I am frequently asked if It makes sense to buy out of an alimony obligation with a lump sum payment. The answer to the question is a bit complex but I will try to tackle it in the length of this post. Usually, when there is a discussion of the buy-out of alimony, the question that is most common to follow is what motivates the desire for a buyout? The recipient of alimony may want a lump of money to use to invest, buy a house, or start a business. The payor can be looking for a clean break and may find the process of paying alimony on a regular basis annoying or emotionally destabilizing or they can be in the process of seeking a final end to the interaction with
When a lump sum is discussed at the very least the payment of alimony overtime must be established. In a marriage of under 20 years the likely length of alimony and amount that needs to be established and then discounted to present value using the present value formula. In marriages, over 20 years alimony is usually assumed to end at the social security retirement age of the payor. Once the term and the amount of alimony is agreed upon there then needs to be an agreement as to the discount rate. The discount rate is the assumed interest rate that will prevail in the marketplace during the term of alimony. The assumption is that if a payee banked the money paid to them or annuitized it they would end up with their full alimony over a period of time.
To put it simply, if you compute the present value of the future payment of alimony and pay it out while assuming you have the economic ability to do so the payment makes very little economic sense for a multitude of reasons. One obvious consideration that is to be made is that you in theory could bank or set up your own annuity to pay the alimony which would hedge your obligation against the possibility that alimony might not be paid for the full term. For example, if your ex-spouse should die, alimony ends. If your spouse received a lump sum the beneficiaries of the remaining lump fund could be your children or could be a new spouse. The payor; could die and alimony would then also come to an end. In most circumstances, alimony is protected with some sort of insurance, however, the money you did not payout in lump sum would be part of your estate and would go to people you love. Your ex-spouse could remarry, alimony ends upon remarriage.
Many times a spouse wants a lump sum because they have a significant other and want to marry or at least be able to live with their partner. Since cohabitation is also likely to suspend or teammate alimony a lump sum frees the spouse as there is no concern of loss of support. The payor (you) could lose a job and be unable to find new employment or could become disabled due to ill-fated circumstances, in which case alimony could be terminated and the unused lump sum available to support the payor.
The point is when discussing a lump sum alimony payment the payout should be discounted not only for the current value of money but for the possible future contingencies that could end alimony before its term. If there is no willingness to provide discounts there is little logic beyond psychological to make the lump sum payment. Lump-sum alimony payments are a useful tool under certain circumstances. If other issues are in place and one side or the other insists on a lump sum alimony payment to resolve the case. The question often comes down to what is the likely outcome in a trial versus the overall outcome of the agreement and what will it cost to procure that likely outcome.
When settling a matter the decision ultimately comes down to a cost-benefit analysis. This is an issue to discuss with a competent professional. If you are considering negotiating a lump sum alimony award I would be happy to walk you through the analysis.