Ask anyone who's been ordered to pay spousal support how they feel about having to write a check to their former spouse every week or month.
You’ll probably be met with a few choice words...
The fact is - most people want to just move on after a divorce, sever ties and go their separate ways.
Unfortunately, when there are alimony payments involved, it can feel for the payor as if this separation never truly happened, which can ultimately lead to frustration and bitterness on the part of the payer.
That’s why some divorcing spouses choose an alternative to the weekly “check in the mail” alimony approach.
A concept known as a lump sum alimony buyout.
What is Lump Sum Alimony or an Alimony Buyout?
Simply put, a buyout (sometimes called lump sum alimony or spousal support buyout or spousal maintenance buyout) is the payment of alimony or its equivalent in one lump sum payment, rather than through periodic payments made over the course of a designated time frame.
This can be done in the form of a cash lump sum payment, where the payor writes one check for the entire amount of spousal support he or she will owe to the dependent spouse, or it can be done through marital property division (also referred to as equitable distribution in some states).
When it’s the latter, one party basically agrees to give up a portion of the assets they’re entitled to during the property division to the other spouse in lieu of paying alimony.
There are a few things you need to understand about the challenges of determining lump sum alimony:
- Since today’s value of a lump sum alimony buyout will be less than the total of the periodic alimony payments, how can you make sure the award amount you agree on is fair?
- How do you and your spouse determine the discount rate used to calculate the present value of the alimony buyout? Especially when the two of you have different tolerances for risk?
- Unlike periodic payments that can be suspended or terminated upon cohabitation or remarriage by the recipient spouse, how would that be addressed in the case of an alimony buyout award?
- Currently, in 2018, there are differences in the tax treatment of lump sum alimony versus periodic alimony payments. So how would your alimony buyout agreement account for that tax consequence?
- What happens if you want to convert periodic alimony payments to a lump sum alimony payment in the future? Can you do that? And if so, how would that work?
- There's more than meets the eye when it comes to calculating a lump sum alimony buyout payment and it isn’t as straightforward as it may seem. This is far too complicated an issue to attempt on your own.
That's why the best way to determine if this type of solution is right for you, and come to an agreement you and your soon-to-be ex think is fair, is to work with an expert divorce mediator with a financial acumen like me.
"There are a lot of moving parts when it comes to determining a lump sum alimony buyout. And if you're not careful, you could wind up with a divorce settlement agreement that's unfair to one or both of you.
I’ll help you examine the pros and cons of such an approach and together, we'll determine if it's right for you. And, if it is, help you and your spouse negotiate a buyout amount that works in your particular situation."
Calculating A Lump Sum Payment for The Alimony Buyout Amount is Difficult.
Especially since the lump-sum payment paid now, may not necessarily match the total of the periodic monthly payments.
Because while it does involve taking the award amount of each periodic payment and multiplying that by the number of payments that would be due if alimony was to be paid out over time, there are a number of other factors that are used to help determine the “present value” of the lump sum payment.
One such factor is what's commonly referred to as the "discount rate."
Investopedia defines the discount rate as:
The interest rate used in discounted cash flow analysis to determine the present value of future cash flows.
The idea being that if you pay your ex-spouse a lump sum payment, they could invest that money and earn interest on it. Ending up at the end of the term (in theory) with the same amount of money had you paid out their spousal support in a more traditional manner.
Agreeing On a Discount Rate Can Be a Real Challenge.
Perhaps you're a person who has a high tolerance for risk. And over time, feels that in exchange for that risk, you could earn a high rate of return. So in your world, the lump sum alimony buyout amount you would offer your soon-to-be-ex would be low.
Your thinking being, at a good rate of return, the recipient spouse could turn that lump sum into a nice chunk of change.
On the other hand, perhaps your spouse is more conservative, so the opposite holds true. They'd want a higher alimony buyout amount as they are expecting a lower rate of return on that investment.
Beware The Complications of Cohabitation or Remarriage!
In a traditional alimony arrangement, it’s not uncommon for alimony to be suspended when the recipient spouse is cohabitating. And when they remarry, alimony is irrevocably terminated.
No more alimony payments made or received.
So what happens in the case of an alimony buyout when a year or two later, the recipient spouse gets remarried? Since they’ve already got the money, there’s no turning off the faucet and stopping the periodic alimony payments.
What do you do then? Something tells me they’re going to be unwilling to give it back once they’ve got it.
If you’re the one paying alimony, you’re willing to pony up your fair share. But you also don’t want to give away money to someone who under different circumstances, wouldn’t qualify to receive it.
There are Significant Difference in How Lump Sum Alimony Buyouts And Period Payments are Taxed.
Currently in 2018, alimony paid to an ex-spouse is tax deductible for the payer so it lowers their taxable income, and is considered taxable income for the award recipient. This creates a favorable tax treatment for both parties.
The higher earning spouse gets a break on their taxes, and the alimony received by the lower earning spouse, is taxed at a lower tax rate.
But in the case of an alimony buyout, the sum will be treated as a distribution from your marital or community property.
And will not be considered taxable to the recipient spouse.
So what do you do to account for this?
Then there’s the issue of conversion.
If after you’re divorced, you try and convert your periodic alimony payments to a lump sum alimony buyout in the future, the tax treatment may change, and you may find yourself arguing with your now ex-spouse on what an appropriate alimony buyout amount should be.
So for these, and many other reasons, determining a fair buyout amount is not something you should attempt to do on your own.
Why Consider a Buyout of Alimony?
There are a number of reasons why someone would consider an alimony buyout.
If you’re the one paying alimony, perhaps you want to make a career change, or your job is at risk, so your salary may be greatly reduced in the near future.
You see, if your earnings were higher while you were married, and your monthly alimony payments were based on your previous level of earnings, you may simply not have the funds to make that level of alimony payments in the future.
Or maybe you’re planning on getting remarried soon, and you don’t feel comfortable making alimony payments to your ex-spouse while married to your new spouse.
And then there’s the simplest explanation of them all: you simply don’t like making alimony payments. And you just want your obligation over and done with.
All of these are common reasons for considering an alimony buyout.
And if you’re the spouse receiving alimony? A lump sum alimony buyout may have advantages for you as well.
For one, you won’t have to constantly rely on your ex-spouse to make payments. Especially with high-conflict couples, there is a risk that your ex could suddenly decide to flat-out stop paying alimony. You’d then have no choice but to go to court to enforce your agreement.
Or maybe you want to buy a place of your own. And having a lump sum to use as a down payment would allow you to more quickly move forward.
And finally, while you may not have immediate plans to remarry, perhaps you see yourself getting remarried before your alimony ends.
Taking a lump sum buyout could possibly provide you with a greater amount of money than if you had simply taken the periodic payments, and had them terminate upon your cohabitation or remarriage.
By choosing instead to settle on a one-time payment, or a disproportionate share of assets during the divorce, both parties are able to effectively end their dealings with one another (assuming there are no children involved) and move forward.
This often results in a more amicable resolution, avoiding years of potential bitterness and animosity between ex-spouses.
There is more than meets the eye when it comes to lump sum alimony buyout.
While I’ve done my best to give you the highlights, every couple’s situation, circumstances, and determining factors are unique and this is not a one-size-fits-all topic.
This issue of an alimony buyout is much too complex for you to attempt to determine on your own, because there’s a lot involved in this highly complex matter.
Not only that, but there are a lot of places you can make costly mistakes.
You’ll get the best result by mediating with us.
The best way to determine if an alimony buyout is right for you is to mediate your divorce or separation agreement with Equitable Mediation.
Using my extensive financial knowledge into the complex matters of alimony, as your mediator, I will:
- Explain in detail the pros and cons of each approach to help you determine which type of alimony may work best in your particular situation;
- Work with you to determine if a buyout is feasible and what an appropriate amount would be;
- Discuss and help you define what (if any) conditions exist that could modify the lump sum payout;
- Help you understand the tax implications of such a payout;
- Explain how child support factors into the buyout calculation;
- Ensure the proper agreements are reached and documented to govern the conditions of such a buyout between you and your spouse;
And ultimately, help you and your spouse negotiate a solution out of court that's fair, works for both of you and will best enable both of you to meet your financial obligations after you're divorced.
Equitable Mediation enables you to get a fair alimony outcome.
Why be forced to accept a settlement created by divorce attorney or family law judge when you can have a direct say in your financial future instead?
If you want to arrive at an agreement on alimony out of court - that’s fair to each of you and doesn’t bankrupt you in the process, mediate your divorce case or separation with Equitable Mediation.
If you and your spouse have both agreed to divorce and both want to mediate, take the next step and book an initial meeting for the two of you.
Early in the process?
Get our Free eBook to learn about the benefits of mediating your divorce out of court.
Before you go out and hire a divorce lawyer, learn why you owe it to yourself and your children to mediate your no-fault divorce out of court instead.
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