Divorce: how to calculate “reasonable needs” – by guest blogger Rachel Roberts
January 15, 2010 7 comments
As family lawyers, we talk a lot about needs when we advise our clients. We talk of capital needs for housing, transport and to redeem liabilities and income needs to meet ongoing annual and monthly expenditure. Needs are trump cards for arguing for a departure from an equal division of capital for a wife with children who cannot otherwise re-house, even if it means taking inherited assets away from the beneficiary in some cases. Needs apply equally to income as to capital, and are an important concept in family law.
Within ancillary relief proceedings, each party will give full and frank disclosure of their financial situation. As part and parcel of that disclosure process, each party must also complete a budget sheet, setting out what they say they need to meet their outgoings. We provide all Stowe Family Law clients with a budget sheet at the outset of the proceedings, so that they can consider their own needs early on.
I thought of this as I read an article over the weekend in the Saturday Telegraph Magazine, about a family who had been asked to account for every penny that they had spent in a month. The point of the article was to highlight whether we are in fact aware of what we spend, even in the current recession driven economy. The couple in question were successful, with an income of £150,000 per annum, an income that most people would consider enormous, yet they were still spending more than they earned. Even after breaking down their expenditure and analysing why they were overspending, they concluded that they would not alter their spending, save for limiting their last minute trips to Sainsburys, and did not consider themselves to be extravagant.
Of course, deciding to manage your finances in this manner when you are operating as a family unit, and have one household to run is one thing. It is quite another to decide to continue to do so following a divorce, when there are two households to run out of the same income pot. Upon separation, items that are considered an essential during the marriage become impossible to fund.
The courts have been very clear in their view that when parties disclose their financial situations, they do themselves no favours by submitting inflated budgets that do not reflect the reality of their lifestyle pre-separation, or indeed the income available between the parties. One only has to look at the approach that the court adopted towards Heather Mills and her income claims against Paul McCartney to see the sort of response that such exaggeration receives from the judiciary.
Of course, the levels of income that are talked about in that case and many of the other publicised cases bear no resemblance to the vast majority of the cases that go before district judges on a daily basis. In those cases, the judges may only be able to give scant regard to what parties claim their needs are, and will simply have to divide up what limited income there is between the parties in a way that is fair. So both parties will have to cut their cloth accordingly.
In such a case, an income need for cable television may seem to be a luxury. In cases with surplus income, however, £1,000 per month or more on holidays plus similar sums for savings might be considered legitimate needs.
In essence, what constitutes a need and what constitutes a want in family cases will very much depend on the available income, the lifestyle prior to the marriage and the circumstances of the case as a whole. In almost every case, save those where the income exceeds the needs of both parties, items that were fundamental before the marriage must, by necessity, be regarded as luxuries.
So how do you go about completing a budget?
The starting point is to break it down into categories, which you can set out as follows:
- Housing, fuel and power
- Household goods and services
- Food and drink
- Recreation and culture
- Eating out
- Holidays and accommodation
- Clothing and footwear
- Child specific costs
- Miscellaneous goods and services
You then list each cost in the appropriate category. For many items, a client can simply review previous bank statements and work out fixed sums, such as the mortgage and utility costs. Other items, perhaps household maintenance and clothing, will be less straightforward, as the costs are often irregular and met as and when they arise. In those circumstances, it is best to take an average over a period of time, taking into account unforeseen costs that inevitably arise from time to time.
In some cases, budgets will need additional categories. Examples include second houses, boats, yachts, horses and the like. Again, a budget has to be determined by the lifestyle enjoyed prior to separation within the context of what is likely to be available after separation and is individual to each person. We have had clients with monthly budgets of £5,000 per month for clothing, and other clients who wouldn’t spend that in five years.
It is important not to understate your budget. Before the landmark decision of the House of Lords in White v White (2000), a wife’s maintenance and overall requirements were generally limited to their reasonable needs, regardless of the wealth of the paying party. We have long since moved beyond that point. Now the idea that one party, usually the husband, can retain the bulk of the income simply because the wife can objectively “manage” on a small portion of it is not an approach adopted.
Recent case law such as McFarlane v McFarlane even introduces the concept of compensatory maintenance in – admittedly rare – cases of surplus income for wives who have given up potentially excellent careers for the benefit of family life.
Nevertheless, in some cases reasonable needs will still be a feature of the Judge’s thinking when deciding on an appropriate level of maintenance. For that reason, the budget figures are important. Any party completing a budget sheet should do so with care, ensuring that it accurately reflects their needs, is realistic and can be evidenced by past expenditure.
Careful preparation, together with documented evidence, will help a budget stand up to cross examination in Court. It will also stand a client in good stead to manage their finances within the context of the financial settlement going forward.
Regardless of divorce proceedings, perhaps we should all do this budget exercise to have an honest look at our financial expenditure!
Rachel Roberts joined Stowe Family Law in 2002 as a trainee solicitor. Since qualification in 2004, she has become one of the key senior solicitors in the practice. Notable highlights of her career to date were the location and securing by way of an injunction over a million pounds in assets and representing several well-known television personalities. Her particular interest lies in ancillary relief and the tracing and protection of assets.
Abacus image credit: aussiegall.
January 15, 2010
Categories: Finances and Divorce