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

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.

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.