Alimony, or “maintenance” as it’s called in New York State, is traditionally in the form of monthly payments. However many couples choose to negotiate a lump-sum buyout instead. The payor gives the payee a single large disbursement instead of monthly payments over the next several years. Although the total amount in a buyout is less than the payments would total to, many recipients are better off accepting such an offer.
First let’s understand why a lump sum is a smaller total amount than the monthly payments calculated by the New York spousal maintenance formula. A dollar today is worth more than a dollar tomorrow so the payout amount has to be adjusted for inflation. In addition a lump sum can be invested, potentially providing monthly income for the rest of a person’s life so it is a source of future earnings. Even though the lump sum is a smaller number, it will have the same long-term buying power as the individual payments.
One of the leading reasons spouses accept maintenance buyouts is immediate need. Sure it’s nice to have a reliable monthly income–assuming the ex is reliable but that’s another issue–but that doesn’t help pay off large bills right now. Job loss, medical bills, car accidents or other disasters can leave a person with enormous debt. It is better to pay off the loan immediately rather than run up massive finance charges as payments chip away at the sum over years.
The buyout can be advantageous for the payor in a divorce settlement as well. Yes, it can be a short-term hardship to raise that much money. However if the payor aggressively works to replace savings or pay of loans taken to meet the obligation, it can mean less money paid out in the long run. Many people would rather make monthly payments to a savings account or a lender than to write a check to an ex, so the emotional cost is lower as well.
Family law attorneys use divorce settlement calculators to determine a fair buyout amount. These calculators take into account the monthly payments and the length of the maintenance agreement to find a base value, and then adjust that for inflation. The further in the future a given payment is the smaller effect it will have on the buyout amount. It’s harder to determine a fair lump sum for maintenance agreements with no end date, though it can be done.