Nolo's Essential Guide to Divorce - Emily Doskow [130]
Why doesn't everyone do this, then? Lots of people can't afford the big payout, for one thing. And although spousal support payments are tax deductible, a huge deduction in one year might not be as valuable as a number of years of smaller deductible payments. On the other end, the recipient spouse won't be able to count on the regular income from ongoing support, but instead must invest and manage the lump sum. If you're thinking about taking a lump-sum payment for spousal support, consider your own financial habits. What are you likely to do if you suddenly have a large sum of money available to you? If you're something of a spendthrift, work out a plan beforehand for investing the money so that it doesn't get frittered away.
Lump-sum spousal support also raises important and sometimes complicated tax issues. The tax hit can be significant for the recipient spouse, who must include the entire amount on that year's return as taxable income. You can, however, get around this tax issue. You have the option of stating in your agreement that the support payment is neither deductible nor taxable-as long as it works both ways, you're allowed to choose.
You also have to be careful that the IRS doesn't view the payment as a property settlement instead of support, and try to challenge the paying spouse's deduction. (See "Tax Planning When You Pay or Receive Support," below.) You can do this in your settlement agreement, which should set out the amount of support agreed upon over time and then state that it will be paid as a lump sum.
Consult an attorney or accountant. Before deciding to go ahead with a lump-sum payment, talk to a professional about the tax consequences.
Payments to Third Parties
In certain circumstances, the paying spouse can make payments to third parties instead of to the other spouse, and have those payments considered spousal support. In order to be tax deductible as spousal support, the payments must be made under an agreement or order in your divorce case. So, it takes some planning if you want to make this kind of arrangement.
Payments to a third party can include payments for medical costs, housing expenses, tuition, or anything else that is provided for under your divorce order or settlement agreement. For example, if you're required by the divorce decree to pay the mortgage, insurance, and property taxes on the family home even though your spouse now owns it, those payments can be considered spousal support.
Why would you use third-party payments? If your spouse is getting extended (COBRA) coverage under your group health insurance plan at work, the employee spouse might want to pay the premiums through payroll deductions. Either spouse might want to have spousal support paid directly to a third party if the spouse receiving support isn't the greatest financial manager. For example, if you know your spouse isn't good about paying the mortgage on time, you might want to make sure your kids' living situation is secure by paying the mortgage yourself. If you're the spouse getting support and are worried about your ability to save up enough of your support to pay your school tuition each quarter, you might ask your spouse to do it for you and deduct the amount from monthly support payments.
Planning for Possible Disability or Death of the Supporting Spouse
If the supporting spouse dies unexpectedly, the recipient will suffer a sudden, and possibly catastrophic, loss of income. To protect against that possibility, it's prudent to purchase a life insurance policy with the recipient spouse as the beneficiary. It's also not unreasonable to buy disability insurance to protect against total disability, which would render the supporting spouse unable to pay as agreed.
In either case, if you're the recipient spouse, it'll probably be up to you to ask for the insurance and to