Because alimony involves so many complex determinations, the court would much prefer divorcing parties to work out an arrangement between themselves. But with so many relevant factors, and so much discretion given to the judge, it's essential to have a good lawyer in alimony negotiations to make the best argument for your position.
Negotiation might be difficult, but each side should realize there is great risk in leaving the heavy lifting to a busy judge who won't be as familiar with the parties' circumstances as they and the lawyers are.
The result could be an arbitrary decision leaving one or both sides unhappy they didn't resolve the matter themselves.
The need to keep planning
The stakes are high, whether you'll be paying or receiving, because the amount of alimony will have a profound effect on your planning in the years ahead.
Likewise, since alimony is often not permanent, it may be necessary to plan for post-alimony life. In this regard, it is often wise to include a life insurance policy on the paying spouse's life in the negotiations, to ensure the recipient spouse gets all he or she is entitled to in the event of the payer's premature death.
Meanwhile, if at all practical, the recipient spouse should use the period of alimony to acquire education or skills to allow him or her to become self-supporting once the payments stop.
Some couples negotiate a single lump-sum payment from one spouse to the other as part of the divorce separation agreement, rather than recurring alimony payments. This has the advantage of simplicity and certainty, and avoids ongoing contact between the parties.
Note that in the nine community property states (AZ, CA, ID, LA, NE, NM, TX, WA, and WI) assets and income acquired during the marriage by either spouse will automatically be divided equally, with limited exceptions. This division can be a factor in negotiations.
Community property or not, whenever a lump sum is involved, the recipient spouse needs a sound investment strategy to ensure that the lump sum yields the same economic benefit as annual payments would have.
Tax issues of alimony
Alimony is considered unearned income. But unlike child support, alimony is tax deductible to the person who pays it, and is included in the taxable income of the person who receives it.
For welfare purposes
An alimony recipient is eligible to collect state unemployment benefits, however, as long as he or she meets the normal unemployment insurance eligibility requirements. The effect of alimony on public assistance benefits varies by state and program. Alimony income will indeed often be considered as countable income for welfare purposes, so this factor must be investigated during alimony negotiations when public assistance is an issue.
When high alimony payments are good
Note that when the spouses have widely disparate incomes, there may be some tax advantage to negotiating a higher alimony level, in exchange for lower child support. Since a husband, for example, could deduct his alimony payments, he might be able to pay his wife more than enough to compensate her for a reduced amount of child support.
Both parties could come out ahead, after taxes. Of course, detailed calculations based on your individual situation would be necessary to see whether such an arrangement made sense.
Whether alimony is negotiated or left to the court to decide, there are myriad variable factors to consider. It's imperative to get expert advice and make accurate projections as to how various alimony levels will impact your financial circumstances.
While a lawyer can help present your position clearly and persuasively, that position needs to be established first. Your attorney might not be ideally suited to handle the necessary financial issues and calculations alone, and many folks would be well-advised to seek the services of a financial planner with particular expertise in divorce planning.
This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.
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