Sometimes the emotional turbulence of divorce coupled with the uncertainty of the future can distract from effective legal negotiation and proper financial planning. One area where this is evident is alimony, also known as spousal support. Most people assume there is no alternative to the traditional monthly-payment alimony structure. A couple getting divorced, however, may request to pay a lump sum rather than make monthly payments. There are advantages to a lump sum approach for both sides.
First, divorce can be a challenging process, so the person responsible for alimony may just want to move on with their lives, and paying one lump sum avoids the constant monthly reminder of the divorce. Likewise, because a lump sum alimony is one transaction, there will be no collection problems after the fact. Additionally, alimony can cease if the recipient remarries. Moreover, if the recipient gets a newer and higher paying job, the paying spouse could convince the judge to change the alimony.
Additionally, if invested properly, a lump sum payment can be invested today to receive a better return in the future, which could net the alimony recipient more in the grand scheme of things. A lump sum payment could be used to buy the remaining share of the house, too. A lump sum alimony can reduce financial uncertainty; for example, the paying spouse may lose their job or experience other difficulties preventing them from paying. While these are great reasons to receive a lump sum alimony, there are additional factors to consider, as well.
For instance, there will be tax consequences. A lump sum payment will likely be taxed in its entirety for the year received, which could significantly diminish your alimony. Depending on how the alimony is categorized, it may be nondeductible. The categorization of alimony is important, and if it is mishandled, it could cost a divorcee. Fortunately, an experienced attorney can assist a divorcee in receiving the maximum benefit from any proposed alimony.
Source: FindLaw.com, “Avoid Alimony Monthly Payment Programs,” accessed on Oct. 22, 2017
