As far as divorces go, it seems that Jack and Lisa Osbourne had a fairly quick and civil one. The couple settled out of court. Jack will pay child support to Lisa for their three children, as well as what would be considered in Ontario to be “section 7 expenses.” These include private school and extracurricular activities. There is no ongoing spousal support obligation between the couple. Instead, Jack is paying Lisa a lump sum amount in settlement of the issue.
Why would one prefer a lump sum payment to ongoing spousal support payments? When is a lump sum payment appropriate?
There are several reasons why a lump sum payment would be preferable or appropriate. As the payor, you will have no continuing obligations to your former spouse. This can make it easier to move on from the relationship. A lump sum payment may also mean a cost savings to the payor, since there is likely to be a reduction for the time-value of the payment. Finally, with monthly spousal support payments, the payor will often have to maintain a life insurance policy to protect the support obligation in the event of their death. A lump sum payment does away with this added expense.
On the other hand, lump sum payments do not allow for the same tax deduction as one would receive for ongoing monthly payments. Generally, one would reduce the amount of the lump sum payment to reflect this. Furthermore, if you need to borrow money to make the payment, a payor may end up spending more money on interest payments.
For the recipient, this can ensure that money is received from an unreliable payor and gives immediate access to the funds. With the right investment strategies, this can mean making a return on the lump amount that is greater than the amount deducted for the time-value of the payment.
If you have any questions regarding spousal support and would like to book a free initial consultation with one of our family lawyers, please give us a call at (905) 581-7222.