The latter half of the 1990s has seen a dramatic increase in downsizing, improved early retirement programs, and voluntary early retirements in order to enjoy the “golden years.” For the past 10 years, appellate courts have made it clear that a spousal support payer who chooses to take advantage of early retirement is still liable for imputed income, based on his or her earning capacity.
Another trend has emerged in recent years, toward limiting and reducing the spousal support burden on payers. The Legislature provided a powerful example of that trend in its 1996 amendment to Family Code § 4320 (c), which defines a reasonable period of time to determine that the duration of spousal support is half the duration of the marriage. At the same time, the Legislature amended Family Code § 4330, to require the lower courts to admonish the parties of their obligation to “make reasonable efforts in good faith to be self-reliant.” This amendment makes no distinction between supported spouses and maintaining spouses.
These two trends provide the dual focus of the recent In re Marriage of Reynolds appeal decision (5/19/98) 98 Daily Journal DAR 5279. Prior to Reynolds, no court had addressed the question of how to determine whether income can be imputed where the paid spouse retired at full or mandatory retirement age.
The Reynolds court, which ruled on this, received considerable attention for its statement that, “in the case of a bona fide retirement, a supporting spouse should not be forced to work.” Thus, while a spousal support payer cannot retire prematurely without risk of being charged an income attributable to earning capacity, the same is not true for a payer who retires at normal retirement age or after.
In Reynolds, the supporting spouse was 67 at retirement; his retirement was deemed “genuine”. In contrast, in the previous case of In re Marriage of Sinks (1988) 204 Cal.App.3d 586, 251 Cal.Rptr. 379, the supporting spouse was 62 when he retired with a full pension; however, the appeals court stated that the trial court held that her voluntary withdrawal was an attempt to evade her support obligations.
The Sinks panel noted that had the paying spouse’s motives not been suspect, the event would have presented a first impression issue, if a spouse who is eligible for retirement is required to continue working to provide spousal support. It was that issue, still a first impression regarding payers of normal retirement age, that the Reynolds court grappled with.
In In re Marriage of Stephenson (1995) 39 Cal.App.4th 71, 46 Cal.Rptr.2d 8, the retiree was 59 years old and decided to accept his employer’s offer of early retirement in the form of a lump sum “golden squeeze of hands “. The appeals court held that when a supporting spouse chooses to retire early, income is imputed based on earning capacity. even when, as in that case, the spouse’s employer practically forced him to retire and his motives were not suspect. The panel did not discuss the case of the spouse who retires at the normal retirement age, instead of taking early retirement.
Yet despite the fact that Reynolds broke new ground by first addressing whether a supportive spouse could retire at age 65 or older without risking being charged with imputed income, that decision is most notable for his penultimate paragraph, which deals with treatment of private retirement accounts like IRA and Keoghs. Incorrectly quoting In re Marriage of Olson (1993) 14 Cal.App.4th 1, 17 Cal.Rptr.2d 480, the Reynolds panel wrote:
Only the investment income, not the investment capital, should be available to pay spousal support, especially in this case if the retirement assets in question represent the Husband’s residual portion of the community property that was awarded to him as part of the dissolution. [98 Daily Journal D.A.R. at 5281]
Olson’s decision held, among other things, that after the paying spouse turns 59½, a trial court can impute income to the payer based on the ability to make withdrawals from an individual retirement plan account. In one sentence, the Reynolds court created a conflict of authority, not just with Olson, but with two cases (including a California Supreme Court case) that hold that retirement accounts that were previously community but have been split are available for the payment of spousal support. .
In Olson, Judge Donald B. King addressed a first impression issue, the extent of the discretion of the lower courts to consider accruals in a retirement plan when setting spousal support. The court limited its discussion to individual retirement plans such as IRAs, Keoghs, and deferred compensation plans, and then considered federal and state law relating to such withdrawals from such retirement plans.
The Olson court then defined divided support payers and trial court discretion into three different classes, based on age of payment:
1. When the payer is under the age of 59-1 / 2, it would be an abuse of discretion for a trial court to order the amount of spousal support based on the funds of a retirement plan, since if those funds they will retire to be subject not only to taxes as ordinary income but to a fine of 10 percent.
2. When the payment is between 59-1 / 2 and 70-1 / 2, the payer can make withdrawals from the plan without being subject to the 10 percent penalty. Therefore, if the payer chooses not to make such withdrawals, the court has the discretion to consider whether or not to charge reasonable withdrawals as additional income for the purpose of fixing spousal support. However, in the exercise of its discretion, the trial court must consider public policy that favors the provision for retirement by allowing plan funds to grow tax-free; That policy must be weighed against all other circumstances in the case as set forth in Family Code § 4320.
3. When the pay is greater than 70-1 / 2 years, the plan participant is penalized if he does not make the minimum withdrawals based on life expectancy. Once the participant reaches the age of 70-1 / 2 years, the court has the discretion to impute as income an amount greater than the mandatory minimum withdrawal, but must be cautious in doing so in light of the public policy considerations discussed in the previous paragraph.
Reynolds also noted that the trial court could not impute income based on retirement funds “especially in this case where the retirement assets in question represent the Husband’s residual portion of the community property awarded to him as a party. of dissolution “. This statement flatly contradicts the Supreme Court statement in In re Marriage of Epstein (1979) 24 Cal.3d 76, 154 Cal.Rptr. 413, as well as In re Marriage of White (1987) 192 Cal.App.3d 1022, 237 Cal.Rptr. 764.
The White court reversed the trial court for refusing to consider the husband’s retirement income from a previous community property pension when determining his ability to pay spousal support. The White court cited and relied on the Supreme Court ruling in Epstein, which held: Furthermore, even if a future spousal support award must come from half of the husband’s community property, there is no requirement that excludes such property as a source of that support. [24 Cal.3d at 91 n.14]
Since Reynolds involved a reversal of the trial court’s ruling, and not just an assertion of the trial court’s exercise of discretion, it will obviously have a significant impact on spousal support orders where the payment is over 65 and seeks reduce spousal support after retirement. . As a result, sustained spouses who have not been able to become self-sufficient and who were confident of having a predictable income stream from spousal support in their “golden years” may find that, through reverse alchemy, those years have been turned to lead.