The word alimony is often used in relation to a divorce proceeding. Yet, if you use the term alimony as you design your settlement options you will likely hurt yourself financially. It doesn’t matter if you are the provider of the alimony or the receiver of the alimony. Why? It is important to look at what makes up the term alimony and the tradable components within this concept; some are outlined below.
By way of background, the concept of alimony was established a long time ago from the legal system. Alimony focuses on the difference between each spouse’s current or future earning capacity and applies a percentage of the future earnings to her or his former spouse’s earnings after the divorce is finalized. Traditionally, alimony is calculated based on the legal rights of the “income dependent spouse”. Most of the variables used in the calculation are as follows:
- the term of the marriage which defines the payment horizon
- the difference in salaries or wages of each spouse which defined the base for the calculation
- the standard rate of alimony depending on your resident state (jurisdiction) (e.g. 32.5% of the difference in salaries)
There is more to the concept of alimony than the traditional calculation. For instance:
- Erratic earnings – What happens if you no longer have the same earning capacity or earnings stream in the future? Shouldn’t this concept be taken into account when you calculate the amount of income that should be paid to your former spouse?
- Standard alimony rate – How do you know that 32.5% of the difference in your earning capacity will support your desired standard of living? Why does your entire life get captured into a single percentage? What does the standard rate do to the provider’s standard of living? Is there a different way to approach the “percentage methodology” so you do not get financially harmed from “the process”?
- Future earning capacity – What if one spouse has the capacity to earn more income in the future? Should this be incorporated into the settlement structure?
- Payment horizon – Should the term of the marriage govern the definition of the payment horizon? Does this always make sense for every situation? Can the time horizon be negotiable and offset other financial components used in the settlement structure?
- Marginal tax rates – Given the change in the tax laws where alimony is no longer deductible or includable in income, should the receiver of alimony receive 100% of the alimony tax free as if it is 100% discretionary earnings? Or is there a way design the settlement options differently?
When the term alimony is used to design the settlement options you are, by default, using legal rights to design your divorce outcomes. If you use financial frameworks to design your settlement options you can see new opportunities to manage the financial outcomes from your divorce process.
If you manage your divorce process based on your legal rights — which uses the concept of alimony — then you will likely overpay or receive less alimony than you could. When you shift the concept of alimony from a line item that appears on your personal income statement to a line item called deferred compensation that appears on your personal balance sheet. By doing this you start to uncover your tradable components and figure out how to design your settlement options. This may sound like semantics to some. Yet, professionals who are financial divorce architects view this as a significant evolution in a positive direction compared to the “old way of doing things” using the concept of alimony which can financially hurt one or both divorcing parties. Thinking in terms of “alimony” will place your capacity to accumulate future wealth at risk.
About the Author
Larry Smith CPA, MBA
Larry is a Founding Partner of Divorce Outcomes, a specialty professional services firm that analyzes, architects and negotiates all of the financial aspects of a divorce.
Since 2003, Larry has worked with divorcing parties as their fiduciary to design sophisticated divorcing strategies that enable clients to preserve and create wealth from their divorce. As a technical financial expert, he uncovers hidden tradable components through various analytical and architectural processes to arrive at desired outcomes. He is an alumni of KPMG and Andersen and has expertise in:
- technical accounting, taxation, business consulting, risk management, M&A
- forensic analysis, performance analytics
- M&A, business valuations, divorce management, family equity transfers, multi-party negotiations, communications management
- advanced process engineering, cognitive performance technologies
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in a divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients:
- manage their divorce process
- uncover hidden financial risks
- architect divorce solutions
- manage ever-changing negotiating positions
- communicate complex financial matters
- close the divorce process as soon as possible
Throughout the process we evaluate our clients’ current wealth-at-risk and architect desired outcomes to best preserve or create wealth.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.