Tip #3: Understand TheBasics of Alimony and Child Support

You Should Understand The Basics of Alimony and Child Support

There are all kinds of alimony: permanent, periodic, lump sum, temporary, rehabilitative, reimbursement. Child support is generally governed by formula. Each state has laws that govern the application of alimony and support in its court system, so you should always check these things out with your lawyer. But there are some general things you need to know.

Find out how long each type of payment can last in your state. Remember: Planning for employment options and children's education must begin now.

Always check out the tax consequences of what you are going to pay or receive. It is too late to plan after the agreement or court order is signed. Make sure your lawyer or CPA explains the tax consequences of all payments to your satisfaction.

"Alimony" as defined by the state may not be "Alimony" as defined by the IRS. It may or may not be taxable to the receiving spouse or deductible to the paying spouse, dependent upon how the agreement or court order is worded.

Child support is not taxable to the receiving spouse and is not deductible to the paying spouse. But there are questions about dependency exemptions and medical expenses that may affect your tax situation. Get informed now so there are no misunderstandings later.

If the dependent spouse or a child is disabled, then there must be planning for not only education, but also the length of the support obligations. Find which public benefits may be available. Then structure a settlement around these benefits and be sure that the settlement avoids reimbursement.

If the paying spouse becomes disabled or dies, there should be security so that support payments can be continued. Although Social Security benefits may be available, they may not be sufficient or may not extend for a sufficient length of time. For example, Social Security for a surviving child continues only until the child reaches age 18. This means that you cannot plan to pay for college with Social Security benefits.

Check into disability insurance and life insurance options. Remember: If you have an insurable interest in the life of the person on whom coverage is sought, you can buy the policy. In this way, Social Security can be supplemented.

Try to plan for cost of living increases. See if your payments can be tied to the Consumer Price Index from the U.S. Department of Labor or other statistical data which can be used to automatically increase (or decrease) payments. Such a provision may save later court appearances.

Find out if anticipated interest income from the division of assets you get will affect the amounts of support or alimony you pay or are to be paid. If so, you need to know 1) When you will get the money and 2) How to plan to invest the money in a safe fashion to get you that return. And remember: If you spend the money, your return will be reduced.