For many, one of the most bitter divorce pills to swallow is paying spousal support (aka alimony). Paying support is a monthly reminder of emotional painful loss or financial stress, all the while someone is trying to recover from the financial cost of divorce. This is not just the case for the payor, a payee also can feel the same loss when receiving payments. They can experience frustration for still being reliant on an ex-partner. The payee might feel beholden to or under the power of their ex by receiving these payments every month. This receivership can cause a lot of stress and lower one’s feeling of self-worth.
Typically, neither party wants to extend their financial ties after their divorce is final.
Yet monthly payments over a specific period are the most common form of spousal support. Generally, there are protections stipulated for the payor, in a pay over-time model. The common causes for modification or cessation of payments are as follows:
Payee
- remarries
- cohabitates with a person they a romantic partner
- passes away
Payor
- retires
- becomes disabled
- passes away
Payees can protect themselves from loss or non-payment of spousal support during negotiations. It is best to consult with an attorney, in your appropriate jurisdiction, to put protections in place at the outset of these payments.
With established protections for the payor, why would a payor want to do a spousal support buyout?
- 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.
- Someone earns money in a lump fashion.
- Someone earns money in the form of stock that they do not want to convert to cash, but have 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 payments are expected to continue.
Calculating a lump sum scenario can be complex.
Again, when calculating a buyout, consulting with jurisdictional legal and financial experts is in your best interest. There are few payors that are going to simply take the payment amount and 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 both parties will consider fair:
- Determining the discount rate used to calculate the present value. A discount rate determination is generally based on a person’s tolerance for risk. This rate usually equates to an amount of money today the payee could grow over time into an amount near to equal the amount they would have received over time. What if both parties have different risk tolerances and the ability to get a return that meets or exceeds the amount offered today?
- How does the risk of death, remarriage, or cohabitating get addressed? Life and disability insurance actuaries get paid a lot of money to come up with complicated calculations for determining risk, how can this be done for a specific divorce scenario?
- While at the federal level for divorces after 2018, the payor can no longer deduct periodic spousal support payments, some states still allow for this. The payee pays the tax. Accounting for these two different tax treatments is tricky.
Spousal support buyouts are financially and emotionally complicated. Both parties should consult with their divorce professional team to assess if this is the best decision for them financially and emotionally, as well as legally.
