Understanding Bonus Income in California Divorce Cases: The Ostler-Smith Approach
If you’re a Californian contemplating divorce or currently undergoing one, and you or your spouse has a variable bonus income, understanding how this income is accounted for in support payments is crucial. This is especially true if the party paying support has both W-2 income and variable bonus income.
One of the seminal cases in California that addresses this issue is the Ostler-Smith case. This case has set a precedent for how bonus income is treated in the calculation of child and spousal support.
The Ostler-Smith Case Explained
In the case of Ostler & Smith (1990), the court addressed the issue of how to handle bonus income that varies from year to year when calculating support payments. The court approved a method where a percentage of future bonus income is added to a support order. This approach is intended to avoid unnecessary future litigation.
The court reasoned that since no future bonus is guaranteed, it would not be appropriate to base a support order on the payer’s bonus income and then require them to file motions to modify at such times as the bonus is reduced1. Instead, it would be more fair to all parties to base the support order on the payer’s income from salary, and to allocate a portion of the future bonus income to the children and spouse by way of a percentage interest1. This way, future litigation will not be necessary as the bonus income changes.
The Ostler/Smith approach (also called Smith Ostler for reasons I could not tell you), allows for a fair distribution of variable bonus income in divorce cases. It ensures that the spouse and children share in the bonus income if and when it is received, without the need for constant court modifications. If bonus income was included in spousal and child support calculations, and future years’ bonuses fell short, the paying spouse would have to go to court every year to get an adjustment, and until the adjustment was awarded, they would be over-paying. On the other hand, if the receiving spouse did not get some provision for bonus income to be included, they would have to track down the paying spouse’s bonus every year and then go in and ask for an order for the appropriate share of that income. Under Ostler/Smith, the court calculates support based on base income, and then orders that an additional percentage of bonus income be paid when bonuses are received. What percentage can only be determined on a case-by-case basis, but a significant factor will be what percentage of base income is ordered as support under the normal support determinations.
Remember, every case is unique and it’s always best to consult with a family law attorney to understand how these principles apply to your specific situation.
Galen Gentry assists clients in Los Angeles and Southern California with divorce issues and explains the person’s rights and obligations in a divorce. Mr. Gentry has 30 years of experience and can help people to protect their interests. Call at (310) 282-7521 or contact us online by using the Orange form on the right of your screen to schedule a free consultation.