regarding alimony to its post-tax equivalent. These efforts have resulted in conclusions that appear to fall within the range of 20% to 25%. These percentages have been arrived at by reducing the “rule of thumb” 1/3rd rate (33.33%) by a range of presumed effective tax rates running from about 25% to 40%. However, one must ask why. Although there is an argument that more guidance is needed as to how to fix the duration and amount of alimony awards, for over 175 years, New Jersey courts have resisted the temptation to use mathematical formulas or bright-line rules to determine the amount or duration of an alimony award. Nevertheless, such “rules of thumb” have proliferated with great frequency; even by those who have argued vociferously for their rejection. In light of this current push to arrive at the “post-tax rule of thumb”, it seems an apropos time to review the applicable pronouncements from our various courts.
In order to ensure that an alimony award does not punish a payor spouse, nor result in an unjustified windfall to a payee spouse, New Jersey Courts have continuously refused to sacrifice customized decisions rendered through a careful analysis of the particular facts of the case for the use of a mathematical formula that would result in the same amount and duration of alimony being awarded in marriages of comparable duration or earning capacity.
In fact, as early as 1838, Chancellor Pennington held in the case of Richmond v. Richmond[i] that “it is impossible to frame a fixed, general rule for allowances of this character which would work justly in all cases; every case must depend very much on its own peculiar circumstances.” Turi v. Turi[ii].
Accordingly, whenever litigants or attorneys have attempted to advocate to our appellate courts for a strictly formulaic approach to alimony in New Jersey, such as awarding a non-working spouse one-third of the other spouse’s income (or a working, yet still dependent spouse, one-third of the disparity between the parties’ respective incomes) our appellate courts have consistently rejected such notions. For instance, nearly sixty-five years ago, in Turi[iii], the Appellate Division admonished:
“It may be noted, in passing, that the observation made in Dietrick that the amount allowed the wife is “usually about one-third of the husband’s income” — see Hebble v. Hebble, 99 N.J. Eq. 53, 56 (Ch. 1926), affirmed Ibid. 99 N.J. Eq. 885 (E. & A. 1926), and Andreas v. Andreas, 88 N.J. Eq. 130, 133 (Ch. 1917), for a similar statement — has lost any significance it may have had in view of changing economic and social conditions. The one-third standard has never been more than a guide, and has been referred to as “not a rule, even in a loose sense.” O’Neill v. O’Neill, 18 N.J. Misc. 82, 93, 11 A.2d 128 (Ch. 1939), affirmed 127 N.J. Eq. 278 (E. & A. 1940). This criticism is justified in view of the provisions of N.J.S. 2A:34-23 and 24, whose language has been followed by our highest courts. As observed in the O’Neill case, to follow the one-third rule would result in the total obliteration and undiscriminating exclusion of the many other factors that should be considered and which have more or less importance, depending on the circumstances of particular cases.” (Emphasis added).
See also Capodanno v. Capodanno[iv] (New Jersey Supreme Court rejecting use of one-third rule and instead focusing on the particular facts of the case before it).
There appears to be one out-lying unpublished case of recent vintage that refers to the rule of thumb without negative commentary in the context of a malpractice action. (see Smith v. Grayson[v]) However, in that case the court simply referred to the malpractice expert’s use of the rule of thumb when addressing the duty of care in that matter and determined that it was sufficient to avoid the granting of summary judgment dismissal of the plaintiff’s case. Importantly, because the case was at the summary judgment stage, the expert had not yet been cross-examined on how the so-called rule of thumb could possibly constitute a duty of care when it is inconsistent with the well settled case law discussed above.
Indeed, our appellate courts have repeatedly admonished that the amount of any alimony award, whether pendente lite, at final hearing or post-judgment, is determined by performing the following three-part test: (1) Determine the dependent spouse’s reasonable needs in light of the marital lifestyle; (2) Determine the dependent spouse’s ability to contribute to their own expenses; and (3) Determine the amount of alimony the payor spouse has the ability to pay towards the dependent spouse’s monthly shortfall. Crews v. Crews[vi]. See also Gross v. Gross[vii](Appellate Division noting that pendente lite support is calculated based upon the wife’s needs in light of the standard of living enjoyed when the couple was living together and husband’s ability to pay); Miller v. Miller[viii](New Jersey Supreme Court noting that the standard that governs the modification of alimony is the same standard that applies at the time of original judgment).
Proper application of this three-part test to determine the amount of an alimony award requires an analysis of virtually all of the statutory factors, except factors 2 and 13, which are more relevant to the duration of an alimony award. For instance, consider the following:
Factor 1 (need and ability to pay) is covered by part 1 and 3 of the test;
Factor 2 (duration of the marriage) goes to duration;
Factor 3 (Age, physical and emotional health) mostly goes to duration, but also can be relevant to ability to support oneself (part 2 of test) and obligor’s ability to pay (part 3 of test);
Factor 4 (marital lifestyle) is covered by part 1;
Factor 5 (earning capacities) is covered by part 2 and part 3;
Factor 6 (length of absence from job market) is covered by part 2 (when determining whether to impute income and how much) and also goes to duration;
Factor 7 (parental responsibilities) again is covered by part 2 (when determining whether to impute income and how much) and also goes to duration;
Factor 8 (time and expense to acquire education and training) is covered by part 2 and goes to duration, while ability to acquire future capital assets is covered by inclusion of a savings component in part 1 of the test and when deciding whether or not to allow investment income to be accumulated as additional savings (part 2 of test);
Factor 9 (History of financial contributions and career interruption) is covered by part 2 (when determining whether to impute income and how much) and also goes to duration;
Factor 10 (Equitable distribution ordered) goes to part 2 (whether to impute investment income from distributed assets when determining ability to support oneself), whereas paying out an equitable distribution award through the payor’s future earnings goes to part 3 (ability to pay);
Factor 11 (Income available to either party through investment of assets) goes to imputing income to investable assets and is covered via part 2 and 3;
Factor 12 (Tax treatment) is factored in by using after tax dollars when performing parts 1, 2 and 3 of the test;
Factor 13 (nature, amount and payout of pendente lite support) goes to duration.
In summary, to the extent rules of thumb were used (contrary to case law) to calculate alimony, they cannot apply any longer. Although the search for greater guidance in setting the amount and duration of alimony should not be abandoned, it is suggested that the best short-hand approach (if such is sought) is to begin the analysis with an assessment of the parties’ post-divorce, after-tax cash flows (after removing child-related expenses and child support from the analysis) and their respective post-divorce projected budgets computed and analyzed in conjunction with the statutory factors under N.J.S.A. 2A:34-23 (b). The old supposed “rule of thumb” (that wasn’t law and expressly rejected) should be rejected in favor of applying the statutory factors via the three-part test. We shouldn’t try to translate an old disallowed rule to fit the post- TCJA world. Therefore, the authors suggest utilizing the Crews three-part test through the following 7-step process to determine the amount of alimony (modified as needed to fit the particular facts of any case):
While there has been much concern and apprehension regarding the impact of alimony becoming non-taxable, in many ways dealing exclusively in terms of after-tax dollars makes application of the Crews three-part test much easier to apply when determining the amount of alimony in a manner that is consistent with our case law. Thus, rather than looking to a non-existent one-third rule (or its new equivalent) that our appellate courts have repeatedly disavowed, counsel should instead look at and apply all of the statutory factors via the Crews three-part test and determine an alimony award that is fit, reasonable and just in light of the particular facts of the case.
[i] 2 N.J. Eq. 90, 92 (Ch. 1838)
[ii] 34 N.J.Super. 313, 321 (App. Div. 1955)
[iii] supra, 34 N.J. Super. at 321-22
[iv] 58 N.J. 113, 119-20 (1971)
[v] A-1072-10T4, 2011 WL 6304145, at *3 (N.J. Super. Ct. App. Div. Dec. 19, 2011)
[vi] 164 N.J. 11, 32-33 (2000)
[vii] 22 N.J. Super. 407, (App. Div. 1952)
[viii] 160 N.J. 408, 420 (1999)