Is it better to take more of the marital property, such as a house or IRA, instead of spousal support?

By Paul Toohey
February 01, 2008
 
pensions and spousal support

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Whether or not it is better to take a property settlement in lieu of support will depend on your individual financial situation. You will need to ask yourself two things: is this a fair trade, and can I afford to do this? The support recipient should only consider accepting a property settlement if they absolutely will not need the support in order to maintain their household.

When a property settlement is considered in lieu of support, the husband may offer to give the wife a larger portion of the home's value, perhaps even all of it, in exchange for not paying her any spousal support. The wife refinances the home in order to get the husband's name off the title and loan, and to free up cash to buy out the husband's share of the home's equity (if any). The question is: will she have sufficient cash flow to handle the higher payments, maintenance costs, and homeowner's insurance on her own? Now that the family will be maintaining two households with the same income that used to support only one, sacrifices in lifestyle on both sides may be necessary to make ends meet. The wife, the husband, or both could end up being "house-rich, but cash-poor". Sometimes, a better solution is to sell the home. While still married, the couple is eligible to take up to $500,000 in capital-gains exclusions. Once one spouse takes sole possession of the property, $250,000 of that disappears.

Accepting an IRA in lieu of support presents its own set of concerns. An IRA is a tax-deferred investment. Taxes will need to be paid when the money is withdrawn. It is also an illiquid investment, since unless you are 59½, you can't use the money without paying a fairly severe penalty. An IRA used to offset support should therefore be discounted to take into account the taxes that will be paid on it when it is withdrawn. An IRA also has the ability to go up or down in value, so that over time it may be worth more or less than the support payments would have been.

Before accepting either type of settlement option, consider this: what if the support recipient or payer dies, gets remarried, or has some other material change in circumstances? Since the support buyout was based on a given amount paid over time, then discounted to present value, the person paying the lump sum may end up paying more money than they would otherwise have been required to pay. If the support payer were to die suddenly, support payments would cease and the recipient would be hard-pressed to support them and (if applicable) their children. These potentialities need to be considered when weighing whether a lump sum support settlement is appropriate or not.

One argument in favor of actually paying the support is this: it is sometimes possible to glean certain tax efficiencies out of the specific support arrangement. Taxes on spousal support are paid by the recipient and deductible for the payer. If the paying spouse is in a higher tax bracket than the receiving spouse, more money is kept in the "family's" pockets and less paid to the government. This helps both parties, and the same effect can be used in dividing, or even "tweaking", the ratio of child to spousal support when there are minor children involved. This option would obviously not be available if a property settlement is accepted in lieu of support.

As you can see, there are many factors to be considered before taking a lump sum buyout of support. Every couple's circumstances are different. It is highly recommended that anyone contemplating such an arrangement consult with a Certified Divorce Financial Analyst" or other qualified professional before committing to anything. Together, they can weigh the pros and cons of the various options available so the couple can make the right decision for them.


Paul J. Toohey is a Certified Financial Planner CFP® and, Certified Divorce Financial Analyst CDFA. He is a member of Collaborative Divorce Solutions, a Collaborative Divorce Group located in Orange County, California. 

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February 01, 2008

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