Written by Admin | Jan 23, 2018 6:00:00 AM
What to do with Bonuses, Commissions, and other Variable Income BY ERIC SCHULMAN* O ver the years, it has become common practice to build into marital settle- ment agreements provisions for “automatic” adjustments to child support and maintenance where the payor has variable income due to commissions, bonuses, overtime, and the like. Negotiating and inserting such provisions into the agreement served as a proactive measure to help avoid future litigation and provide a sense of fairness to both parties. Including such terms was fairly routine or straight- forward, depending on the complexity of the income stream. The common approach to address bonuses, com- final order must state an amount of child support in missions or other variable income streams was to actual dollar amounts. The practical effect of a child provide that certain documentation would be period- support order that based payments on a percentage ically exchanged, and there would then be a “true-up” of the support obligor’s net income was that child in terms of paying the net percentage pursuant to support automatically increased when the payor’s net statutory guidelines. The true-up could be as simple income increased. as requiring “20 percent of the net Now that the income share income properly calculated” within x model of child support has been ad- days of receipt. The only restrictions Eric L. opted in Illinois, what impact does on such agreements were that the Schulman the change in the law have on these is a senior agreement not be contrary to public types of variable-income situations? partner at the policy, unconscionable, or violate Can agreements still be drafted that family law section 505(a)(5) of the IMDMA.1 firm of Schiller effectively respond to these fluctu- That section provides that although DuCanto & ations, despite the fact that income the guidelines were set up according Fleck LLP. He from both parents must now be con- can be reached to percentages of net income, the sidered? Time will ultimately tell, at eschulman@ but, for now, the answer appears to sdflaw.com. be “yes.” 1 750 ILCS 5/505(a)(5) (West 2017) 26 The DocketBefore tackling the problems associated with pending proceedings or any other proceedings variable income dilemmas, it is critical to have a basic that must be included in the recipient’s gross understanding of the primary policy considerations income for purposes of calculating the parent’s behind the enactment of our new statute. Our new child support obligation.” statute was based upon the economic assumption that Under the prior version of the statute, questions as income increases, families spend proportionately arose as to what exactly was “gross income,” as the stat- less money on children, and as such, the old statute ute did not define the term. Instead, the prior statute had the effect of sometimes creating a windfall to a provided, in relevant part, as follows: “‘Net income’ recipient. Also, an important aspect was the perception is defined as the total of all income from all sources, of fairness provided by minus…” a system that requires The new income consideration of income share statute incorpo- The adoption of the from two persons, rath- rates this concept and er than one; the goal provides for a similar with such a system is to income share model adds definition: “…‘gross avoid dis-incentivizing income’ means the people from entry into a new wrinkle to the use total of all income from the labor market. With all sources, except…”2 an understanding of the Therefore, there is noth- of base-plus-percentage policy implications, the ing really new here, and statute can be better what constitutes “in- understood, enabling orders of support typically come” or “gross income” more persuasive argu- remains conceptually ments to a court. relied upon where a payor’s unchanged, except that now, in determining THE INCOME gross income, mainte- income fluctuates. SHARE STATUTE – nance paid is included RELEVANT PROVI- in the recipient’s in- SIONS come. Further, the term 1.“Gross Income”. “all sources of income” The starting point in has previously been this analysis is what constitutes “gross income” under interpreted very broadly by the Illinois Supreme Court the new statute? The answer is found in IMDMA Sec- in In Re Marriage of Rogers:3 tion 505(a)(3)(A), which provides as follows: [T]he first step in calculating a parent’s “net in- “(3) Income. come” is ascertaining “the total of all income from all As used in this Section, “gross income” means sources” received by that parent. That determination, the total of all income from all sources, except in turn, depends on what items may properly be con- “gross income” does not include (i) benefits re- sidered “income.” “Income” is not separately defined in ceived by the parent from means-tested public Section 505 of the [IMDMA]. We will therefore give it assistance programs, including, but not limited its plain and ordinary meaning. to, Temporary Assistance to Needy Families, As the word itself suggests, “income” is simply Supplemental Security Income, and the Sup- “something that comes in as an increment or addi- plemental Nutrition Assistance Program or (ii) tion * * *: a gain or recurrent benefit that is usually benefits and income received by the parent for measured in money * * *: the value of goods and other children in the household, including, but services received by an individual in a given pe- not limited to, child support, survivor bene- riod of time.” Webster’s Third New International fits, and foster care payments. Social security Dictionary 1143 (1986). It has likewise been defined disability and retirement benefits paid for the as “[t]he money or other form of payment that one benefit of the subject child must be included receives, usu[ually] periodically, from employment, in the disabled or retired parent’s gross income business, investments, royalties, gifts and the like.” for purposes of calculating the parent’s child Black’s Law Dictionary 778 (8th ed. 2004). support obligation, but the parent is entitled Under these definitions, a variety of payments to a child support credit for the amount of will qualify as “income” for purposes of section benefits paid to the other party for the child. 505(a)(3) of the [IMDMA] that would not be tax- “Gross income” also includes spousal mainte- nance received pursuant to a court order in the 2 750 ILCS 5/505(a)(3) (West 2017) 3 IRMO Rogers, 213 Ill. 2d 129 (2004) January 2018 27able as income under the Internal Revenue Code. court has addressed handling the issue of variances As our appellate court has recognized, however, or uncertainty of income by looking to past income as the Internal Revenue Code is designed to achieve a harbinger of future income, and includes, in some different purposes than our state’s child support instances, income averaging as a reasonable solution to provisions. Accordingly, it does not govern the determine a support award. Some of the cases dealing determination of what constitutes “income” under with issues of variable income include the following: the statutory child support guidelines enacted by • In re Marriage of Carpel, which held that fluc- the General Assembly.4 tuations in husband’s income as an attorney Rogers, along with other Illinois cases, provides working on a contingent basis made it difficult to that anything of value can fit under the umbrella of determine his net income, and that the trial court income, including automobile allowances,5 IRA distri- should consider his previous income to determine butions,6 and moving expenses.7 Now, the legislature his prospective income;11 has codified the concepts of economic value into our • In re Marriage of Garrett, which held that a 3-year statute by declaring that perquisites received, if not average of the father’s income where his income included in taxable income, can be included as gross varied significantly from year to year, and the past income under IMDMA Section 505(a)(3.1)(B).8 The year’s reduction in income was not typical and laundry list of examples now in the income shares unexplained;12 statute includes, but is not limited to, a company car, • In re Marriage of Nelson, which held that it was housing, housing allowance, and reimbursed meals. appropriate to average his income over three All of those items are now on the table for calculating consecutive years for purposes of child support, gross income. because the father’s income fluctuated;13 2.Variable “Gross Income”. Where one parent • In re Marriage of Freesen, which held that the has variable income sources, or fluctuating income trial court’s consideration of only one prior year’s from year to year, calculating his or her “gross income” income was error when the husband’s income var- becomes challenging, and this impacts the other cal- ied due to large bonuses, and that the trial court culations down the line, such as net income. IMDMA should have averaged income from at least three Section 505(a)(5)9 addresses this issue, and remains prior years;14 and largely substantively unchanged from its prior version: • In re Marriage of Pratt, which affirmed the deci- (5) If the net income cannot be determined sion of the trial court to determine the father’s because of default or any other reason, the estimated annual income from stock dividends by court shall order support in an amount consid- multiplying the first quarter’s dividends by four.15 ered reasonable in the particular case. The final order in all cases shall state the support level in ISSUES AND STRATEGY UNDER THE dollar amounts. However, if the court finds that NEW STATUTE the child support amount cannot be expressed The adoption of the income share model adds a exclusively as a dollar amount because all or a new wrinkle to the use of base-plus-percentage orders portion of the obligor’s net income is uncertain of support typically relied upon where a payor’s income as to source, time of payment, or amount, the fluctuates. In the past, it was relatively easy to draft court may order a percentage amount of sup- orders providing that support would be set at a base port in addition to a specific dollar amount and amount plus a percentage over that base amount con- enter such other orders as may be necessary to sistent with the child support guidelines. Percentage determine and enforce, on a timely basis, the awards have proved to be a flexible means of adapting applicable support ordered.10 support to fluctuating income levels without having to Thus, for cases in which net income cannot be resort to the filing of a petition to modify support as a determined because of variances or fluctuations, IMD- result of changes in the payor’s financial circumstances. MA §505(a)(5) still requires that the court provide for However, it must be kept in mind that under the reasonable support, in a set dollar amount, but also new provisions, the income of both parents must be potentially as some percentage amount. Our appellate considered. Accordingly, this makes it impossible to simply provide in a settlement agreement that the 4 IRMO Rogers, 213 Ill. 2d at 136-37 (citations omitted) statutorily-required level of support would be paid on 5 In re Marriage of Einstein, 358 Ill. App. 3d (4th Dist. an obligor’s additional income except in those cases 2005) 6 In re Marriage of Lindman, 356 Ill. App. 3d 462 (2nd Dist. 2005) 11 IRMO Carpel, 232 Ill. App. 3d 806 (4th Dist. 1992) 7 In re Marriage of Shores, 2014 IL App (2d) 130151 12 IRMO Garrett, 336 Ill. App. 3d 1018 (5th Dist. 2003) 8 750 ILCS 5/505(a)(3.1)(B) (West 2017) 13 IRMO Nelson, 297 Ill. App. 3d 651 (3rd Dist. 1998) 9 750 ILCS 5/505(a)(5) (West 2017) 14 IRMO Freesen, 275 Ill. App. 3d 97 (4th Dist, 1995) 10 Id. 15 IRMO Pratt, 2014 Ill App (1st) 130465, ¶ 26 28 The Docketwhere only the obligor is employed. In a case where In Marriage of Moore,18 the trial court entered a only the obligor has variable income, it is possible to child support order similar in structure to the order draft a percentage order based upon the ratio of the in McManus. In Moore, the father was a surgeon who obligor’s child support obligation to his or her gross had been practicing for approximately four years at income with a further provision that any additional the time of the judgment. His income was on the rise. income would be paid as child support based upon The parties had two minor children. The father was that percentage. Yet, even this could be problematic, as ordered to pay $1,000 per month, per child, for sup- the child support obligor could overpay support in the port, with annual increases of $1,000 per child per year. event of substantial income, due to the fact that under The mother urged that the trial court could reasonably the new statute as income increases the relative per- expect that the father’s income would increase. The centage of support paid decreases. appellate court held that the trial court was not enti- As another option, it is foreseeable that the use tled to rely on the possibility of a likelihood of future of Family Law Software may become a common prac- increases in income. tice to help determine the overall percentage of net The same principle as in Moore and McManus was or gross income that the obligor is paying based upon also present in Coons v. Wilder.19 Mr. Coons was a law- the income share guidelines considering the income yer who had just passed the bar examination. The sup- of both parents. Thus, the settlement agreement could port order was based on what the father was expected provide for mutual disclosure and exchange of income to earn as a lawyer. The support order was reversed on records, and then if the overall percentage no longer appeal. Similarly, in Schwartz v. Schwartz,20 a support corresponds to the prior settlement amount, then child order providing for an increase in child support in two support would be determinable per the guidelines and years, based on anticipated income that the father the matter could then be reviewed as a de novo matter. would receive from a trust in two years, was reversed. Because the income share model makes the child In contrast to the above disapproved approaches is support assessment less straightforward than it pre- the approach that was affirmed in Vollenhover v. Vol- viously was, the case law regarding income averaging lenhover.21 In that case, the father’s income fluctuated will likely be of great weight. Income averaging can be because he received quarterly bonuses. The trial court’s an appropriate and fair mechanism to employ so as to decision, which was affirmed on appeal, provided for avoid continuously having to recalculate child support, increases in support payments, which were contingent exchange and pursue financial updates, expend legal on the increase in the father’s income actually taking fees, and return to court for additional litigation. place, but it also contained a provision for automat- When the obligation for child support is not estab- ic reduction during those months when the father’s lished by a marital settlement agreement, but is set by earnings decreased. Thus, the Vollenhover decision the court either as a result of a trial or a default hear- may be cited and relied upon when urging a true-up ing, trial courts have on occasion placed a provision in or true-down under the income sharing amendments, the judgment that required an automatic increase in although the age of the case, and the decisional case child support. Such provisions have usually not with- law that has evolved since 1954 calls into question the stood attack on appeal. The basis for the disapproval of weight to be afforded the case. automatic increases in support was well-expressed in Moreover, while a substantial change in circum- the case of McManus v. McManus,16 in which the father stances pursuant to IMDMA Section 510(a) encom- was ordered to pay $70 per month until the child’s passes a change in income as a basis for a petition to sixth birthday, $140 per month until the tenth birthday, modify support,22 that petition can only affect a pro- $180 per month until the fourteenth birthday, and $200 spective modification. If we know a parent typically per month thereafter. In that case, the appellate court gets bonuses, or has commission based compensation, stated as follows: overtime or other variable income, here are some In ordering the payment of child support, a circuit potential ways to set child support that adequately court must consider the needs of the child, the sep- accounts for that variability, and does so in certain arate income of the wife, and the income of the hus- instances retrospectively. band. Because changes in these facts cannot be antic- ipated with accuracy, a circuit court should ordinarily SOME IDEAS FOR HANDLING VARIABLE not try to anticipate such changes by making its award INCOME of child support to increase automatically with the child’s age. The self-adjusting aspect of the award of 18 IRMO Moore, 117 Ill. App. 3d 206 (5th Dist. 1983) 19 Coons v. Wilder, 93 Ill. App. 3d 127 (2nd Dist. 1981) child support must, therefore, be reversed.17 20 Schwartz v. Schwartz, 38 Ill. App. 3d 959 (1st Dist. 1976) 16 McManus v. McManus, 38 Ill. App. 3d 645 (5th Dist. 21 Vollenhover v. Vollenhover, 4 Ill. App. 2d 44 (1st Dist. 1976) 1954) 17 Id. (citations omitted). 22 750 ILCS 5/510(a) (West 2017) 30 The Docket1.True-up child support periodically. A true- Child Support Obligation for the prior calendar up agreement could be applied retroactively—i.e., to year based upon the parties’ total gross incomes, as the past year or other period of time over which child that term is defined under Section 505 of the IMD- support was paid—or prospectively—i.e., based on MA; if there was an overpayment or underpayment the inclusion of the additional income to set child of child support, the parties shall “true-up” the support for the next period of time if it becomes clear overpaid or underpaid amount. Further, in running that changes to a payor’s income warrant some future their child support calculations, the parties shall adjustment. True-ups can allow for a sense of fairness utilize the Individualized Tax Amount approach because the ”correct” amount of statutory child sup- pursuant to Sections 505(a)(3(D), and 505(a)(3)(E) port is always being paid, albeit after the fact under of the IMDMA. The Husband shall be responsible these arrangements. They can present some negative for circulating the initial proposed amount to Wife, challenges as well, including the time, cost, and aggra- together with his calculations and any source back- vation of having to continue with obtaining records, up materials (such as Family Law Software program running new calculations, and incurring more legal printouts), and if the parties cannot by agreement fees in some instances. Regardless, when negotiating a resolve the “true-up” amount, then prior to either true-up agreement, be certain to include and contem- party proceeding with a petition, they shall imme- plate the following: diately employ the services at their equal expense • What is the timing of the true-up (annually, of an agreed-upon neutral accountant to assist in semi-annually, quarterly, annually, etc.)? a good faith effort at resolving the “true up” calcu- • What documents will be used to prove gross in- lation. Once the “true up” amount is agreed upon, come (tax returns, paystubs, schedule K-1s, 1099s, or determined by court order if no agreement, the general ledgers, etc.) and how will it be defined? parties shall effectuate the actual “true up” pay- • Who has the burden of moving forward to prove ment within 14 days, with[out] interest. the correct amount of support? • How will the computations be done and by 2. Use predetermined ratios for implementing whom, and is there a verification process? future child support awards. In situations where • What is the timing for the exchange of informa- only the obligor has variable income, it is possible to tion and computations? draft a percentage-based order predicated upon the ra- • What are the terms of repayment, and whether tio of the obligor’s base child support obligation to his there will be interest accrual? or her total gross income. Any such agreement would include a provision that any additional income (earned Sample Marital Settlement Agreement Language: above the amount on which the initial child support “Husband shall pay Wife child support in the award was calculated) would be paid as child support amount of $875 per month. This child support based upon that percentage. Remember, however, that amount is based upon Husband’s gross income of there still is a requirement for a specific dollar amount $100,000 and Wife’s gross income of $50,000, and in your child support orders despite this mechanism. the parties’ minor child primarily residing with Example: Husband earns $100,000 per year from Wife. The payments shall be made on the first day his base salary, and receives variable bonuses an- of each month, commencing December 1, 2017, by nually. Wife earns $50,000 per year and has prima- Husband to Wife through a direct wire into Wife’s ry residence of one minor child. Husband’s basic checking account no. XXXX at Chase Bank. The child support obligation from salary alone would parties acknowledge that Husband’s gross income be $875 per month. The ratio of Husband’s child from employment has fluctuated annually, and support obligation to his total gross income is 11%. that in an effort to achieve consistency within the Husband then earns a $50,000 bonus. Applying the framework of the Schedule of Basic Child Sup- 11% ratio to the gross bonus, results in additional port Obligation, they have agreed to complete a child support of $458.33 per month on the $50,000 re-computation or “true-up” of child support each bonus. year. To effectuate this “true-up” the parties shall exchange complete federal and state income tax Note: As suggested above, this result is not with- returns within 7 days of filing, together with all out fault. It is potentially problematic because the schedules and attachments, including, but not child support obligor, the Husband in the above limited to, W-2 forms, Schedule K-1s, 1099s, etc., example, could be overpaying child support in and a year-end paystub from employment. Within the event of substantial income. Under the same the 21 days of exchanging income tax returns, they facts above, assuming the total income was simply shall re-calculate the amount of child support that $150,000, without any application of the ratios, should have been paid under the Schedule of Basic child support would be a total of $1,145 per month January 2018 31compared with $1,313 in the above example (a dif- can always be expressed as additional dollar amounts ference of $168 per month). or percentages on different ranges of income. A helpful tool in analyzing different child support scenarios is to 3.Employ Income Averaging. The income shares run alternative options through the Guideline “What amendments make it far more difficult to implement If” worksheet in Family Law Software. This allows you accurate percentage awards of child support, due to a to change variables for child support, including various variety of factors, including: (i) as income goes up, the income levels, to see how it modifies the child support relative support percentages decline; and (ii) the new obligations in amount and allocation. statute considers the income of both parents. Thus, income averaging may become more prevalent in in- 5.Provide for permissive modifications retro- come variance cases moving forward to avoid constant actively in the agreement. If this is an agreement, re-adjustments to child support awards based upon the there is no reason why the bar to retroactive modifi- difficulty both logistically and practically in our cases, cations could not be waived in certain well-defined and the fact that the case law clearly supports employ- circumstances. The agreement can provide for periodic ing income averaging. production or exchange of income information, and See In re Marriage of Karonis (holding that the permit either party to trigger a review of the support circuit court may consider past earnings in determin- amount for a prior period with specific terms for any ing the non-custodial spouse’s net income for purposes shortfall or overpayment. of making a child support award, where it is otherwise difficult to ascertain the net income of a non-custodial 6.Work outside the confines of guideline sup- spouse,).23 See also In re Marriage of Hubbs (“Using an port. In addition, while the new income share provi- average income for the previous three years of em- sions now apply to all child support determinations, ployment is a reasonable method for determining net there can still be deviations from the guidelines (as income where income has fluctuated widely from year long as appropriate findings are made and the actual to year”).24 support amount is referenced). For negotiated cases, This approach requires another look at our cases consider whether support guidelines have any mean- on income averaging to ensure consistency and fair- ingful application, or whether the family’s best inter- ness. In other words, do we employ simple averages, ests might be served by allocating or sharing payment or perhaps, weighted averages more akin to business of the children’s direct and indirect expenses rather valuation cases, where it seems one year of income than an arbitrarily-defined child support amount. compared to another is determined to be an unreliable While the support amount is supposed to reflect ex- predictable of future income (e.g., when the obligor penditures (for an intact family) at various income lev- suddenly suffers a suspicious and dramatic drop in els for the children, those statistical averages may not income in the year of divorce)? in any way reflect your client’s family’s expenditures. The other aspect of using income averaging relates Consider moving outside these defined amounts to to the timeframe over which incomes will be averaged. allow the clients to make their own agreements in me- While three years seems to be a general trend through- diation, collaborative, or other settlement processes. out Illinois cases,25 three-year averaging does not nec- essarily have to be the last three years where there is *Eric L. Schulman gratefully thanks Michele M. evidence that a recent downturn in income, attendant Jochner, Esq., of Schiller, DuCanto & Fleck, LLP, for her to divorce, is atypical.26 assistance in putting together these materials. 4.Determine a predetermined amount or per- centage of additional income to be paid as addi- tional child support. While the amount of support changes if net income changes, one can run several alternative scenarios and look realistically at other income results to predetermine additional support amounts to be paid, even if these do not supply pre- cisely accurate predictions of what later occurs. This 23 IRMO Karonis, 296 Ill App.3d 86 (2nd Dist. 1998) 24 IRMO Hubbs, 363 Ill. App. 3d 696 (5th Dist. 2006) 25 See IRMO Elies, 248 Ill. App. 3d 1052 (1st Dist. 1993); IRMO S.D and N.D, 2012 IL App (1st) 101876 26 See IRMO Garrett, 336 Ill. App. 3d 1018 (5th Dist. 2003). 32 The Docket