The last half of the ’90s have witnessed a dramatic rise in downsizing, enhanced early retirement programs, and voluntary early retirements for the sake of enjoying the “golden years.” Over the last 10 years, appellate courts have made it clear that a spousal support payor who chooses to take advantage of early retirement is still chargeable with imputed income, based on his or her earning capacity.
Another trend has emerged over the last few years, toward limiting and reducing the spousal support burden on payors. The Legislature provided a powerful example of that trend in its 1996 amendment to Family Code § 4320(c), which defines a reasonable time period for purposes of determining the duration of spousal support to be one-half the length of the marriage. At the same time, the Legislature amended Family Code § 4330, to requires trial courts to admonish the parties of their obligation to “make reasonable good faith efforts to become self-supporting.” This amendment makes no distinction between supported and supporting spouses.
These two trends provide the dual focus of the recent appellate decision of In re Marriage of Reynolds (5/19/98) 98 Daily Journal D.A.R. 5279. Prior to Reynolds, no court had addressed the issue of how to whether income may be imputed where the payor spouse retired at full or mandatory retirement age.
The Reynolds court, which ruled on this, received considerable attention for its statement that, “in the instance of a bona fide retirement, a supporting spouse should not be forced to continue working.” Thus, while a spousal support payor cannot retire prematurely without risk of being charged with income attributable to earning capacity, the same is not true of a payor who retires at or after normal retirement age.
In Reynolds, the supporting spouse was 67 at time of retirement; his retirement was deemed “bona fide.” In contrast, in the earlier case of In re Marriage of Sinks (1988) 204 Cal.App.3d 586, 251 Cal.Rptr. 379, the supporting spouse was 62 at the time he retired with a full pension; however, the appellate court affirmed the trial court’s holding that his voluntary retirement was an attempt to shirk his support obligations.
The Sinks panel noted that if the paying spouse’s motives had not been suspect, the fact would have presented an issue of first impression, whether a spouse who is eligible for retirement is nevertheless obligated to continue working to provide spousal support. It was that issue, still of first impression as to payors of normal retirement age, with which the Reynolds court grappled.
In In re Marriage of Stephenson (1995) 39 Cal.App.4th 71, 46 Cal.Rptr.2d 8, the retiree was 59, and chose to accept his employer’s offer of early retirement in the form of a lump-sum “golden handshake.” The appellate court held that where a supporting spouse elects to retire early, he or she is chargeable with imputed income based on earning capacity. even where, as in that case, the spouse’s employer virtually forced him into retirement and his motives were not suspect. The panel did not discuss the case of the spouse who retires at normal retirement age, rather than taking early retirement.
However, despite the fact that Reynolds broke new ground by addressing for the first time whether a supporting spouse could retire at age 65 or greater without running the risk of being charged with imputed income, that decision is most notable for its penultimate paragraph, dealing with treatment of private retirement accounts such as IRAs and Keoghs. Improperly citing In re Marriage of Olson (1993) 14 Cal.App.4th 1, 17 Cal.Rptr.2d 480, the Reynolds panel wrote:
Only investment income, not investment principal, should be available to pay spoussal support, especially in this case whether the subject retirement assets represent Husband’s residual share of the community property awarded to him as part of the dissolution. [98 Daily Journal D.A.R. at 5281]
The Olson decision held, among other things, that after a payor spouse reaches age 59-1/2, a trial court may impute income to the payor based on the ability to make withdrawals from an indiividual retirement plan account. In one sentence, the Reynolds court created a conflict of authority, not only with Olson, but with two cases (including one California Supreme Court case) holding that retirement accounts which were formerly community but which have been divided are available for payment of spousal support.
In Olson, Justice Donald B. King addressed an issue of first impression, the extent of trial courts’ discretion to consider accruals in a retirement plan in fixing spousal support. The court limited its discussion to individual retirements plans such as IRAs, Keoghs, and deferred compensation plans, and then considered the federal and state law pertaining to such withdrawals from such retirement plans.
The Olson court then defined divided support payors and the discretion of the trial court into three different classes, based on the age of the payor:
1. Where the payor 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 funds in a retirement plan, since if those funds were withdrawn they would be subject not only to tax as ordinary income but to a 10 percent penalty.
2. Where the payor is between 59-1/2 and 70-1/2, the payor may make withdrawals from the plan without being subject to the 10 percent penalty. Therefore, if the payor is choosing not to make such withdrawals, the court has discretion to consider whether or not to impute reasonable withdrawals as additional income for purposes of fixing spousal support. However, in exercising its discretion the trial court should consider the public policy favoring making provision for retirement by allowing the funds in the plan to accrue tax-free; that policy should be weighed against all of the other circumstances in the case as set forth in Family Code § 4320.
3. Where the payor is over the age of 70-1/2, the plan participant is penalized if he or she fails to make minimum withdrawals based on life expectancy. Once the participant reaches age 70-1/2, the court has discretion to impute as income an amount greater than the mandatory minimum withdrawal, but must be cautious in doing so in view 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 subject retirement assets represent Husband’s residual share of the community property awarded to him as part of the dissolution.” This statement flatly contradicts the holding of the Supreme Court 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 formerly community property pension in determining his ability to pay spousal support. The White court quoted and relied on the Supreme Court’s ruling in Epstein, which held:
Moreover, even if a future award of spousal support must come from husband’s half of the community property there is no requirement excluding 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 affirmance of the trial court’s exercise of discretion, it will obviously have a significant impact on spousal support orders where the payor is over age 65 and seeking to reduce spousal support following retirement. As a result, supported spouses who have been unable to become self-supporting and who relied on having a predictable income stream from spousal support in their “golden years” may find that by reverse alchemy those years have turned to lead.