Spousal support usually involves payment of a monthly dollar amount for a certain period of time. However, it doesn’t need to be this way. When you work out your own spousal support agreement, perhaps with the assistance of a divorce mediator, you can be very creative. One fairly common approach is to pay all or a large chunk of the agreed-upon support at one time as a lump sum. Sometimes this lump sum is referred to as a spousal support buy-out.
Why might a lump sum be good for the recipient?
- You don’t have to worry that your spouse will stop (or become irregular in) paying you the monthly amount. Ditto for the possibility that your spouse will try to get the court to reduce the amount of monthly support. This could happen if your income increases or your spouse’s income goes down.
- If you remarry, monthly spousal support normally ends, perhaps before its expected duration.
- You may have good uses for the lump sum, such as to keep your current home, buy a new home, pay for job training / education or start a business.
Why might a lump sum be attractive to the payer?
- It can be annoying or upsetting to have to pay spousal support month after month for a period of years. Monthly support can make it harder (for both spouses) to move on – both emotionally and financially.
- You might think that your income is going to go up (or your spouse’s income is going to go down). This could make it advantageous to lock in a fixed spousal support amount before either happens.
- If you remarry, you would probably prefer not to still be paying spousal support to your prior spouse.
Where does the lump sum come from?
When there is an equal community property division, normally the spousal support lump sum is paid in cash or cash equivalents. Sometimes, however, couples agree upon an unequal division, in which some or all of the extra property going to the recipient spouse may be in lieu of spousal support.
How to come up with the lump sum spousal support amount?
The usual approach is:
- Determine what the monthly spousal support amount would have been.
- Determine what the monthly spousal support duration would have been.
- Multiply the monthly amount by the duration to get a monthly spousal support total.
- Agree up on a discount rate (to take into account that money received now is worth more than money received in the future).
- Discount the spousal support total by the discount rate.
Say, for example, a couple agrees on spousal support of $2,000 per month for 6 years (72 months). The total monthly spousal support would be $2,000 times 72 = $144,000. With a discount rate of say 3%, the discounted lump sum would be $133,602.
Does the lump sum have to be paid all at once?
Not necessarily. Perhaps it could be split into several payments, each with an agreed-upon due date.
Possible lump sum issues
- Non-modifiability. Remarriage by the spousal support recipient normally terminates monthly spousal support. Usually, a lump sum spousal support buy-out is nonrefundable. However, a couple could negotiate terms under which lump sum monies would be refunded, such as remarriage by the recipient shortly after receipt of the lump sum.
- The liquidity and real value of the lump sum monies. A dollar in cash doesn’t have the same value and liquidity as a dollar in an investment account or retirement account or a dollar tied up in real estate. There may be hidden tax implications that should be understood.
- Before the Tax Cuts and Jobs Act of 2017, spousal support was tax-deductible for the payer and recipients reported it as (taxable) income. Now, for federal income tax purposes, all spousal support agreements made after 1/1/19 are no longer tax-deductible or taxable income. However, in some states such as California, spousal support received is still taxable and spousal support paid is deductible for state income tax purposes. So this should be taken into account when negotiating lump sum spousal support in California.