What Does Child Support Cover?

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People frequently ask the question, “What does child support cover?”  The answer depends, at least in part, on who you ask.  Note: Although the principles in this article may be relevant in other states, this article only applies to child support in Oregon.  The topics discussed are not “rules” per se, but rather observations based on practicing family law for 10 years and having mediated hundreds of cases.

The General Rule.  Generally speaking, if you go to trial a judge will tell you that child support covers a parent’s entire contribution to a child’s expenses in the other parent’s household, except for unreimbursed medical expenses which are their own separate category.  (It’s important to note that contributions for childcare and health insurance premiums are factored into the child support calculation.)  In other words, parents are generally not required to split various costs related to their children.  With that in mind, one common reason for choosing mediation is so that people can reach their own agreements without having someone tell them what they are going to do. 

The Parenting Time Credit.  The Oregon Child Support Guidelines factor in something called a ‘parenting time credit.’  The parenting time credit is a reduction in child support based on the total amount of time a parent spends with the children (usually based on overnights).  The idea is that if someone has more time with the children, they are spending more money on the children during their time than if they did not have as much time (and the other parent is spending less).  It’s pretty easy to imagine that a parent who has a ‘week on/week off’ parenting plan will spend a lot more money on things related to the children then a parent who only sees the children every other weekend.  The parenting time credit accounts for this.

The concept of the parenting credit makes sense, but it can also make the “normal” child support rules a bit confusing in certain situations.  If one parent has very limited parenting time, then it makes sense that that parent pays child support and the other parent pays for most expenses.  But who is supposed to pay for the various expenses if parents have equal parenting time, particularly if they have similar incomes?  This is one example of why people often split certain expenses.

What Percentage To Use?  When it comes to “splitting” expenses, you need to identify what percentage each parent will pay.  If parents have similar incomes – particularly after transfer of child support and/or spousal support – then parents will often (although not always) agree to split these expenses 50/50.  One of the benefits of splitting expenses 50/50 is that the accounting and reimbursing for expenses is more straightforward.

Alternatively, people sometimes split expenses proportionate to their incomes.  This means, for example, that if one parent has 70% of the income and other parent has 30% of the income, then they would split expenses 70/30.  Parents will often split things proportionate to incomes in situations where they have very disparate incomes.

There is not a ‘right’ answer to how expenses will be split – or if they will be split.  Further, people will sometimes split one category 50/50 while splitting other categories proportionate to their incomes.  It all depends on what makes the most sense to both of you.

No Child Support.  In situations where child support is low anyway, e.g. less than $100, parents will sometimes agree that they will reduce child support to $0 and instead split some or all of the categories of expenses described below.  It’s important to know that child support is inherently modifiable, which means that even if there is no child support now, there could be child support in the future.  (Here is an article about modification.)  In any event, child support will only be reduced to $0 if both parents agree to it.  If there is no agreement, then the Oregon Child Support Guideline calculation will apply.

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Here are categories of expenditures that people will sometimes include in addition to (or in lieu of) child support:

Irregular Expenditures.  The Oregon Child Support Guidelines don’t necessarily factor in larger irregular or “one off” expenditures.  For example, if a child has a junior trip to Washington D.C. how should that be paid for?  What if a child has to have an iPad for school?  What about a $300 bike?  People often include a provision that says that they will split the cost of these irregular expenditures as long as both parents agree.  This provision isn’t a “risk” to either parent because it only requires parents to pay for something if they both agree.

Extracurricular Activities.  Does your child have a specific activity that he or she has always participated in?  In that case, parents will sometimes agree that they will split anything related to that particular activity, regardless of cost.  For example, if your child has always played club soccer, you might agree that you will split the cost of anything soccer-related without the need to discuss it first (although as a practical matter, you should run these sorts of things by the other parent).  With this type of provision, it still makes sense to say that, notwithstanding the agreement to split everything soccer-related, you will discuss anything over a certain amount before incurring the cost ($e.g., $200).  Additionally, parents will sometimes agree to split all extra-curricular fees even if their child does not have a “preferred” activity.

Sometimes parents paying child support do not want to include this provision because the Oregon Child Support Guidelines assume that these expenses are covered by child support.  This is a perfectly reasonably position for the parent to take.  If parents disagree about splitting extracurricular activities, the presumption is that the provision would not be included.

School Related Expenses.  Back-to-school shopping can be a very significant expense.  New clothes and school supplies can easily cost a few hundred dollars or more.  Parents will sometimes agree to split back-to-school shopping.  They may also agree to split other school related expenses such as misc. school fees, school pictures, field trip fees, etc.  As with extracurricular costs, if parents disagree about splitting these costs, the presumption is that the provision would not be included.

Private School Tuition.  Private school tuition is typically something a court will not order parents to split unless they agree.  With that said, if it is important to both parents that a child continues to attend a particular school, parents will sometimes agree to split the cost of private school tuition.

Childcare.  Work or school-related childcare is a factor in the child support calculation.  The child support calculator splits the expense proportionate to each parent’s income.  What ends up happening is that if one parent pays all of the childcare expenses, then child support will go up if that person is receiving child support or child support will go down if that parent is paying child support.

One of the challenges of factoring childcare costs into the child support calculation is that childcare costs fluctuate regularly.  As children get older costs typically change.  Also, when there are breaks from school costs typically change.  If you factor childcare into the child support calculation and then there is a significant change in childcare cost, then you will probably have to run a new childcare calculation.

One way that people avoid having to constantly rerun child support calculations is by excluding childcare from the child support calculation.  Instead, people will split childcare proportionate to their incomes (usually) when it is incurred.  That way if childcare costs fluctuate, your contributions to childcare will fluctuate but child support will stay the same.  The reason childcare is split proportionate to incomes instead of 50/50 is because the child support calculator splits the cost proportionate to incomes.

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It’s important to understand that parents are generally not required to split the above expenses.  However, many parents often agree to split at least some of these expenses.  In the absence of an agreement, it is important to know that the presumption is that these expenses will not be split.

The topic of splitting expenses is a good example of why people pick mediation in the first place – so they can create agreements that make sense to them rather than having someone else make their decisions for them.

So what does child support cover?  The answer, at least in mediation and Collaborative Law, is that child support covers whatever you both agree it should cover.

The Ins and Outs of Spousal Support Buyouts

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A spousal support buyout is a transfer of assets (cash, retirement, home equity, etc.) instead of paying monthly spousal support payments.  A “spousal support buyout” usually refers to a complete buyout of support.  A “partial” support buyout usually refers to a transfer in addition to monthly support payments, but which reduces either the amount or duration of spousal support.

Why do people do support buyouts?

Spousal support buyouts are not real common, but they do occur and can be a good option in certain situations.  There are several reasons that people will do buyouts instead of pay monthly support.  Common reasons for support buyouts include:

  • Disentanglement.  One or both people may prefer to be completely disentangled from each other.  If people are exchanging monthly payments, it means that they remain connected financially to one another for as long as support payments are owed.
  • Finality.  Spousal support buyouts are non-modifiable whereas monthly support payments are modifiable.  If you do a complete support buyout, you know that you will never have to deal with modifications in the future.  If you do a partial support buyout, it’s still possible that support could be modified.
  • Not Enough Cashflow. Sometimes the person who owes support does not have enough cash in their budget to pay support (but they still have a support obligation).  An example would be if there is a high earner who would normally owe spousal support but who takes on a substantial amount of debt and therefore does not cash to pay support.  One way of addressing this is to do a full or partial support buyout.

Are there any other considerations?

Spousal support buyouts are technically property transfers instead of spousal support payments.  This means that the transfer is not a taxable event, i.e., the person transferring the buyout does not get to write off the transfer on their taxes and the person receiving it does not pay taxes on the transfer.  This is something that is typically very appealing from the recipient’s perspective.

To make a buyout work, though, there (obviously) must be enough assets to do it.  It’s often the case that one or both people prefer a buyout but there simply are not enough assets to make it feasible.  For example, if someone would normally owe $1,500 for 10 years, the recipient presumably is not going to agree to accept $20,000 in extra 401K assets in exchange for waiving monthly support payments.

How do partial buyouts work?

A partial support buyout can be used to reduce the amount of support owed or the duration of support owed (or both).  For example, if someone owed $2,000 per month but could only afford $1,000 per month, the agreement might be that the support recipient receives $1,000 per month but also receives more retirement or home equity to “make up” for the other $1,000.

One scenario where partial support buyouts are frequently used is when support would be “indefinite” but both parties want to make sure they are not financially connected indefinitely.  The agreement might be that support is paid until the payor retires, and instead of paying a reduced amount indefinitely, the parties decide that the recipient will receive extra assets right now to “buy out” the indefinite component of the support award.  For example, someone might pay spousal support until age 65 but transfer extra retirement or home equity right now so that support terminates at 65.

Warning: If you are doing a partial support buyout, it is very important that your judgment is very specific about how the buyout limits (or does not limit) future modifications.  For example, if someone paid a lump sum of cash to “buy out” the last 5 years of support, they would not want to end up in a situation where support ended up getting modified and the duration of support lengthened.  You can protect against this by making sure that the duration of support is non-modifiable but amount of support remains modifiable.

Are there any risks to a spousal support buyout?

The main risk to a support buyout is the fact that a support buyout is not modifiable (whereas spousal support payments are modifiable).  For example, if someone were paying monthly support payments and lost his or her job, that person could probably get the spousal support reduced (at least until they got a new job).  Since support buyouts cannot be modified, if that person transferred $100,000 in extra 401K as a support buyout and then lost their job, the support buyout could not be modified and there would be no getting the buyout back.  Another example is that if the support recipient gets remarried, it is possible (although not guaranteed) that support could be reduced or terminated.  If there had been a buyout, the buyout is final and cannot be changed even if they recipient gets remarried.

Another “risk” of support buyouts from the payor’s perspective is that he or she uses most or all their assets to fund the buyout and then is left with very few assets.  (Related to this, it’s possible that the payor just doesn’t have enough “extra” assets to do a buyout.)  This is a calculated risk by the payor, but it’s a risk nonetheless.

How do you calculate a support buyout?

To calculate a support buyout, we start by looking at how much monthly support payments would normally be if there were going to be monthly payments.  (Sometimes people will just decide on an arrangement they think makes sense without going through this analysis, but people typically go through this analysis.)

After you determine what support payments would normally be, we total the amount of all payments and then make two reductions to the total amount.  The first reduction is to account for the fact that the support recipient pays taxes on monthly spousal support but does not pay taxes on the support buyout.  For example, if the total payments were $48,000 over 4 years, the recipient might pay $12,000 in taxes on those payments and therefore the actual “value” to the recipient is $36,000.  This means that $36,000 cash is worth the same as $48,000 in monthly payments since you must pay taxes on the monthly payments but not the buyout.

The second reduction is for something called “present value”.  The basic idea behind present value is that a dollar today is worth more than a dollar received at some time in the future.  For example, would you rather have a $1,000 today or $1,000 five years from now?  Why?  There are several reasons, but the two main reasons are that if you invest $1,000 now it will be worth much more in 5 years (hopefully).  The other reason is that inflation will erode the value of money over time, so $1,000 buys more today than $1,000 will buy in the future.  An example of this is that a new car used to cost $3,000.  Today, the same type of car might cost $30,000.  That’s the result of inflation (amongst other things).

So, in the above example, if you received say, $32,000 today, it might be worth the same as $36,000 paid over 4 years.  Again, the reason why is that 1) you can invest the $32,000 over 4 years to (hopefully) end up at $36,000, and 2) it costs less today to buy goods then it will cost to buy the same goods in the future.

So to summarize the above example, $1,000 per month in spousal support for 48 months is basically the same thing as receiving $32,000 today.   This is only an example!  Round numbers have been used for simplicity.  The numbers are generally in the ballpark, but these should not be relied on as “accurate” buyout numbers. 

So now what?

This is a complicated topic, so don’t worry if it doesn’t totally make sense!  If you think that a support buyout might make sense in your situation, you should discuss it with your spouse and see if it is something he or she is open to.  Your mediator, lawyer or financial professional is available to help you do the analysis and you should not feel like you need to get it figured out yourself.

Lake Oswego Office Opening Soon!

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We are moving!  Beginning October 1, 2016, Forrest’s office will be relocating to 5200 SW Meadows Rd., Ste. 150, Lake Oswego, 97035.  Forrest will continue to take appointments in downtown Portland for the month of October.  The new office is conveniently located just minutes off of I-5 near 217.  There is plenty of free parking available at the new location.

Forrest will continue to be available for downtown mediations on a half-day or full-day basis as well as for Collaborative Law 4-way meetings.  Consultations and two-hour mediation appointments will occur at the Lake Oswego office or (by phone or Skype).

Notifying the Life Insurance Company

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Judgments that contain child support, spousal support or property settlements that will be paid over time typically contain a requirement that the person who owes the money has to maintain life insurance to “insure” the support award.  Once the divorce or custody judgment has been signed by the court it will be time to notify the life insurance company.  Here is what you need to know:

Disclaimer – Use and review of this article is subject to the Disclaimer at the end of the article.

Copy of the Life Insurance Policy

First, the insured party (the party who owes the money) has to provide a copy of the applicable life insurance policy to the person who is the beneficiary (or trustee beneficiary) of the policy.  The policy document provides the beneficiary with the address and other policy information that they need.

Notification Letter

Next, the beneficiary needs to send a notification letter as well as a certified copy of the judgment to the applicable life insurance company.  A certified judgment is one that contains the court’s official seal on it.  You will need to obtain a certified copy directly from the courthouse (your lawyer or mediator can assist you with obtaining a certified copy).  You can learn more about obtaining certified copies here.

The notification letter is the part that is confusing to most people.  Here is a sample life insurance letter.  This resource is provided only as a sample only and cannot be used as-is.  You will need draft your own letter and tailor it to your own specific circumstances and terms of your judgment.

Do not attempt this notification process if you are represented by an attorney.  Your attorney should take care of this for you.  If you are unsure if your attorney has taken this step, be sure to ask.

Confirmation from the Life Insurance Company

The life insurance notification process is not complete until you receive a notification from the life insurance company acknowledging receipt of the judgment and that they will comply with the terms of it.  If you do not receive confirmation from the company be sure that you follow up with them until you do.

Disclaimer

  • The information in this article is provided only as a general informational resource for unrepresented parties. Nothing contained herein letter constitutes legal advice and nothing contained herein should be construed as legal advice.
  • If you are represented by an attorney, you should not attempt the life insurance notification process yourself.
  • The sample letter above is not to be used “as-is”. This is a sample only which must be modified based on the circumstances of your situation.  It is your responsibility to draft your own letter.  This sample is specifically provided as a .pdf file so that you cannot use this document.
  • The life insurance requirement is very important and there can be significant consequences if it is not done correctly. If you have any questions about the life insurance notification process you should contact an attorney.
  • Use of, or reliance upon, the sample letter is done so at your own risk. Forrest Collins accepts no liability or responsibility for your use of or reliance upon the sample letter, whether used in whole or in part.
  • This article only applies to judgments entered in the State of Oregon.