What is an alimony buyout?
A spousal support buyout is when the payor pays the spousal support obligation in one lump sum rather than paying it out over a period of time. It can be done with a cash payment from one party to the other, or it could be done through the division of marital property. In other words, one party agrees to give up a portion of their share of the marital assets instead of paying spousal support.
Why might a buyout of alimony be right for you?
Clients consider a buyout of their alimony obligations for a variety of reasons. In my practice, it is most commonly used when there is not enough cash flow to support the monthly commitment. I also see couples choose it as a way to indeed cut ties when the marriage ends. This could be because one of the parties is already in a new relationship, or it could be due to the high conflict nature of the relationship.
It could also just make better financial sense. For example, a buyout of spousal support could give one party the necessary funds for a downpayment on a home or money to further one's education. Remember, there is no "one-size-fits-all" solution, so it's important to fully understand what is in your best interest when negotiating. If you are not sure, meet with a Certified Divorce Financial Analyst (CDFA) to determine what makes the most financial sense for your specific situation.
Is an alimony buyout tax deductible?
No, an alimony buyout is not tax-deductible.
Considerations When Calculating a Lump Sum Alimony Buyout
In addition to merely determining if a buyout is appropriate for your situation, there are also several factors to consider when agreeing on the buyout. For example, what is a fair amount? A buyout is not calculated by simply adding up the periodic payments. The periodic payments are discounted back to the present value in today's dollars. To determine the present value, both parties must agree on the appropriate discount rate.
Also, keep in mind that periodic payments could be modifiable if there is a significant change in income and/or end if the recipient of spousal support is cohabitating or remarries. How should that be factored in when determining an appropriate lump sum spousal support buyout?
How We Help Our Clients to Determine What's Right for Them
To determine if a buyout is right for you, hire a professional with the expertise to guide you. Allow me to work with you either as a Financial Advocate or a Financial Neutral. As a Neutral, I work with both parties to understand their needs and craft a solution that works best for everyone. As an Advocate, I work with one of the parties and his/her attorney to determine the best financial strategy. In either case, I will explain the pros and cons of each approach. This will help you determine which type of spousal support will work best in your specific situation. I will help you calculate a fair buyout (if appropriate) and make sure that you fully understand the short and long-term financial implications so that you can make wise financial decisions.
If you need assistance in understanding your financial options, contact us.