Alimony reform is sweeping the country, with many state legislators seeking to overhaul antiquated rules that govern how much, for how long and under what circumstances spouses can receive alimony payments. The reforms are meant to give judges very specific guidance in regard to this issue, replacing the broad discretion that judges currently have to decide the terms of alimony in the specific cases that come in front of them.

“When I look at alimony reform, particularly in Massachusetts, it’s a situation where the law was extremely antiquated because there was little ability to adjust alimony based on specific circumstances,” says Linda Stirling, a senior vice president and financial consultant with RBC Wealth Management in La Jolla, California. “Some states are just coming into the twenty-first century. That isn’t the case in other states like California, where the code is very specific.”

In the vast majority of cases, judges and state laws don’t decide alimony terms in specific divorces. That’s because most cases are settled privately between the parties involved and their legal counsel, says Tim Spiess,  partner and chairman with EisnerAmper’s Personal Wealth Advisor division in New York. However, attorneys and their clients are guided by what’s permissible under state law, so alimony reform has the potential to be extremely influential as to the actual outcome of divorce cases going forward, he adds.

While alimony reform is long overdue in many states, in some cases it’s gone too far, says Roberta Stanley, a partner with Brinkley Morgan in Fort Lauderdale, Florida. “It’s not good for legislators to allow extreme positions and specific situations to dictate how we legislate,” she continues.

“I’ve been in practice for 29 years and each case has a specific fact pattern, they are all unique. It doesn’t work well when legislators try to take away discretion from judges, because judges are in a position to take all the facts into consideration and make a decision based on the specific facts,” she adds. “And when there are different options given by the laws for alimony, lawyers have more of an ability and incentive to settle because it’s not, for example, permanent alimony or nothing.”

For wealth managers dealing with specific divorce cases, all that matters is the law in the state where the divorce is taking place, notes Spiess, because state law governs divorce and alimony provisions. So it’s incumbent upon wealth managers to have some familiarity with divorce laws and alimony rules in their state and to forge strong relationships with the most knowledgeable and skilled family law attorneys so they can offer informed referrals, says Stirling.

Alimony "ABCs"

Throughout history, alimony has existed to provide divorced spouses who lack the ability or skills to be financially self-sufficient without financial support to pay their day-to-day bills. “Alimony is intended to benefit a recipient spouse, who, basically, in the purest sense had no assets and no means to support themselves,” says Spiess. “And if that person’s financial or living situation changes, the evolution of alimony generally holds that the payer, the former spouse, should not be obligated because the recipient is now demonstrated some level of self-sufficiency.”

Prior to recent alimony reform movements, only three states – Pennsylvania, Colorado and New York - were extremely specific about how much alimony divorcing spouses would receive based on both spouses’ incomes, according to Spiess. Those states have a formula that spits out a specific number while other states provide guidelines - some very general, others very specific.

Alimony is generally used under several circumstances: when an older spouse has never worked and doesn’t have the ability or capacity to work, when a spouse has been out of the workforce or has been underemployed and needs time to retrain and/or when a spouse is raising minor children, says Stanley. Rehabilitative alimony is the most common, where a spouse goes back to school for training or to upgrade skills or needs time to find a full-time job at a better salary. Frequently, because of minor children, spouses are given additional years of alimony until the children are grown, Stanley notes.

Alimony reform specifics

Under recent alimony reform efforts, legislators are spelling out more specifically the circumstances under which various types of alimony are suitable and how long the terms of alimony should be, says Spiess. Of course in any divorce, alimony is just one part of the picture along with the equitable division of property, and when attorneys talk to each other about a settlement, both alimony and property division are negotiable; the spouse could get more alimony, for example, and less in property or vice versa, he adds.

Wealth managers with divorcing clients should be conversant with recent changes in alimony law so they can provide their clients and their clients’ attorneys with the best possible financial advice around this issue. “Advisors should be working with their divorcing clients to make sure they understand, first, the guidelines around an amount of alimony based on the earnings of both spouses and the impact on their lifestyle going forward and, second, what the term of that payment will be,” Speiss says.

Stanley notes that in Florida, alimony reform has resulted in three types of alimony: permanent, which is for spouses that lack the ability to support themselves and has an indefinite term; rehabilitative, which is designed for stay-at-home mothers who need time to bring their skills up to date and re-enter the work force; and short term, which bridges the gap between the end of the marriage and a period of a few years when the spouse would have the ability to support him or herself. Each type of alimony has guidelines around the number of years and the amounts that a spouse will potentially receive.

It’s vital that wealth managers realistically assess the ability of their clients who may be eligible for alimony to re-enter the workforce and at what level of pay they will do so, so that they don’t overestimate what a spouse’s salary would be in the future and potentially underestimate what that spouse needs to pay his or her bills, Stanley adds. Under many of the new guidelines dictated by alimony reform, this is even more important than it was in the past.

“In many cases, even professional women with degrees who have been out of the workforce for many years don’t have the ability, especially in this economy, to immediately re-enter the workforce and command a six-figure salary,” she notes. “There are situations where it will be extremely difficult for that person to get a job even with retraining and even if that person does get a job, it won’t be at a very high salary.”