Is it better to receive one lump sum payment up front rather than monthly spousal support payments?

Take taxes into account when making your decision about alimony payments, and always clear it with a skilled financial advisor first before finalizing it.

By Connie Walsh
June 22, 2006
 
IL FAQ/Financial Issues/Alimony/ Spousal Support

It may be more beneficial to obtain a lump sum up front rather than an equal amount of payments given to you over several years if the sum of the payments is equal to the one-time payment, mainly because you would be able to invest the lump sum and earn interest on the amount that remains invested. Also, if the lump sum is defined as a "distribution of assets," as opposed to "spousal maintenance," you will owe no taxes, but on the other hand, no tax deduction will be available by the provider. But there are a few cautionary notes:

  • The earnings on the lump sum would be taxed as ordinary income;
  • If the IRS construes the lump sum as spousal support, there could be tax penalties and/or interest owed by the receiver, so structuring this properly is very important;
  • If the payor is planning to deduct the lump sum payment as spousal maintenance, there is a great risk of "tax recapture" by the IRS for what is commonly known as "front-loading of maintenance." The IRS has a rule that says that if the payor of spousal maintenance wants to deduct everything over $15,000 per year, payments must last for at least three years. These recapture rules were designed to prevent non-deductible property-settlement payments from being deducted as spousal maintenance. The rules are very specific to the extent that spousal maintenance payments decrease annually in excess of $15,000 during the first three years post-divorce; and
  • Spousal support ends in the case of death or remarriage. It may be a good idea to protect it with life insurance.
 As always, be sure that you review any agreements with your attorney and a financial specialist, such as a Certified Divorce Specialist (CDS) and/or Certified Divorce Financial Analyst (CDFA).

Connie Walsh is a Certified Financial Planner and Certified Divorce Financial Analyst who heads Divorce $olutions, part of Walsh Financial Services. Connie brings approximately 25 years' experience in the financial industry, including 12 years on Wall Street, to her practice.

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June 22, 2006
Categories:  FAQs

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