In a divorce it can be challenging to work out child support or spousal support when the payer has a variable income.  This variable income might arise from being paid on commissions or tips.  Or perhaps the payer may receive a substantial annual bonus at the end of the year.  What does the law say about such situations?  It’s summarized in the California divorce world by the phrase “Smith Ostler” (or “Ostler Smith”).

The problem can be avoided when the parties can agree upon (or a judge orders) a certain figure as a reasonable expectation for the variable income.  Then the standard guideline child support calculation program can use this figure in the calculation.  The same program can also use this figure to come up with a recommended amount of temporary spousal support.

But sometimes it’s more reasonable to come up with a percentage of the variable income or bonus that will be paid as support.  This is especially true for bonuses, where a set salary is probably most of the payer’s compensation.  But their bonus could be anywhere from zero to a large figure.

Smith Ostler Divorce Case

In the Marriage of Ostler and Smith (1990), the couple had two minor children. The husband was a bank executive and was receiving significant annual bonuses.  The judge concluded that future bonuses were not guaranteed.  He decided it would be appropriate to designate percentages of the bonus as support.  This would allow the amount of support to automatically flex up or down depending on the size of the bonus.

The Smith Ostler judge decided upon 10% for each minor child and 15% as spousal support for the wife.  This gave a total of 35% of the gross annual bonus to be paid as support.  The case was upheld on appeal.

There is no case law which provides a formula for determining the appropriate percentages.  So courts are left to determine what they think is appropriate on a case-by-case basis.  The same goes for couples trying to negotiate an out-of-court settlement.

Here is a link to an excellent article on the subject: https://cristinlowelaw.com/how-is-bonus-income-treated-in-spousal-support-situations/

Key Points

Some key points from the article are as follows:

• The percentages are normally (but not always) applied to the gross bonus rather than to the net (after-tax) amount.
• 10% per minor child (for child support) is common.
• Percentage awards for spousal support will be upheld up to at least 16%.
• When large bonuses are a possibility, it may be appropriate to specify a cap, i.e. no more than X dollars from the bonus.
• When the amount of post-divorce spousal support is at issue, an analysis of the 16 Family Code 4320 factors becomes relevant in determining an appropriate bonus percentage.  The third of the 14 factors says that all earned and unearned income of the payer is to be taken into consideration.

It’s also worth noting that the standard calculation of the dissomaster (and other approved programs) for temporary spousal support and child support does not treat bonus income differently from other income of the payer.  It doesn’t apply a percentage to bonus income.

The Smith Ostler case does not provide definitive answers.  Instead it gives a possible framework for a solution.  If you want to achieve an out-of-court settlement, clearly there is room for negotiation here.  It may be helpful to enlist the services of an experienced divorce mediator or a Certified Divorce Financial Analyst to help you come to a resolution.