Alimony: Getting the Best Deal

A Word of Warning

Make sure that spousal support payments are not crafted to end when a child comes of age. In general, the Internal Revenue Service will view such payments as disguised child support and might disallow the tax deduction for them. That is because the recipient spouse does not have to count that money as income (though the paying spouse doesn't get to deduct the payment from his or her taxable income). Although this might be good for the recipient (who now won't be taxed on the support), it is bad for the paying partner (who will now be unable to deduct the payments from his or her income), and it can wreak havoc on a deal.

In addition, reworking an agreement after it's been in place for a while can present a sticky problem because the IRS might go back to recharacterize what is taxable and what is not taxable. Presumably, the receiving spouse has been paying the taxes. You would now have to amend your returns and seek a refund. It is better to draft your agreement correctly the first time.

When Circumstances Change

We all know that life is a roller-coaster. One moment, you're flying high, on top of the world; the next, your world has been shattered to a thousand bits. Economies can crumble; companies can fold; real estate values can soar or plummet based on world events or the fates.

The roller-coaster is one reason why it might be best, in some states, to see a judge when negotiating spousal support. In a few states, if a judge decides your case, you will have an easier time changing a support award than if you and your spouse sign off on the payment in a separate agreement.

Why is that? According to the law in these states, when you sign an agreement, judges will assume that you thought of all the possible things that might happen in the future and that you accounted for them in the agreement. For example, if you were to pay support at the rate of $300 a week for five years, the agreement could have provided that if you lost your job, you would no longer have to make payments. If you didn't provide for that and you do lose your job, you can ask a judge to allow you to stop making the payments—but the judge might point out that you had your chance to include that in the agreement and now it's just too late.

When a judge decides your case after a trial, on the other hand, he or she does not account for future possibilities. The decision is based solely upon what the judge has heard in court. Therefore, if you or your spouse lose a job some years down the road, you'll have an easier time, in these states, convincing the judge to make a change than if you had signed an agreement.

Bottom line? Try to account for all possibilities when you sign an agreement, and always consult with an attorney.