When an individual files a petition for the dissolution of marriage or registered domestic partnership, alimony can be awarded depending on the couple’s marital assets, marital settlement agreement or the economic need. Typically, the payments are meant to provide financial support and equalize the spouses’ standard of living after divorce. Alimony is usually made by the higher-earning spouse to lower-earning spouse or non-wage earning spouse, upon the dissolution of marriage, often on a monthly basis. This means that even after the marriage has ended, the spouses will still be tethered together, and that may leave a bad taste in either spouse’s mouth. Also, the paying spouse may not be willing to give their former spouse a chunk of their paycheck each month. Moreover, there are possibilities of failing to make a payment, which may leave the receiving spouse in a bad position financially. With this in mind, California law allows for alternative solutions to monthly alimony payments as a way of offering flexibility and freedom for both parties.
Possible Solutions to Spousal Support in Divorce
Below are some of the options that can be discussed when addressing spousal support:
- Support can be long-term and modifiable
- Spousal support can be temporary or short-term
- Spouses may come up with their own alimony settlement agreement, which indicates the duration and amount of payment to be made. This allows the parties involved to come to an agreement without having to return to court to argue those issues
- Alimony can be in a lump sum. In this case, the paying spouse makes a one-time lump sum payment instead of monthly payments over a predetermined duration.
- Alimony can be waived in lieu of obtaining a greater portion of the marital property. Property buyout is one of the popular alternatives to traditional alimony payments in California. In this form of alimony payment, the spouse requesting support chooses to obtain the full value of a marital property asset instead of the monthly payments.
- Spousal support can also be paid through the formation of a trust, in which the recipient spouse will be the beneficiary
Let’s take an in-depth look at some of the available alternatives to monthly alimony in California.
ALIMONY TRUSTS
An alimony trust is provided for under the trust and estate law. An Alimony Trust is created primarily to provide financial support in the event of a divorce. Like standard trusts that have their own agreements, an alimony trust is a setup that is agreed upon by the two spouses. The supporting spouse places stocks or additional income-earning investment into the trust. The recipient spouse, on the other hand, will be the beneficiary of the trust. A neutral third-party professional can be appointed as an intermediary to keep the asset management structured as agreed upon by the divorcing spouses. The professional also serves as an advisor on financial legalities and obligations to each other and the agreement.
When the alimony trust is activated, the recipient spouse receives all the income generated by property and assets from the trust as alimony for the period stated in the agreement. If the recipient spouse dies or the agreed term expires, the deal contains already laid down clauses on how to proceed with the remaining assets. If the former spouses share any children or grandchildren, new trusts can be formed under their names. Alternatively, the assets can be used for charity purposes or can be returned to the payor spouse.
Both spouses can greatly benefit from an alimony trust. For instance, a trust covers several risks and uncertainties that may arise in future to frustrate the agreement such as bankruptcy. The agreement sets aside the assets earlier in advance, providing security on the contract to proceed smoothly even if the payor is unable to make the payment at some point. If a scenario arises where the payor needs to sell an interest in the business to fund monthly alimony spousal support payments, then a portion of the businesses’ equity will be dedicated to the trust. This will facilitate payment using the distributions from the particular portion on a yearly basis up until the term outlined the agreement expires. When the time expires, then the shares are returned to the payor.
Under Section 682 of Internal Revenue Code (IRC), the beneficiary (recipient spouse) of the income from the trust is required to report and pay tax duly and should not report the income as alimony. Also, the payor spouse does not enjoy the advantage of claiming an alimony deduction from the income made in the trust.
Additionally, alimony trusts are affected by cases of underfunding or overfunding in terms of the settlement. In case of underfunding, the payor spouse may choose to personally provide a guarantee for any failure to make payments by regaining the ability to deduct the amount on their own income. However, this leaves the potential of the income from the trust being taxed if the guaranteed payments are derived from the trust assets. Conversely, if the alimony trust is overfunded and the payor spouse starts to slow down on payments, he or she will not attract any potential penalty which mostly involves recapturing alimony payments which were made in the first three years of the separation or divorce.
Alimony trusts can be very useful agreements in streamlining divorce mediations and separation circumstances. Added to other tools and professional crafting they can financially keep both spouses afloat and smoothen alimony transactions. If you have any inquiries or need help in setting up an alimony trust, please contact San Diego Family Attorney today.
PROPERTY BUYOUT
Divorcing parties may choose to waive spousal support and instead, they can agree on an uneven division of community property. The payor would be obligated to pay support to the other spouse and in this case, it would be from his or her share of the marital assets such as cash, home equity, business, or retirement benefits. Alimony property buyout, therefore, involves buying up the property in one colossal sum instead of paying monthly alimony. This can happen in two ways; full spousal support buyout partial spousal buyout. Partial alimony buyout refers to a transfer of a portion of the payor spouse’s share of the assets and also involves monthly support payments. An advantage is that this arrangement the amount or duration of payments depending on the value of the property transferred.
Why do people do support buyouts?
Spousal support buyouts are not that common but do happen to be very useful in certain situations. They offer an advantage of complete disentanglement between couples who are hostile to each other and do not want to remain connected financially through the exchange of monthly alimony payments.
Also, alimony buyouts offer finality. If you’re obliged to monthly support payments, you may be involved in never-ending modifications of the terms and agreements. Spousal support buyouts are non-modifiable. Once completed, you know that will not have to worry about your former spouse taking you back to court to change the deal. However, it’s worth noting that this advantage does not apply in the case of partial support buyout.
In cases where the spouse who is supposed to pay alimony does not have enough cash flow in their budget to pay support but is still obliged to pay, they can go for full support buyout to address their situation. This, for instance, may apply in a case where the higher earning spouse does not have the cash to pay alimony because he or she takes on a substantial amount of debt.
A spousal support buyout replaces the monthly alimony payments and is therefore not taxable. This becomes very appealing to most divorcees since the individual relinquishing his or her ownership rights does not have to declare the transfer on their taxes and neither does the recipient upon transfer of property.
Some of the Risks Related to Spousal Support Buyout
One major risk involved in spousal support buyout is that it does not allow room for any modification (monthly spousal payments can be modified if need be). For example, if an individual were subscribed to paying monthly spousal support payments and lost their job, the individual could perhaps get the spousal support payment reduced for some time until they get a new job. If that person transferred $100,000 as their share of their home’s value and then lost a job, the alimony buyout could not be revised, which also means that the individual won’t get the buyout back. Another instance is that if the beneficiary of the support gets married again, monthly spousal support payment may be reduced or even terminated. But in the case of a buyout, the settlement is final and cannot be altered even if the receiving spouse remarries.
Another risk of support buyout involves the paying spouse utilizing most or even all their assets to fund the buyout and left with very few assets. It’s also possible that the share of assets is not enough to do a buyout, which means that the spouse will have to relinquish their share and still make monthly payments. This can be a calculated risk by the payor, but it is still a risk nonetheless.
LUMP SUM SUPPORT
Some individuals may choose to make a lump sum payment so that they can peacefully move on with their lives while avoiding a monthly reminder of their previous marriage. One of the best ways to avoid a monthly alimony payment program ordered by the court involves paying all your spousal support in a one lump sum. However, for you to qualify for a lump sum payment, it must be approved by your spouse and the court.
Paying your spousal support as a one lump sum allows you to clear your entire alimony balance all at once and evade monthly payments. In California, a spouse is allowed to pay the entire alimony amount in one lump sum provided that the total sum is equivalent to the total amount of forthcoming monthly payments.
Benefits of Receiving Lump Sum Alimony
There are a number of benefits that come with you accepting a lump sum spousal support payment. To begin with, if you choose to take a lump sum payment, you're likely to get more money compared to taking a monthly payment over a sequence of several years. A lump sum alimony payment is equal to the total amount of future payments and this means that it’s not discounted to current day value. Accepting spousal support or alimony as a lump sum payment upfront will give the recipient spouse an opportunity to invest and later obtain rational returns on investment compared to investing the cash on a monthly basis.
Also, receiving a lump sum alimony payment helps you avoid collection problems that may come with the monthly payment option. In most cases, the support recipients are usually forced to obtain a court order that compels their former partner to continue paying monthly alimony. Lump sum alimony payment, therefore, helps you evade such enforcement issues that may arise in future since you will collect all your spousal support upfront.
Tax Implications of Lump Sum Alimony
If you choose to accept a lump sum payment for all your alimony, it is important to remember that there may be tax consequences. This, therefore, implies that anyone who accepts a lump sum payment that is specifically labeled as “alimony” or “spousal support” will be taxed for the full amount received in that year. However, this could be avoided if the same payment is instead categorized as a “settlement” in the divorce decree. It’s, therefore, imperative that you consult with an alimony attorney when deciding to pursue a lump sum payment. The lawyer will advise you on how best to pay or accept a lump sum payment. To some, hiring a lawyer may seem expensive but it’s worth it compared to the amount of income taxes you may owe if a wrong decision is made.
Contact San Diego Family Law Attorney Today
California alimony laws can be complex especially when it comes to sourcing for other alternative means of making the payments. Monthly alimony payments may not work for all spouses in divorce. If you're looking for better alternatives to spousal support in divorce, San Diego Family Law Attorney will be happy to share options that other couples have used to settle this issue. Our attorneys will help evaluate your unique situation and lifestyle in choosing the right option for you. We’ll also help you prepare the necessary documents needed to point out the terms of your settlement. Contact us today at 619-610-7425to discuss the unique facts of your case.
