Which is better, alimony or property?
Question: I am negotiating my divorce settlement in Massachusetts and have the option of receiving alimony for a fixed period of time (e.g. five years) at a fixed amount (e.g. $5,000 per month) or to receive a certain amount of cash in our division of property (e.g. $250,000). Which option should I choose?
This question is often posed by divorcing couples both on the receiving and giving end. The recipient of the settlement wants as much cash as possible and the person making the payment wants to pay as little as possible. Doing the math, the alimony payable would be $300,000 over the five year period of time and the cash payment would be $250,000. This seems like an easy answer for both sides. However, the answer is not what you might think.
Finality: One of the most fundamental concepts to think about when analyzing whether alimony or property is better in a divorce case is the fact that property division judgments and agreements are final and non-modifiable while alimony judgments or agreements may be subject to modification, unless very specific language is included in the parties’ agreement. This is important because an alimony judgment is usually modifiable based on some change in circumstances. For example, suppose the spouse obligated to pay alimony to the other spouse loses his or her job. They should and will file an action to modify the alimony judgment based on the fact that they cannot pay the amount ordered. If the recipient of alimony took the cash buyout of $250,000 during the divorce settlement negotiations, they eliminate the risk of future modification.
Tax Consequences: Alimony is taxable income to the recipient and tax-deductible to the party obligated to pay alimony (almost always). Depending on the income tax bracket for each of the parties it might make a significant difference in the net amount provided. If the recipient pays 25% taxes, for example, the net amount received is only about $225,000 in alimony over the five year period.
Variables to Consider: When contemplating whether to accept an alimony award or property division award, it is always smart to consider the following important variables:
- Whether the party paying alimony has stable employment.
- The age of the parties, which is important because the party paying alimony generally will not have an obligation to pay alimony past his or her age of retirement which is defined the same way as the Social Security Administration defines retirement. In this example, suppose the party that is obligated to pay alimony reaches retirement age in year 3?
- The tax consequences for the recipient. As suggested above, the net effect of a substantial alimony payment will be weakened by the associated tax consequences.
- The nature of the asset to be provided. Cash is a wonderful asset to receive in a divorce. But what if the proposed property to be divided is land? Or a pension or other retirement account? Or stocks? Or stock options? Or a business interest? Obviously, the “present value” of the asset to be divided is key. Money in a retirement account may not be accessible for years. Or land may not be saleable. Or stock options may not be exercised until a future date and/or may have a wildly variable value. These are just some examples and a certified divorce financial planner is a useful ally in making an appropriate determination as to how to divide assets appropriately.
- Whether child support is payable. In Massachusetts, alimony is generally not payable by the person that pays child support unless the family income totals more than $250,000 per year. This is an important consideration particularly for the person paying alimony, as they may not likely have an alimony obligation to begin with.
Given the above information, taking the cash would be a far better option. But what if the option is for a $175,000 cash payment upon divorce or alimony in the amount of $5,000 per month for 5 years?