Q. What if spousal support is payable for 6 years, but one spouse dies?
Payments must cease upon the death of the recipient in order for it to be considered spousal support for tax purposes and tax deductible to the payor. Spousal support can be paid after the death of the payor, typically from their estate in some form, but most settlement agreements and divorce decrees state that it will stop upon the death of either spouse.
We suggest the payor spouse be required to carry a life insurance policy to cover the lost cash flow for the payee spouse in the event of premature death. If this isn’t required in your settlement you should ask for it to be added. In the event the agreement can not be modified you should consider buying the policy on your former spouse yourself. You will have to pay for it but the peace of mind is worth the cost.
In order to determine the death benefit amount needed you would do a present value calculation on the stream of cash flow from the spousal support payments.
For example, a $5,000 per month spousal support payment payable for 10 years would have a present value of $471,540. (Call us if you need help determining the right amount of life insurance.)
No matter the route you take for insuring the payments make sure you, the support recipient, are both the owner and beneficiary of the life insurance policy. Losing the cash flow from spousal support can have devastating affects on your ability to maintain your lifestyle.
Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.
Contact us to find out how we can help you through this process.