For most couples, lump-sum spousal support looks appealing. She doesn’t have to worry about whether the check is in the mail, and he doesn’t have to worry about writing (and funding) the check. And best of all, it’s one more tie that’s cut, and they can move on with their lives.
That’s the myth. Here’s the reality. Ken asked Barbie if she’d accept a lump sum from his inherited trust fund instead of monthly payments. Barbie was entitled to $1,200-a-month spousal support until Ken retired in 15 years, so she did the math ($1,200 x 12 x 15) and was thrilled with the result: $216,000. Yes, she told Ken, I’ll take it.
Meanwhile, Ken made calculations of his own. He reduced the $1,200 support by $400 of income taxes on it, since his attorney had advised him that lump-sum spousal support should be non-taxable to avoid a recapture tax. Ken then made a present-value calculation: if Barbie’s investments could earn 6%, she’d need a lump sum of $95,000 to draw $800 a month for 15 years. Yes, said Ken, I’ll pay it.
Who was right, Ken or Barbie? Neither. Barbie had ignored the income-tax implications as well as the present value of money. But Ken hadn’t considered the taxes Barbie would have to pay on her investment earnings. Reducing her return from 6% to an after-tax 4% changes the present value of $800 a month to $108,000 instead of $95,000.
And that’s the end of the story. Barbie wouldn’t accept $108,000, and Ken wouldn’t pay more, so as most couples do, they opted for monthly payments after all.
Ginita Wall is a San Diego CPA (Certified Public Accountant), CDS, and CFPª practitioner specializing in divorce. She is author of The ABCs of Divorce for Women and It’s More Than Money — It’s Your Life: The New Money Club for Women. She’s the co-founder of the Women’s Institute for Financial Education (www.WIFE.org).