By Ron J. Anfuso, CPA, ABV, CFF, CDFA, FABFA
Historically, families’ living expenses have been used to determine a spouse’s marital standard of living (MSOL). Although this is typically the chosen method, it can be time consuming and expensive.
One issue a judge must determine is the most appropriate time period to utilize in calculating MSOL. In practice, we have found three years is typically the most reasonable period to use. However, in some instances, two, four or five years may be more sensible depending on the unique circumstances of a case.
Some Words of Caution
Be mindful of experts who may attempt to inflate the MSOL by reaching back to earlier years to capture larger incomes, or include non-recurring events. The courts have broad discretion to award spousal support that exceeds, meets, or is lower than the MSOL. Additionally, the longer the period that has passed since the date of the parties’ separation, the less relevant the MSOL becomes.
The Cases of Cheriton and Ackerman
To help determine when to use the Income Only or Subtraction method, we will consider the cases of In re the Marriage of David R. and Iris M. Frasier Cheriton, and In re the Marriage of Boris M. and Ann E. Ackerman. It was after these cases were decided that forensic accountants began looking at both income and expenses.
The marriage of Cheriton used both income and expenses to determine MSOL. This led to what is commonly referred to as the Subtraction Method of calculation. In contrast to Cheriton, the court used the average net income earned per month by the Ackerman family to determine the marital standard of living without consideration of expenses. It is of interest to point out that during their marriage, the Cheritons lived well beneath their means. On the other hand, the Ackermans (especially Ann) lived extravagantly, routinely spending their entire net income each month. (At the time of judgment, their average net monthly income was $36,000).
Cheriton and the Subtraction Method
The subtraction method uses the income less the children’s direct expenses and housing expenses (allocated back later in calculations), divided by the number of persons in the household to determine the allocable expenses to the spouse receiving support. The question of what period of time to use is subjective and should be based on the specific facts and circumstances of the case. For example, if within the last five years of the marital relationship, four years are relatively consistent and there is one year that appears to be an anomaly (i.e., an extraordinarily high or low income), it may make sense to only consider the periods that were consistent, as this more accurately establishes the normalized living expenses of the parties.
Iris and David Cheriton separated in 1994 and David petitioned for the dissolution of marriage. The parties specified that David would pay temporary child support of $689. In 1997, a few months prior to the parties stipulating to a dissolution judgment, David netted several million dollars from the sale of Cisco stock, which he and his partner received from the sale of their business to Cisco. This transaction was considered an anomaly and was not taken into account in calculating spousal support.
The Court’s Decision
In the trial court’s statement of decision, the court detailed each party’s income and assets, reviewed Iris’s income and expense declarations, and analyzed the marital standard of living. On the issue of spousal support, the court reviewed and applied various Family Code §4320 statutory factors in light of the evidence presented. However, the court did not mention David’s ability to pay, nor did any of the court’s earlier findings suggest that it recognized David’s wealth as a mandatory factor in setting spousal support.
The court properly considered both income and expenses in determining their marital standard of living. With respect to expenses, the court noted evidence from David’s accountant that put the family’s expenses at $4,800 per month, as well as David’s estimate of expenses of $6,000 per month. The court reviewed David’s tax returns for the year of separation and the three years prior in calculating the average family income, which equated to nearly $11,000 per month. As expressed earlier, the court did not include the sale of Cisco stock options in its calculations. Based on the evidence, the court set the marital standard of living at approximately $7,400 per month. Adjusting for David’s absence from the household, the court subtracted $1,400 per month. Thus, the marital standard of living was set at $6,000 per month.
Ackerman and the Income Only Method
It is relevant to point out that during their marriage, the Cheritons lived well beneath their means. On the other hand, the Ackermans (especially Ann) lived extravagantly, routinely spending their entire net income and then some each month. This contrast in spending compared to Cheriton led the court to accept an alternative method for the calculation of spousal support… one solely on income.
Boris Ackerman, MD, is a licensed physician practicing plastic surgery. Ann, on the other hand, was not employed outside the home during their marriage. Although Ann had graduated from law school, she had never passed the California state bar examination. It was deemed by the court that she was capable of working either as a paralegal, or by eventually passing the bar examination and practicing law.
When awarding spousal support, one factor the court must consider is the needs of each party based on the standard of living established during the marriage. This can be described as “reasonable needs commensurate with the parties’ general station in life.” In assessing a parties’ standard of living, a trial court may consider their income, expenses and lifestyle during their marriage. However, the court may also determine MSOL based solely on the family’s average income. Whether the parties were living beyond their means is an appropriate factor for a trial court to balance against other considerations to reach “a just and reasonable result.” (Smith, supra, 225 Cal. App. 3d at p. 490; see also Weinstein. supra. 4 Cal. App. 4th at p. 566).
Ann argued in her appeal that the trial court was in error because the court failed to consider her expenses. She expressed that because Cheriton determined the marital standard of living by taking the total family income, the trial court had the obligation to do the same.
Prior to the separation of the parties, Boris was earning an average of $61,000 per month while Ann claimed monthly expenses of $50,000. The parties were spending “everything husband made” each month. Even after separation, Ann continued to spend “everything each month and then some.” Ann asserted that many of her expenses were child-rearing obligations, which included care for their autistic child. The appeals court, however, ruled that the trial court was not bound to accept Ann’s assertion of claimed expenses. Thus, the appeals court disagreed with the wife’s belief that she needed two nannies, a cook, two baby sitters, and a personal assistant.
Furthermore, due to their lavish spending, the appeals court ruled it was appropriate for the trial court to base the MSOL solely on income. Therefore, the appeals court agreed with the trial courts’ ruling that Ann’s claimed expenses of $50,000 per month were unreasonable when compared to the $61,000 gross monthly average Boris earned prior to the parties’ separation. The appeals court agreed that the trial court acted within its broad discretion in deciding what it determined were wife’s actual needs and expenses.
We see that spending habits of the parties during a marriage need to be taken into strong consideration when determining the approach the court will accept in calculating the marital standard of living. If you have questions concerning this or any other issues concerning determining MSOL and related spousal support issues, I encourage you to contact me.