Financial Concerns Around New Support Arrangements
We’ve all heard the song, and we all know the lyrics – “You gotta know when to hold ‘em, know when to fold ‘em, know when to walk away, know when to run.” These prophetic words were sung by country star Kenny Rogers in the early years of his marriage to Marianne Rogers, who managed to walk away with a cool $60 million dollars in 1993 following their divorce. Part of this of course was her portion of the accumulated marital property (it was a 16-year marriage, after all). The other part of it was her alimony buyout.
There are so many factors that go into a divorce settlement…custody arrangements, property division, ongoing support. Splitting the life you’ve built with someone can be a very daunting, overwhelming and unpleasant task. Suddenly you find yourself tangled up in an unbalanced court system along with two sets of brawling attorneys, and an ex that is becoming increasing unhinged during the whole process (and let’s face it, you’re probably starting to feel pretty unhinged yourself). The chaos of it all is about enough to make you want to scream.
One of the big-ticket items on the table during your negotiation (or eventually your litigation, if a deal cannot be struck between the two of you and your attorneys) is alimony. Alimony goes by several different names including maintenance and spousal support (though it is not the same as child support, and is calculated using different factors). Alimony may be the single most hotly debated topic during divorce discussions, and for very good reason – it determines the amount of money above and beyond the current marital balance sheet that one spouse must pay the other, and is based on a set of objective and subjective factors.
“There are so many factors that go into the spousal support calculation in California, and the amount of support is determined on a case-by-case basis,” says Melanie Mandles, family law attorney at Wasser, Cooperman and Mandles, one of the most trusted law firms in Los Angeles. “Among a number of factors, the court will take into consideration each party’s earning capacity, ability to pay, needs of the supported spouse, the marital standard of living, the length of the marriage and potential income generated from all owned assets, even assets that don’t necessarily produce an active income stream.” Melanie exclusively represents ultra-high net worth clients in the family law space, and is known for her settlement-minded orientation and empathetic approach to her client’s most challenging divorce issues. “Of course, it’s more expensive to maintain two households than it is one, so in most instances it’s reasonable to expect that both spouses may not be able to keep up the same high standard of living, but the goal of the spousal support arrangement is maintain the status quo to the extent it is practical to do so.”
Lump Sum versus Monthly Payments
There are two different ways that you can pay (or receive) alimony. The first way is an ongoing payment for a set period of time, possibly even for an indefinite period of time (i.e. the entire working lifetime of the payor). Ask anyone you know who has been divorced how they feel about writing that check each month and you’re likely to met with some angry words and festering resentment. Feeling like you are on the hook to bankroll someone else’s life (someone you probably don’t like at this point) is a pretty repugnant situation for the payor...and the payee, quite frankly. Feeling dependent on your ex’s ability to get a check into the mail every month doesn’t create a comfortable dynamic either if you are on the receiving end of this arrangement.
The second option is an alimony buy-out. This is where the paying spouse opts to provide a larger upfront payout, or a larger portion of the assets in order to buy themselves out of an ongoing alimony obligation. Sounds simple enough, but what is the best scenario financially?
Given the choice, what is the optimal outcome if you are the payor, or the payee? It’s hard to say, it depends on a few factors. Let’s review a few pros and cons.
Is the bird in the hand worth two in the bush?
There are several reasons that taking an alimony payment up front might be beneficial, not the least of which is elimination of income risk going forward. If your soon-to-be-ex is making a high salary at the moment, you remove uncertainty from the table by accepting a buyout. Should your ex lose their job later, or experience a significant change to the downside, your income stream is protected because the assets received in the buyout are invested on your behalf, and earning a return that provides your stream of income. The spousal support buyout is not modifiable, so if there is a negative event later on that significantly changes the primary earner’s situation, the spouse receiving support is not financially affected. “I like this option for many of my clients,” Melanie says. “This works best if the divorcing couple has a high asset base and a shorter marriage, because it can be quite difficult to come up with a large lump sum payment to buy out spousal support after a long-term marriage.”
Of course it is not always possible to arrange a large single payment when you are signing your divorce decree. If the marital estate is not large enough, or the assets are illiquid (meaning you and your ex own a lot of assets that cannot be easily converted to cash, or transferred from one party to another) then a lump-sum buyout may not be feasible.
Additionally, you and your ex-spouse (and your respective attorneys) will need to agree upon a discount rate to use when calculating the present value of the ongoing alimony obligation – the discount rate is an agreed upon rate of interest that you will use to mathematically make this calculation, and it is often dependent on where interest rates are today and not necessarily where they are going in the future. As you may know, interest rates have been at historic lows for the past several years, but in recent months we have seen a very sharp upward trend. This could heavily affect the lump-sum amount of alimony.
The present value of future freedom
There are a couple of intangible benefits to forgoing the monthly alimony payment…in most states, if the receiving spouse remarries or cohabitates, the payor is no longer obligated to make the monthly alimony payments to his or her ex-spouse. This can work for or against you, depending on the role you are playing in this dissolution – if you are the payor, this is great news because you are released from what may feel like a life sentence of ongoing payments (in some cases it is “life without parole,” you must continue to make support payments until the day you retire and both you and your ex go on social security). If you are the payee, the ability to move on with your life and get married again is best supported through the alimony buy-out option.
“It’s also important to remember that if you find yourself in front of a judge at trial with your ex instead of the settlement conference table, the court’s spousal support order in the state of California is modifiable – meaning you could wind up back in court with your ex to renegotiate the terms of support if one of you experiences a material change in circumstance,” counsels Melanie.
Court Ordered Divorce
When ongoing monthly payments are involved, it can feel as if you just can’t ever get away from your ex, and moving on can feel like a dream just out of reach. It almost feels like the separation never even happened. It’s hard to attach a quantifiable value to mental and emotional freedom, but it has a high value nonetheless and cannot be ignored.
A few final thoughts on the financial front
Facing the complexities of alimony arrangements can be a bit scary, but there are a few things that you can do to start planning for the next phase of your life financially. Creating a spending plan at the outset of the dissolution process can help you understand the cost of your lifestyle, and ultimately help you make the best decisions with the money you have coming in. Working with a financial planner to reconcile your spending plan with your assets and income is the next step. With all of this information in hand, it may make it easier to decide which method of support works best for you and your ex.
You can reach Kimberly at knelson@coastalbridgeadvisors.com.
