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Should you accept a lump sum alimony payment?

If you are divorcing and on either the receiving or paying end of alimony, there can be certain circumstances where it is advantageous to do away with monthly allotments and accept or pay a single lump sum.

The reasons for this can be varied. Resentments can linger when one party has to make monthly payments to their former spouse, especially if a new spouse enters the picture. Those on the receiving end may wish not to be reminded of their ex on a monthly basis, and would like one lump sum and then move on.

Accepting a one-time alimony payment can actually net you more money, as the lump sum must equal the total value of future payments. Given the present rate of inflation, that's money in the bank. It can be used for major purchases like a house or invested wisely for future returns.

Another benefit of lump sum alimony is that you have no way of knowing how an ex's financial future may pan out. If your ex has a reversal of fortune or simply decides to quit paying, you would have to pursue costly collection efforts and obtain judgments to get your monthly alimony payments.

There are, however, tax consequences to accepting a lump sum payment. Anything labeled "alimony" can be taxed in its entirety the tax year it's received. But if the same payment is classified as a "settlement," the taxable amount could potentially be much less.

Before either agreeing to accept or pay a lump sum of alimony, it's advisable to seek legal or financial advice.

Source: FindLaw, "Avoid Alimony Monthly Payment Programs," accessed Dec. 31, 2015

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