Few things in life will prepare you for a legal suit against someone you formerly loved and possibly share children. Divorce is complicated, frustrating and depressing.
But, at the end of it, you must go on. In doing so, you will need an excellent legal advisor to guide you towards the best settlement for you and your children.
There are many considerations to developing a fair settlement. While the division of assets is important; many spouses find a great deal of stress over developing the support, alimony or maintenance of the agreement. Many find that the continued relationship (alimony, support, maintenance) with a former spouse can cause more problems following the divorce. A lump sum settlement or buyout may be best in these circumstances.
What is a lump sum settlement?
Instead of continued support over a period of time, a lump sum settlement is an amount that is negotiated or agreed upon that one spouse pays in one payment to the other spouse in order to finalize a financial settlement instead of periodic monthly payments for support or alimony.
When is a lump sum settlement better than term payments?
If there is a significantly bad relationship between the spouses that would be aggravated by continued contact due to remittance of support or otherwise, a lump sum settlement may be advised.
If one spouse expects to be in a higher tax bracket and the dependent spouse plans to file in a lower tax bracket but anticipates a higher income in subsequent years, an alimony buyout in year one is common.
There may be a tax advantage to a lump sum settlement based on income of either spouse, investments or settlement terms. Note that based on the new (TCJA) Tax Cuts and Jobs Acts of 2017, tax laws have changed regarding new divorce settlements and filings for 2019. Consult with your tax attorney or accountant for more details.
If the paying spouse has problems with commitments or has indicated through current or past behavior that he/she would not honor the legal agreement to forward payments over a term specified in the agreement; a lump sum settlement may provide a means to ensuring the dependent spouse will receive the agreed upon amount.
How is the buyout calculated?
It can be negotiated between each spouse. Many calculate the estimated payments by the anticipated term and apply a discount rate along with rate of inflation in order to determine a present day value of future cash flow (expectation of growth through the receiving spouse's investments with the funds minus inflation).
Plans to remarry
If you cohabitate, most traditional alimony agreements suspend alimony payments and if you remarry the alimony payments are irrevocably terminated. So, if you plan to do so before the end of the term set forth in your agreement for alimony payments, a lump sum settlement may provide an overall higher financial payout.
Concerns of a buyout versus periodic monthly payments
It's important to understand your tax liability and anticipated returns related to support payments, buyouts and assets before making a decision regarding the amount or distribution of either. Your spouse's attorney is working diligently to exploit every opportunity to provide his/her client the most advantageous settlement based on numerous factors. If you don't understand the potential consequences of early distribution of investments or taxation on buyouts or support as either the paying or dependent spouse, you should consult an attorney, financial advisor and/or accountant.
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