Potential Considerations in Negotiating Alimony Buyouts

When negotiating and addressing alimony buyouts in matrimonial settlement agreements, family law practitioners should consider several potential issues that may arise. This summary article is intended to provide guidance in determining whether a buyout is beneficial for your client depending on the facts and circumstances of the matter in which you are involved.

In certain situations, alimony buyouts can be a sensible way in which to resolve an alimony dispute. A buyout can be complete or partial in nature depending on the terms discussed, and the buyout will commonly occur through a transfer by the payor to the payee of money or other assets, including, but not limited to, real property, investment accounts, retirement accounts, businesses and more. While a complete or full alimony buyout is intended to eliminate a potential alimony obligation, a partial buyout could involve a combination of an asset transfer and a reduced term or amount alimony that would otherwise be ordered/agreed upon.

How and when buyout payments or asset transfers are made can also be the subject of negotiation, whereby the transfer of assets can occur in a lump-sum form contemporaneous with the signing of an agreement, at an agreed-upon time period following the execution of an agreement, or in staggered payments/asset transfers over time.

To that end, an alimony buyout is a classic example of parties achieving a manner of settlement unavailable through the judiciary. As family law practitioners know well, a family part judge cannot order an alimony buyout of any kind. As a result, it affords to litigants a level of flexibility and options otherwise unavailable through a divorce trial. A list of non-exhaustive considerations is outlined below for your consideration in determining whether a buyout is appropriate for your client in a given matter.

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1. Non-Modifiable Motivation

As the payee spouse, procuring an alimony buyout can be viewed as a positive result (so long as the payment/asset transfer makes sense) because it allows the payee to move on by receiving a non-modifiable, non-taxable equitable distribution payment in lieu of alimony without the associated risk of a future alimony modification. Without concern for what will happen to her financial livelihood should she pass away; choose to remarry or cohabitate; face a situation whereby the payor experiences a downward income change via a job change, retirement or otherwise; or herself desire a position of employment that may not maximize the income upon which alimony may otherwise be based, in some ways it can be the purest form of “freedom” afforded by the divorce process.

The payor spouse may also view a buyout as providing a degree of freedom from the serial payment associated with an ongoing alimony obligation. Aside from potentially eliminating an alimony obligation, the payor is free to pursue whatever career path he may or may not desire, retire and otherwise make financial decisions unencumbered by alimony. In other words, he is no longer bound to the terms of an alimony obligation and the related income he needs to earn to make the support payment. The buyout-associated risk, however, is largely on the payor’s shoulders because buying freedom can result in a non-modifiable payment to the payee spouse that could otherwise have been cut short upon the occurrence of an alimony-modifying event. For instance, if the payor spouse pays to the payee spouse one million dollars ($1,000,000) as a complete buyout of a permanent alimony obligation, the payee will most likely not be required as part of any buyout agreement (unless otherwise negotiated) to repay the payor should she remarry shortly after the payment is made.

As indicated above, other asset-based motivations may be involved. From a straightforward viewpoint, are there enough assets to effectuate a buyout or, similarly, are the assets available appropriate to do so. For instance, perhaps the payee spouse desires to retain the marital residence for the children and cannot afford to purchase the payor’s interest in the home as part of an agreed-upon equitable distribution mechanism. Rather than force the sale of the home, the payor spouse can provide to the payee spouse her share of the net equity in the home rather than pay alimony. While the way the buyout would unfold could depend on the amount of the buyout, the value of the equity in the home or related asset and more, such an asset transfer is relatively commonplace as part of a complete or partial buyout concept. Perhaps the only assets available to perform the buyout are retirement assets that the payee spouse cannot immediately utilize because of resulting tax and penalty consequences. Under such circumstances, can the retirement asset transfer be appropriately modified to ensure the payee receives the agreed-upon net, after-tax payment.

Each litigant is motivated by different factors that will impact whether a buyout is sensible and can be feasibly done in a way that makes sense for both parties involved.

2. Amount of Alimony

When determining what the buyout will be, one necessary that should occur to determine what the monetary alimony obligation would otherwise be if a buyout did not occur. The alimony amount is a primary issue for negotiation and in the buyout setting often devolves from specific numerical calculations to “what can each party live with.” Oftentimes the litigant who does not want the other party to see the potential weaknesses in an alimony figure will prefer the “this is my number and how I arrived there is irrelevant” position.

3. Duration of Alimony

Many practitioners would agree that negotiating an alimony buyout on a limited duration obligation is simpler than negotiating a buyout on an open durational obligation for the simple reason that there is no definitive date upon which alimony will end in an open durational situation. In other words, when an agreed-upon alimony amount is to occur over only a limited period the total value of the alimony can be more easily determined.

In seeking to reduce the durational component of the calculus to the extent possible, the payor may refer to the New Jersey alimony statute’s definition of “full retirement age” as a guidepost.[1] The statute defines “full retirement age” as, “[T]he age at which a person is eligible to receive full retirement for full retirement benefits under section 216 of the federal Social Security Act (42 U.S.C. s.416).”[2] Put another way, one’s full retirement age is when they can retire and receive full or “unreduced” Social Security benefits from the federal government. For instance, the Social Security Administration provides that if you were born between 1943 and 1954, your full retirement age is 66.[3] If you were born in 1960 or after, your full retirement age is 67.[4]

Full retirement age often serves as a guidepost for payor spouses because the alimony statute provides that for divorces occurring after September 10, 2014 (the date when the retirement-related amendments to the alimony statute became effective), “There shall be a rebuttable presumption that alimony shall terminate upon the obligor spouse or partner attaining full retirement age . . . .”[5] Moreover, for retirement applications filed in cases in which there is “an existing final alimony order or enforceable written agreement established prior to [September 10, 2014], the obligor’s reaching full retirement age as defined in this section shall be deemed a good faith retirement age.”[6] The payor’s prevailing view is that because she may be successful in terminating an open durational obligation existing at the date of full retirement age that the value of the alimony obligation for the purpose of a buyout should utilize that date as the conclusion of the obligation. As there is no guarantee that alimony will terminate at such time, however, the payee may request additional consideration (such as a payment premium) in exchange for providing the payor with the certainty associated with a defined duration on an open durational-related buyout.

Payee spouses often approach the durational component of an open durational buyout calculus from the viewpoint of the payee’s life expectancy. Appendix I to the Rules Governing the Courts of the State of New Jersey – Life Expectancies for All Races and Both Sexes – provides a detailed breakdown of life expectancies that can be utilized in negotiations.[7] For instance, while the payor spouse may seek to calculate the value of an alimony buyout by utilizing the payor’s full retirement age, the payee’s life expectancy may be far longer and, as a result, substantially more valuable. Ultimately this is a topic for negotiation and compromise if one can be reached.

4. Present Value Discount Rate

Calculating the value of an alimony buyout is not simply a matter of totaling the number and amount of payments. A present value discount should also be employed based on the theory that the value of money today is worth more than the value of money received in the future. Conceptually, if a payee waits to be paid then the amount to be paid should be higher because of the risks associated with waiting for payment. Determining an appropriate discount rate is also a subject of negotiation, as the increasing or decreasing the rate will impact the total value of the alimony buyout at issue. Oftentimes discussing this specific issue with an accountant will aid your client in understanding the present value concept and how to address the related discount rate.

5. Tax Consequences

Finally, under alimony buyouts predating January 1, 2019, which is the date when the Tax Cuts and Jobs Act of 2017 (the “Act”)[8] rendered alimony no longer tax-deductible by the payor on his federal income tax returns and no longer taxable to the payee as income on her federal income tax returns, the buyout value would commonly account for such tax consequences. While this component of the buyout analysis was also a subject of negotiation because of the parties’ potentially different federal income tax rates, it is now rarely a part of the calculus unless, for example, the buyout involves a pre-Act tax-deductible alimony obligation. It is also important to note that alimony is still tax-deductible to the payor under New Jersey law.

While a complete or partial alimony buyout is not appropriate in every case, it can be a useful and flexible way by which to ensure both fairness and equity in a matrimonial settlement agreement. The non-exhaustive list of considerations detailed above should serve as a general map by which to determine with your client whether the buyout is appropriate under the specific facts and circumstances at issue.

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