Alimony in Lieu of Property

Under Illinois divorce law, the so-called “equitable distribution” principle (enacted in 1977) allows courts to allocate marital property in myriad ways.  The asset mix in the “marital pot” in numerous cases, however, does not lend itself to a percentage division that a court is likely to order (or on which the parties might ideally agree).  Lack of liquidity is a common reality; and, in some such cases, the would-be property transferor may prefer to draw on future income so as to effect a buyout of marital property claims.  Commonly, this thinking leads to an arrangement in which, in lieu of property delivered to the other ex-spouse on entry of a judgment, a stream of future payments is structured as alimony for federal income tax purposes, buttressed with contractual terms providing for the stream to “ride through” most standard terminating events (such as remarriage, cohabitation, or death of the payor), as well as for the stream to be non-modifiable.    Sometimes    such    a   stream  of  payments  is secured by an encumbrance on property.  Various reasons exist for future alimony payments to be made in lieu of a turn-over of property at the time of entry of a divorce judgment; most frequently, illiquidity and overall tax planning are the primary motivating factors.

One key to such planning is that, ever since the 1984 reforms to federal  divorce  tax  law, the  “support requirement” for alimony treatment of a particular stream of payments has been eliminated (except in the context of temporary orders).  Thus, in numerous circumstances, a stream of payments may be structured that reflect some indicia of property division installments, but, when carefully planned, will still constitute alimony for federal income tax purposes, thereby being taxable to the recipient and deductible by the payor.   The  usual  objective,  of course,  is  for  the  estimated present value after-tax worth of the projected stream of payments (from the recipient’s standpoint) to be substantially equal to the value of the property that theoretically would have been awarded by the judgment.  In sum, creative combinations of available planning tools under Illinois divorce law and federal tax law often serve clients well, in large part because, such creative planning often proves to be the crucial element in achieving an amicable settlement.

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