02 Jun 3 Maintenance Options & What You Should Consider
As you go through your divorce, it may feel like you are gaining a whole new vocabulary as you learn about the different aspects and components of everything in separation agreements. Maintenance is one of the topics you are sure to discuss and agree upon, no matter which type of divore you are going through.
In this post, we do a deep dive into maintenance, what you can expect, options to consider, and the risks of those approaches.
What is Maintenance?
Maintenance is payments made by one spouse to the other that assist and support the recipient spouse. Sometimes maintenance is also called “alimony”.
The details of how maintenance is structured is very state-specific and situation-specific. Some states, like Texas, rarely grant maintenance while other states more generously order maintenance, so it’s important to know state laws or work with an attorney in your local area. In Colorado, these payments are time-limited and based on the length of your marriage.
Maintenance may be awarded because “earning power” is viewed as a shared marital asset. These payments are intended to even out income or earning power, post-divorce. Maintenance is based on the standard of living established in the marriage and paid based on the likelihood that each party can maintain a reasonably comparable standard of living. Court-mandated support from one spouse to the other is ultimately intended to provide for the receiving spouse’s financial needs until he or she can obtain the education or work necessary to provide for his/her own needs. In other words, it helps the lower-income-earning spouse “get back on their feet” and fully provide for him or herself.
Some other details that are important to note:
- Generally, maintenance payments end if the recipient gets remarried unless agreed upon otherwise.
- Maintenance is paid in addition to child support if there are children.
- Maintenance payments impact child support amounts because these payments are counted as income for the receiving spouse.
Due to the Tax Cuts and Jobs Act (TCJA), new maintenance agreements entered into starting in 2020 or after are a tax-free transfer. For agreements made prior to 2020, the payor receives a tax deduction and the recipient pays taxes on maintenance.
How can Maintenance be structured?
Not all maintenance is the same and there are 3 main ways maintenance can be structured: modifiable, contractual, and lump sum. Here are details and considerations of each structure:
As the name states, this structure of maintenance can be changed throughout the course of the agreement. Either party may file a motion to modify the original court order at any time and the payor is required to pay the court an ordered amount until a change is granted (which can often take months). Usually, a 10% or more deviation in the current maintenance amount is required before a change will be considered. This approach protects future changes in circumstances for either party that might impact their ability to pay an amount determined based on incomes of the past. However, modifiable agreements can be risky because they can cause continual post-decree conflict.
In contractual maintenance structure, maintenance amounts cannot be modified, regardless of any changes in income or circumstances to either party unless otherwise agreed upon (such as disability, cohabitating, etc). This approach provides more stability and predictability for both parties. It can also provide protection to a spouse who is worried about post-decree litigation and conflict, especially if the divorce process has been full of disputes. This approach can be risky for both parties if the future earning power or health of the paying spouse is subject to change.
As it states, in this approach, a spouse fulfills his or her entire alimony obligation at once, up front with a single lump-sum payment. This lump sum payment comes from assets, instead of monthly payments. This is only an option if there are sufficient assets available to pay the entire sum at the time of the divorce. The paying spouse might prefer to take care of maintenance immediately to avoid monthly communications with their previous spouse or anticipated ongoing conflict. This approach does keep parties out of court regardless of future financial changes and ensures the total payment is fulfilled without waiting month-to-month. That means no missed payments and court dates in the future. One large lump sum payment could create immediate problems if there is job loss and the paying spouse does not have adequate assets to provide for him or herself if they are left with minimal assets.
There are no tax implications on the transfer for the recipient receiving lump sum payments (unless the asset itself has underlying tax implications in which they often do – A.M. Financial can help you with this complex issue). This approach definitely requires better money management skills for the recipient as the investment risk is transferred to the receiving spouse. For divorcees over the age of 59 1/2, a lump sum pre-tax retirement account can recreate favorable tax treatment of maintenance under the old law. In this situation, assets are essentially tax deductible to the payor and taxable to the recipient, creating more overall funds available to the whole family unit.
As you can see, there isn’t a one-size-fits-all approach to maintenance and there are many factors to consider. Your choices around the way you structure maintenance have implications to your current financial situation and your financial future. A.M. Financial helps answer questions around maintenance approaches and how different choices lead to different financial management and outcomes. Schedule your free consultation by contacting us and learn more about how we can help.