A lump sum order is a one-time payment made by one spouse to the other as part of a divorce settlement. It is a common financial provision included in divorce judgments to achieve an equitable division of marital property or debts.
What is the purpose of a lump sum order?
There are several reasons why a judge may order one spouse to pay the other spouse a lump sum payment in a divorce:
- To make an equal division of marital assets – If one spouse is awarded the marital home or keeps a shared investment account, the other spouse may be awarded an offsetting lump sum payment to equalize the division.
- To pay off marital debt – To allocate responsibility for paying off joint loans or credit cards, the spouse who did not incur the debt may receive a lump sum to pay it off.
- As a form of spousal support/alimony – In lieu of monthly spousal support payments, the court may order a lump sum to provide financial assistance.
- To reimburse for marital contributions – If one spouse made significant financial contributions to education or a career that benefited the other spouse, a lump sum may repay those contributions.
Essentially, a lump sum order aims to achieve a fair split of marital assets and debts so neither spouse is disadvantaged by the divorce.
How is the amount of a lump sum order determined?
Judges have significant discretion in deciding the appropriate amount for a lump sum award. Some of the factors considered include:
- The value of marital assets awarded to each spouse – A lump sum may be needed to balance out an unequal division.
- The income and financial needs of each spouse – A higher lump sum may be ordered if one spouse has significantly less income/assets.
- Whether one spouse has custody of minor children – The custodial parent may need a larger lump sum to provide housing and child support.
- The duration of the marriage – Longer marriages tend to warrant a higher lump sum.
- Each spouse’s age and health – Advanced age or illness may entitle a spouse to a higher lump sum.
- Each spouse’s ability to work and earn income – If a spouse gave up their career, a lump sum can help them reestablish financial stability.
There are two main ways a judge calculates the lump sum amount:
- Formula-based – Some states have guidelines providing a mathematical formula, such as awarding 15-20% of the marital assets.
- Equity-based – The lump sum is discretionary based on what the judge deems to be a fair and equitable amount under the circumstances.
How is a lump sum order paid?
A lump sum order will specify the amount owed and the timeframe for payment. Some options include:
- One-time payment upfront
- Installments over a period of months or years
- Payment on a specific date
- Payment upon a triggering event, like sale of a home
The order may direct payment of the lump sum amount by:
- Cash, money order, or certified check
- Transfer of assets like stocks or real property
- Qualified Domestic Relations Order (QDRO) to transfer retirement assets
If the paying spouse fails to pay the lump sum within the timeframe ordered, they may be held in contempt of court. The owed spouse can seek enforcement through wage garnishment, property liens, or other collection methods.
Can a lump sum order be modified?
Generally, a lump sum order is a final non-modifiable judgment. Unlike ongoing alimony payments which can be changed if circumstances change, a lump sum cannot be retroactively amended after the divorce is finalized. There are some exceptions where a paying spouse may request a modification, such as:
- If the order contains a provision allowing modifications
- If both spouses mutually consent to modify the amount
- If there are concerns of fraud, misrepresentation, or concealment of assets by the receiving spouse when the amount was calculated
However, courts are reluctant to reopen divorce property settlements, so any modification request faces an uphill battle. It is important for spouses to thoroughly review and consent to the lump sum ordered in the divorce to avoid subsequent disputes.
Tax treatment of lump sum orders
The tax consequences of a lump sum payment depend on the nature and purpose behind the order:
- Property division – Transfers to divide marital assets are generally not taxable.
- Spousal support – Payments for alimony are taxable income to the recipient and tax deductible for the payer.
- Child support – Child support lump sums are not taxable.
Since most lump sum orders arise from property division, they do not trigger tax liability in most cases. However, spouses should seek tax advice regarding any tax reporting requirements for a lump sum payment.
Advantages of lump sum orders
There are potential benefits to seeking a lump sum payment in divorce rather than monthly payments:
- Provides immediate funds to pay expenses or invest
- Avoids future disputes over missed payments
- Allows both spouses to achieve finality and move on
- Can be easier to budget compared to fluctuating payments
- Prevents concern that the paying spouse’s financial situation may change
Disadvantages of lump sum orders
Lump sum orders also have some downsides to consider:
- May create a significant financial burden if funds are not readily available
- Requires careful planning to ensure the funds meet long-term needs
- May generate a large tax bill if treated as income rather than property division
- Investment risks fall entirely on the recipient if the lump sum is lost or decreases in value
- May reduce eligibility for certain types of public assistance
Alternatives to lump sum orders
If a lump sum payment seems inappropriate, some alternatives may include:
- Monthly spousal support payments
- Order to pay off specific marital debt directly
- Sale of property and equal split of proceeds
- Deferred division of retirement accounts
- Offsetting unequal asset division with other marital property
The key is to reach a total settlement that equitably divides marital property under the circumstances of the specific case.
Conclusion
A lump sum order requires one spouse to make a one-time payment to the other for purposes of equitably dividing marital assets and debts or providing financial support. Courts have broad discretion in deciding if a lump sum is appropriate and calculating the amount based on factors like income, assets, debts, and needs. While lump sums provide immediate funds, they require careful financial planning and may create tax headaches. For many couples, alternative settlement arrangements may be preferable. Spouses should thoughtfully review pros, cons, and alternatives when determining what assets, support, and payment arrangements will facilitate the fairest overall resolution.