How Does Inflation Impact Alimony?
In this blog post, I am going to discuss the topic that has been on everyone’s mind the past few years: inflation. Specifically, how does an increase in inflation impact a New Jersey divorce.
Impact of Inflation on a New Jersey Divorce
When you negotiate a divorce, there are four primary ways to address alimony:
- Mutual waiver of alimony – This is self-explanatory, neither party will receive alimony.
- Lump sum buyout – You determine the amount for a buy-out sum. This is often a one-time buy-out where a larger percentage of some other asset is given to pay for alimony. Care must be made here to make sure the buy-out is tax-effected.
- Regular monthly payments that can be modified if there is a change in circumstances.
- Regular monthly payments that cannot be modified even if there is a change in circumstances. (Cases such as Lepis v. Lepis) provide that alimony can be modified if there is a “permanent and substantial” change in circumstances, but courts have held that the parties can waive this right to revisit alimony if they include “Anti-Lepis” language in their divorce agreements.
Now imagine what the impact of hyperinflation would be in a situation where there was a lump-sum alimony buyout. $100,000 today might have seemed like enough support to last several years while the alimony recipient gets their feet back on the ground. Now, perhaps $100,000 is only enough to purchase a jar of pickles. And that well-thought out plan to include “Anti-Lepis” language now has one serious winner, and one serious loser.
Of course, the above is a somewhat ridiculous example. There’s a reason why the Weimar Republic is still our go-to example of hyperinflation. Because it’s something that does not occur all that often. (It’s why we still discuss Tulipmania as well).
No respected economist is yet claiming we are in a period of “hyperinflation,” but the fact remains that we are in a period of inflation. Steady inflation, meaning that quarter over quarter the cost of basic goods such as food, fuel, housing, and transportation are increasing.
Persistent inflation will continue to have an impact on people’s lives, and thus it will have an impact on people’s divorces.
There are often good reasons to include modifiable alimony and good reasons not to do so. Every case must be treated based upon the data currently available. But unexpected events, such as inflation, can turn any deal sideways. And what is troubling is that there is little that can be done to combat such issues.
One tool that can be utilized is including a cost of living increase (“COLA”) when negotiating alimony. This ties alimony to the rate of inflation, often regional depending on which part of the state the divorce is filed.
But what about deflation? Should alimony decrease by a set percentage if deflation (which is generally rarer than inflation occurs)? Again, interesting topics to consider with no clear answer.
These issues may also impact child support.
How Does Inflation Impact Child Support?
Unlike alimony, which is based on a number of factors, child support is based upon guidelines—essentially an algorithm ordered by the State. That means that child support is generally revisited every three years or so (especially if run through Probation/Family Support Services) to determine how inflation or deflation may impact the child support number.
Accordingly, child support is more immune to issues of inflation.
Impact of Inflation onAlimony and Equitable Distribution
Inflation should also be considered when determining timing events for equitable distribution. For instance, the “time value of money” principle becomes even more important in an era of inflation.
Conclusion
As you can see, inflation’s impact on alimony and other portions of a divorce agreement should not be underestimated.
Although inflation is not usually a primary factor in negotiating divorce, today’s high inflation environment is a good reminder to consider the “silent thief of wealth” while negotiating your divorce.
Partner with Carl Taylor, Esq.
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