It’s difficult to predict the outcome of divorce. However, there’s one statement that applies almost universally: most people have more options for their settlement than they realize. There are ways to structure a settlement that most people don’t think about, particularly when you are settling out of court.
One option that many people don’t consider is doing a lump sum payment for spousal support or child support. Spousal support is often done as a monthly payment over a certain period of time. However, you could do one large payment, or a few large payments, instead.
In some cases, this won’t be an option, because the spouse who is paying support needs to have multiple years’ worth of support in their savings. However, when it is a possibility, it is worth considering.
One of the biggest benefits in paying or receiving a lump sum payment is that you are done dealing with your ex-spouse, with the exception of child custody. It can be a big burden lifted. If you will be receiving spousal support, you don’t have to worry about whether they are going to make their payment every month. If you will be paying spousal support, it can bring up a lot of emotions every month when you write that check.
When you do a lump sum payment, there are different tax considerations. For monthly spousal support or child support, the person who is paying support gets a tax deduction for that amount, and the other spouse receives it as taxable income. However, with a lump sum payment, there is no tax deduction, so the person who is paying the support pays the taxes.
A lump sum payment will be a smaller amount than the total monthly payments would be. For example, if you were to receive $10,000 a year for ten years, you would receive a total of $100,000. However, a lump sum payment might be a check for only $70,000. Receiving $70,000 today is the same as receiving $100,000 over ten years. If you’re interested in why this is, you can look into present value calculations. It’s a well-accepted mathematical formula that takes into account the interest that you would receive over time. Therefore, with a lump sum you aren’t paying (or receiving) less money, it’s just a question of timing.
To decide whether a lump sum will be right for you, you need to know yourself. If you will be paying spousal support, will you be bitter every month when you pay that money? Some people don’t mind it very much, but others have a very negative reaction to every spousal support payment. If you will be receiving spousal support, are you able to manage your money so that you can make that money last? Are you able to stick to a financial plan? Getting that much money up front is almost like winning the lottery – and 70% of lottery winners go bankrupt within five years. It’s very tempting to spend money when you have a large amount in the bank.
Another thing to consider is how much you trust your ex-spouse. Do you trust that your ex-spouse will make their payments on time? If they start missing payments, you may have to get the courts involved. Your ex-spouse may fall on hard times themselves, like losing their job. Conversely, if you are paying child support in a lump sum, can you trust your ex-spouse to manage their money? If the money runs out, you will still want your children to be provided for.
Paying spousal support in a lump sum can solve some financial complexities, so it’s something to consider as you work out your divorce settlement.
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