Weighing Settlement Options: Don’t Forget the Tax Impact or the Time Value of Money

Husband and Wife are divorcing.

In settlement discussions, Husband offers Wife her choice of:

  • alimony in the amount of $50,000 per year for each of the next ten years only, plus half of the couple’s investment portfolio OR

  • no alimony, but an additional $400,000 from “his half of” their investment portfolio.

Which is the better option for Wife?

Well, the answer to this question and the evaluation of many other settlement options, turns on the impact of taxes on each option.

In this particular example, a financial planner advises that Wife is better off waiving the alimony and taking the larger investment portfolio, because the alimony is taxable income to Wife but distributions from the investment portfolio are not.

Another important factor in some settlement options requires consideration of the time value of money.

Read more in this Portsmouth [NH] Herald article by a financial planner: Financially Speaking: The time value of money.