One of the most bitter divorce pills to swallow is having to pay alimony, also called spousal support or spousal maintenance. Paying support can be a monthly reminder of an emotionally painful loss or financial stress. Add this on top of trying to recover from the financial cost of a divorce, and you can see why it’s such a touchy subject for many. This is why we are discussing alimony angst and breaking down this complex divorce topic.
Alimony can be equally stressful for the recipient (payee), who might feel frustration over having to still be reliant on their ex-partner. The payee might feel beholden to or under the power of their ex because they receive these payments every month. This receivership can cause a lot of stress and lower one’s feeling of self-worth.
In general, neither the payor nor the payee typically wants to extend their financial ties after their divorce. Yet monthly payments over a specific period are the most common form of spousal support. Generally, there are protections stipulated for the payor, in this pay-over-time model, with common causes for modification or cessation of payments, including:
- Cohabitates with a romantic partner
- Passes away
- Passes away
- Becomes disabled
Payees can protect themselves from loss or spousal support non-payment during negotiations. It is in the payee’s best interest to consult with an attorney, in the appropriate jurisdiction, to put protections in place at the outset of these payments.
The Different Types of Spousal Support
There are generally four main types of spousal support: temporary, rehabilitative, permanent, and reimbursement.
1. Temporary Alimony
Temporary alimony is spousal support ordered during the time the parties are separated, prior to their divorce being final. It is put into place for a variety of reasons such as unemployment during the divorce proceedings resulting in the inability of a spouse to support themselves, or the spouse needs to use the alimony funds to pay attorney fees and other expenses necessary to continue with the divorce.
2. Rehabilitative Alimony
Rehabilitative alimony is awarded to the payee for a set amount of time after the divorce is finalized. This alimony type gives them an opportunity to become financially independent, whether by means of entering the workforce or continuing their education.
3. Permanent Alimony
Permanent alimony is spousal support paid to the payee until a reason for payment modification or cessation mentioned previously occurs. This includes the payor or payee’s death or remarriage of the payee. Consideration for permanent alimony is usually only for long-lasting marriages, generally 10 years or more.
4. Reimbursement Alimony
Reimbursement alimony compensates the payee for time, money, or effort they provided while their spouse furthered their career, either by going back to school or another means. It is often awarded alongside another type of spousal support. Temporary or permanent.
Spousal Support Buyout
There is an alternative to the typical monthly payments often associated with spousal support. Referred to as a spousal support buyout, or lump-sum alimony, there are many reasons this scenario might be more desirable for both the payor and payee, including:
- Disentanglement: The painful cycle of monthly payments is simply too much to stomach.
- Finality: Cutting all financial ties can help with closure regarding emotional ties.
- Financial challenges meeting or managing the monthly payments. This can be temporary, based on a few circumstances:
- The divorce settlement.
- Earning money in a lump fashion.
- Earning money in the form of stock that your ex does not want to convert to cash, but has an obligation to pay in cash.
- There is a low risk of the payee dying, remarrying, or cohabitating.
- The payor is not retiring within the time the payments are expected to continue.
Calculating A Buyout
A buyout scenario can be complex, and again, jurisdictional legal and financial experts should be consulted. There are few payors that are going to simply take the payment amount. Multiply that by the number of payments to calculate the amount they are willing to pay. Here are some of the nuances that make it challenging to come up with what is fair to both parties:
- Determine the discount rate used to calculate the present value, which is generally based on a person’s tolerance for risk. This rate usually equates to a money amount today that the payee could grow over time into an amount near to equal the amount they would have received over time. This rate may be difficult to calculate if both parties have different risk tolerances or if the return might not meet or may exceed the amount offered today.
- How is the risk of death, remarriage, or cohabitating addressed? Life and disability insurance actuaries receive a lot of money to come up with complicated calculations for determining risk. How to do this for a specific divorce scenario?
- At the federal level for divorces after 2018, the payor can no longer deduct periodic spousal support payments. However, some states still allow for this. The payee pays the tax. Accounting for these two different tax treatments is tricky.
Spousal support buyouts, much like the other four types of spousal support, are financially and emotionally complicated. Both parties should consult with their divorce professional team to assess if a buyout is the best decision for them, financially and emotionally, as well as legally.