New Jersey Law Journal: What Are the Benefits and Risks of a Spousal Support Buyout?

A Case Study

The pre-trial conference has concluded, and a trial date has been scheduled in six weeks. The expense of drafting trial briefs, pre-marking exhibits and preparing witnesses appears unavoidable. Mediation has been unsuccessful in accomplishing your client’s primary goal: a buyout of spousal support, in whole or in part, in order to avoid the inevitable motion practice when she attains the full retirement age of 67. As you have advised your client, the judge at trial does not have the authority to order lump sum spousal support or any hybrid or creative approach to spousal support termination that doesn’t comply with the alimony statute.

The facts of the case are straightforward: Wife earns $350,000, gross, and has worked in finance for 25 years, her entire career. She is 59 years old and has been married to Husband for 25 years. Both of their children are emancipated. Recently, Wife received an offer to teach in the MBA program at a university—a career change she has long considered. Wife would earn $150,000 as a professor, far less than she is earning now. She understands that a voluntary career change would not relieve her from the obligation of paying spousal support based upon her marital salary. Wife would like to retire at age 67 and has plans to remarry. You have counseled Wife about the risks of paying lump sum spousal support, including but not limited to Husband’s remarriage terminating her obligation. She is aware that she may be jeopardizing her financial future in order to structure the buyout and does not want to “pay out” all of the marital assets to Husband. Regardless, Wife is anxious to negotiate a creative way to attain her goals, so that she is working for herself, and not to pay spousal support.

Husband is a tenured high school teacher, earning $85,000, gross, per year. He is also 59 years old. Husband is a participant in a Teachers’ Pension and Annuity Fund and will be eligible for retirement at age 62. Unless he remarries, Husband will be eligible to collect one-half of Wife’s social security benefit or his own, but not both. He plans to buy a home in the school district where he teaches.

In addition to Husband’s TPAF pension, the marital assets are Wife’s 401K account ($750,000), a marital home without a mortgage ($650,000) and a brokerage account ($500,000).

Husband, too, is anxious to reach a resolution of Wife’s spousal support obligation that provides cash to him now, and not installment payments. Both parties are willing to agree, for the purposes of settlement, that Wife’s obligation to pay spousal support will terminate when she turns 67, eight years from now, and that spousal support would not be subject to modification regardless of any future circumstances.

Calculation of the Spousal Support Buyout Amount

The parties have stipulated that Husband’s annual expenses, post-divorce, will total $75,000. He will be a single taxpayer. Considering Husband’s Social Security tax, Medicare tax, Federal income tax and New Jersey income tax (taxes totaling $20,269), Husband’s net annual income will be $64,731. That reduces his annual need to $10,269, or $30,807 for three years, until he is 62 years old. Applying a 4% present value discount to spousal support for the three-year period, Wife’s spousal support obligation is $28,984.91.

During years four through eight, Husband will be retired and will not be earning $85,000, gross, in salary. He will be receiving $4,000 per month in social security benefits and $2,800 per month in retirement benefits, for a total of $81,600 annually. Not all of the Social Security benefits are taxable, so the federal taxes would be $4,995 annually. There are no Social Security or Medicare taxes because Husband is not earning any wages. The retirement income is not taxable in New Jersey, as it is under the required limits. So he will be receiving $76,065 annually, which exceeds his $75,000 stipulated need. Therefore, Wife would not have a spousal support obligation in years 4 through 8.

Structuring the Buyout Payment Using the Marital Assets

Even if Wife allows Husband to retain his entire TPAF pension, she will have her one-half share of the marital residence sale proceeds, minus the discounted buyout of spousal support ($300,000 minus $28,984.91equals $271,015.09). Both parties will share equally in Wife’s 401K plan and brokerage account, which conservatively could yield a 7.5% annual return for both parties.

The first step in formulating this analysis was to calculate and stipulate Husband’s post-divorce need. That analysis took time, as it was a departure from the marital lifestyle set forth in the Case Information Statements, but it was well worth the effort. The discount percentage used to calculate the buyout amount can be based upon Moody’s A-rated corporate bond yields, as referred to in Miller v. Miller, 160 NJ 408 (1999). Discount rates as high as 10% to 25% may be applied. In fact, a second discount can be applied given the risks of termination of spousal support due to remarriage, for example. In this factual scenario, however, given the number of years of spousal support being considered, a lower discount rate is more appropriate for settlement purposes.

With this analysis, Wife has every motivation to buy out her spousal support obligation, allowing her to pursue her professorship at the reduced salary she anticipates. The buyout allows Husband more cash, received now, without any concern that monthly spousal support checks may or may not be arriving in the future. In short, the analysis buys peace and certainty without future litigation—undeniably, advantages to both parties.

Deborah E. Nelson credits and thanks Megan Sartor and Mark B. Murphy for their contributions to this article.

Reprinted with permission from the January 22, 2024 issue of the New Jersey Law Journal. © 2024. ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

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