New Spouse's Income in Factoring Child Support

By Mitchell Jacobs and Patty Rabiola
Daily Journal, March, 2010
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One of the most common questions asked by family law clients is, "Does my new spouse's income increase my obligation to pay support for my child from a previous marriage?" The answer is that courts are reluctant to include a new spouse's income for purposes of calculating child support. Prior to 1994, the court had the authority and discretion to consider a new spouse's income when setting a child support award. Thereafter, the Legislature enacted Family Code Section 4057.5. The statute prohibits family law courts from considering a new spouse or non-marital partner's income for purposes of determining or modifying child support, except in extraordinary cases where excluding the new spouse's income would lead to extreme and severe hardship to the minor child. For the exception to apply, the court looks to the needs of the child, not the needs or conduct of the parents.

What happens when the parent's income is passive income from investments? The case of In re Marriage of Knowles (2009) 178 Cal.App.4th 35 answers this question. Thomas and Elizabeth were married and had one son, Carter. In 1995, Thomas and Elizabeth were divorced. Thereafter, Thomas married Sara. At the time of his dissolution, Thomas was ordered to pay $506 per month to Elizabeth for child support. In 2005, Elizabeth sought a modification to increase child support. In determining child support, one of the factors that the court takes into consideration is the income of both parents. The definition of income includes wages, salary and passive income from investments.

Thomas had previously worked full-time in his family's ranch business. In December 2005, he stopped working for the family business because of his success in certain real estate investments. Based on Thomas' former employment in the family business, the trial court imputed income to him of $50,000 per year. As a result of his investments, Thomas earned $3.1 million in capital gains in 2004 and 2005. The investment income Thomas earned was after his marriage to Elizabeth. In fact, the capital gains increased when Thomas was remarried to Sara, so the capital gains belonged in their community property. Most of the capital gains were invested into a brokerage account and real estate development investment held in Sara's name alone. During the trial, Thomas and Sara testified that the brokerage account was held in Sara's name alone for "convenience."

In calculating child support, the trial court imputed employment income to Thomas of $50,000 per year or $4,166 per month. In addition, the trial court determined that a reasonable return on Thomas' investments was $18,450 per month. The $18,450 per month included $10,950 from the brokerage account and $7,500 from the real estate development. The trial court used the entire monthly investment amount of $18,450 per month for purposes of calculating Thomas' child support obligation. Based on Thomas' income, the trial court awarded Elizabeth increased child support of $1,557 per month. The trial court made its order retroactive to 2005 when Elizabeth filed her motion to increase child support.

Thomas appealed the trial court's decision and the Court of Appeal reversed and remanded. Thomas argued on appeal that the income from investments was community property belonging to him jointly with his new spouse, Sara. Thomas contended that the trial court incorrectly used the full amount of the community property income in determining his child support obligation. Thomas also argued that by doing so, the trial court violated Family Code Section 4057.5, which prohibits the court from using his new spouse's income when modifying child support. Thomas claimed that the trial court should have attributed one-half of the investment income in the sum of $9,225 to him, rather than $18,450.

The Court of Appeal agreed. It held that in determining child support, the trial court is limited to considering only one-half of the community income of a parent even if that income is passive, absent evidence that the minor child would suffer extreme or severe hardship if the new spouse's income were not considered. The Court of Appeal reasoned that Family Code Section 4057.5 prohibits using the community income attributable to the new spouse, whether the income is earned or is a return on investment, in calculating a child support obligation.

Further, the Court of Appeal held that the trial court made no finding that extreme or severe hardship would result if the new spouse's income was not included in the child support calculation. If the trial court had made such a finding of extreme or severe hardship in its statement of decision, the Court of Appeal may have upheld the trial court's decision to include the portion of the new spouse's investment income. However, there was no such finding in this case. Other cases have held that extreme and severe hardship is determined on a case-by-case basis after review of the income of both parents.

Elizabeth argued on public policy grounds. She claimed that public policy should interpret the term "income" broadly for the purpose of calculating a parent's child support obligation. The Court of Appeal stated that when a statute is on point, the public policy of the statute is contained in the statute itself, and that this applied to Family Code Section 4057.5. Thus, this interpretation of the child support statute limits judicial discretion in determining what portion of the new spouse's income is available for child support.

It is apparent from this recent case that courts are reluctant to use a new spouse's income, even in the form of passive investment income, in the equation when calculating a child support obligation. The logic is that payment of child support is the parent's obligation, and not the obligation of the new spouse or non-marital partner.

The decision by the Court of Appeal is important in cases where a parent wants to modify a previous child support order. The parent seeking a modification should be aware that courts disfavor using the new spouse's income, and will not even use passive investment income of the new spouse in calculating child support. There must be a finding that an extreme or severe hardship will occur if the investment income of the new spouse is not used in calculating child support. Otherwise, similar to the Knowles decision, the court will view the passive income from capital gains, interest and dividends as community property, and use only one-half of the income for purposes of calculating child support.

Mitchell A. Jacobs of the Law Office of Mitchell A. Jacobs in Los Angeles is a certified family law specialist who limits his practice to marital dissolution and other family law matters. Patty Rabiola is an associate with the Law Office of Mitchell A. Jacobs.