Many spouses are faced with an important decision before finalizing their divorce. If they were the primary breadwinner during the marriage, they will most likely be required to pay alimony. Although they may have no control over this matter, they do have some degree of control when it comes to how they pay. Spouses can generally choose whether to pay their alimony in a lump sum or via monthly payments.
Here are some pros and cons of both payment strategies:
Get it Over With
One of the most attractive aspects of a lump sum alimony payment is that the paying spouse can forget about their financial obligations and move on with their lives. Once this lump sum is paid, no further alimony payments are required. This might be especially beneficial for a spouse who does not want to be reminded of the marriage every time they look at their bank statement, especially if the marriage ended on bad terms and resulted in emotional trauma for that individual.
Hold them Accountable
If a spouse is receiving the alimony payment, then a lump sum also has its fair share of benefits. In fact, the court may order that a spouse make a lump sum payment if there is a risk that the periodic payments will not be made. Perhaps the spouse has shown that they cannot be trusted to make these payments. Maybe they have engaged in misconduct such as attempting to conceal assets. A lump sum ensures that the receiving spouse will get their fair share, no matter what happens. Note that this is only possible if the paying spouse is actually financially able to make this lump sum payment.
Consider the Tax Implications
Periodic payments and lump sum payments also have notable differences when it comes to the tax implications. When a spouse receives periodic alimony payments, this counts as taxable income. These periodic payments are also tax-deductible for the paying spouse. For this reason, paying spouses might prefer to choose periodic payments. On the other hand, a lump sum alimony payment is handled much like a cash gift. It is not tax-deductible and it does not count as taxable income. This obviously benefits the receiving spouse.
Things Can Change
Another important thing to remember is that circumstances can change after a divorce. A spouse who receives alimony may remarry or become wealthy within a few years of the divorce. At this point, the alimony payments may be clearly unnecessary. But if a paying spouse has already made a lump sum payment to the receiving spouse, there is no going back. In contrast, a paying spouse can modify their periodic alimony payments to better reflect these changing circumstances.
So, which is the better option? There are numerous pros and cons to both strategies. Ultimately, a spouse will need to consider their own personal goals and priorities in order to make a sound financial decision. That being said, a qualified, experienced lawyer can offer them meaningful advice and guidance as they try to make the best possible decision.