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Episode 28 Transcript: Alimony Buyouts

In today’s mini episode, we are going to be talking about alimony or spousal support/spousal maintenance payments, which, as you may recall from previous episodes, are payments from the higher-earning spouse to the lower-earning spouse, and they vary in amount and in length of time.

One concept that I wanted to introduce to you is the idea of what I would call a “buyout” of alimony or spousal maintenance payments. In essence, this is where the payor, the higher-earning spouse, instead of paying the recipient spouse or the lower-earning spouse alimony month to month, year after year for, let’s say, a period of five years monthly (so, 60 total payments) instead pays the recipient spouse one sum or two sums that are much larger upfront, and then is completely done with their alimony payments.

So, there are a couple things that you want to keep in mind when you consider doing a buyout, as I would refer to it, of spousal maintenance or of alimony.

One thing is that if your spousal maintenance or alimony payments are not made over time and instead are made as one lump sum, you are going to have some issues when it comes to deducting them for tax purposes, so you definitely want to work with your CPA to figure out whether it makes sense for you. This is more for the payor of alimony or spousal maintenance. Does it makes sense for you to make an upfront payment that is not tax deductible to you rather than making payments over time that are tax deductible?

And for many people, psychologically – if nothing else, psychologically – they appreciate just being done with their support payments, and they would rather make all of those payments upfront and just be done with them and know that they’ve met that obligation, and they don’t have anything further to worry about. For other people, the tax deduction component of alimony is extremely valuable, and you do lose that if you make all of your payments as one lump sum, and so it does not make sense to them to make payments as a lump sum.

Then, from the perspective of the recipient, you want to think about, in some ways, a bird in the hand is worth two in the bush. And there is a time value to money. So, let’s say that you are to receive monthly alimony of $1,000 a month for five years. So that’s $60,000 total in alimony payments. Well, if you received $60,000 upfront on day one, that is actually more valuable to you than receiving $60,000 over time, over 60 monthly payments, over five years. As a result, when people do a spousal maintenance or an alimony buyout, they will typically be offering a lower sum as a lump sum, as a one-time payment. A lower sum than you would have received over the course of your spousal maintenance or alimony payments.

But, if you consider the fact that you will have all that money at once, and you can then take it and invest a good chunk of it and grow the money over time, you will ultimately have to do the calculus about whether or not it is truly worth the same as or worth more to you than that string of payments was.

The other thing to consider if you are doing a one-time buyout of alimony is that instead of – if you’re the recipient – instead of having to pay taxes on that alimony, you will be likely receiving that as a tax-free payment, so those dollars have greater value to you because you’re not losing a portion of them in tax payments.

So, that is it for our mini episode on the buyout.

 

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