Alimony in Lieu of Property Division

May 11, 2016

[Ed: Originally published on Facebook.]

Alimony and property division often intersect. One is an award from the CURRENT estate, and the other is an award from the FUTURE estate. Sometimes, the current estate is relatively modest, but one spouse has a substantial amount of “separate” property, not subject to being divided or awarded to the other spouse. Alimony can help offset that to some degree.

In fact, alimony should often be part of any final settlement negotiations. Even if the other spouse “doesn’t deserve” (or even can’t legally get – more on that tomorrow) alimony, the high-income earner may want to seriously consider paying alimony anyway in exchange for a more favorable property division. There are several reasons for this, but often-overlooked is the fact that paying alimony can provide a significant tax savings, as it is a “page 1” deduction, meaning the alimony paid is deducted dollar-for-dollar from the payor’s adjusted gross income.

To take a simple example, suppose the couple only has the husband’s 401(k) to split, and there is $90,000 in it at the time of the divorce. Typically the 401(k) would be split so that the wife would receive $45,000 in 401(k) money, but in many cases, the wife would rather have – or may actually need – the cash. If she cashed in that 401(k), after taxes and penalties she might have $25,000-$30,000. But, if the husband was to agree to pay $2,000/month for 2 years in exchange for being able to keep his 401(k) intact, that might provide some much-needed cash flow for the wife, which she may value more.