A client recently asked me an interesting question. The client wanted to know if he should pre-pay his spousal maintenance, giving his wife a large cash payment upfront, or should he pay the maintenance out over the course of the term.
What is Maintenance?
Maintenance, or as it is better known, alimony, is a payment that is made to your ex-spouse to allow him or her to maintain some semblance of the marital lifestyle. Maintenance Should not be confused with child support. Child support is money paid to the custodial parent to provide for food, clothing, and shelter for the children of the marriage.
Historically, there was no incentive to pre-pay spousal maintenance; the tax laws provided that alimony was tax-deductible by the payor. So to pre-pay spousal maintenance meant giving up a pretty sizeable annual tax deduction. But the tax law has been changed and maintenance is no longer tax-deductible.
How long is maintenance paid?
So, now that maintenance is no longer tax-deductible, the answer to the question of whether you should pre-pay maintenance really depends on how much of a risk-taker you are.
Maintenance is generally paid for a term that is of a fixed length, be it a number of years or months. The maintenance payments could terminate earlier than the set term. For instance, if either you or your spouse die before the expiration of the term maintenance could terminate. Likewise, if the recipient spouse remarries during the term of maintenance, the payments could end. In fact, in some circumstances, if the recipient spouse even cohabitates with another person in a romantic relationship akin to marriage, maintenance can be suspended.
Not only can maintenance be terminated early, but it could also be modified downward. If there’s an unforeseen change in economic circumstances, that is you become unemployed through no fault of your own, disabled, unemployable you could seek a modification of your maintenance payments. Payments could be either suspended or downwardly modified.
Risks of prepaying spousal maintenance
If you prepay your spousal maintenance obligation, you are assuming the risk that none of the early termination events would occur. You are assuming the risk, for instance, that both you and your spouse would survive for the entirety of the maintenance term and that your spouse is not going to remarry.
Maintenance prepayment considerations
If you are considering prepaying spousal maintenance, then you should first negotiate the amount and the duration of the maintenance in the normal course, without any consideration of prepayment. Only, after you have an agreement on the term and amount of any maintenance payment should you ask for a discount for making an upfront lump-sum payment. After all, the concept of the time value of money tells us that a dollar today is worth more than the same dollar tomorrow.
In making the offer to prepay maintenances, it would not be unreasonable to also factor in the other risks that the full term of maintenance would not be paid. This should net you a substantial discount on the amount of maintenance you would pay if you had paid for the entirety of the term.
But at the same time, this could be a win-win situation because your prepayment of maintenance puts money in the hands of your soon-to-be ex now. He or she will not have to wait for the entirety of the maintenance term to aggregate this amount of cash
If you’re considering a divorce or have alimony or maintenance issues, please contact me.