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Court Of Appeals Clarifies Treatment Of Settlement Funds For Purposes Of Child Support

In Lyman v. Lyman, 2011 WL 148820 (Wis. App.), 2011 WI App 24, the court of appeals held that 1) all settlement money, including unallocated settlement funds, were considered gross income for purposes of child support; 2) the taxes a party pays on settlement money does not reduce the gross sum used for purposes of child support; and 3) the child support for children will not be placed into a trust unless it can be shown that the recipient would not properly handle the funds.

In Lyman, the parties entered into a stipulation regarding the husband’s (Scot’s) child support obligation.  The 1999 stipulation provided that the husband would pay 25% of his gross income for purposes of child support up to $185,000 in earnings.  On anything above that income level, Scot would pay 5% towards child support, but the funds would be held in a trust for the children.

In 2002, Scot entered into a 10-year contract with St. Jude Medical where he was guaranteed commissions of at least $725,000 per year for the first four years of the contract.  The wife (Sally) moved the court to modify the previous child support order, and the family court commissioner entered an award of $10,275 per month.  Upon de novo review, the circuit court judge modified the amount to $6,250 per month.

Unfortunately, Scot lost his job soon after the circuit court’s award.  Scot sued his employer for wrongful termination.  Scot and Sally then entered into another stipulation incorporated a graduated child support obligation; however that agreement was again modified in 2007 when the older son was emancipated.  Under the 2007 stipulation, Scot would pay the statutory 17% of his monthly income up to $6,999, 14% of his monthly income between $7,000 and $12,499, and 10% of his monthly income over $12,499.

Scot settled his lawsuit against St. Jude’s in June 2008.  He received $3,490,000 and reported all of the settlement as income on his 2008 tax return.  He paid $1,180,000 in attorney fees.

After receiving the settlement, the Lymans stipulated to a shared placement schedule, with the same child support obligation as set forth in the 2007 stipulation and order.  A hearing regarding how to treat the settlement money for purposes of child support was held later, and the court found that all of the settlement was income to Scot and that the children were ultimately deprived of that money.  The circuit court concluded that, after deducting costs Scot incurred to obtain the settlement, $2.2 million was income subject to child support.  The court awarded Sally $220,000.  Scot appealed.

Scot argued on appeal that unallocated settlements are not income for purposes of child support.  Scot cited Krebs v. Krebs and Weberg v. Weberg and argued that in those cases, unallocated settlements were not considered income.  The problem with that argument was that those cases pertained only to maintenance, which is a discretionary award based on fairness and need, versus child support which is an obligation from parent to child. 

Scot’s second argument on appeal was that because his settlement included an unallocated portion for the loss of a contractual right to sell his company, the settlement is not income.  The court of appeals noted that Scot presented no expert testimony to show that the lost right to sell his company was different from the replacement of his income that he received in the settlement. 

Scot then argued that the court applied the incorrect prior order, and that the court should have followed the terms set forth in the 2005 order, which limited child support to $6,250 per month.  The court of appeals held that Scot willingly entered into the 2007 stipulation, which was the last binding order.  Scot had not grounds for complaining about the Order now when he voluntarily entered into the stipulation.

Lastly, Scot argued that any money he owes in child support from the settlement income should be placed in trust for the children.  The court of appeals disagreed.  When a party argues that a trust should be used, the party making the argument must show that the other party would not use the money for the intended purpose.  In this case, there was no showing that Sally was incapable of using the child support monies. 

In summary, the court of appeals affirmed that ALL gross income is subject to child support under the administrative code.  If a party argues that money is not gross income, he/she has the burden of showing why that is the case.  The court also affirmed that unallocated settlements are treated differently depending on whether the issue is maintenance or child support.

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