Maintenance (formerly known as alimony) in Illinois is an ongoing obligation for a set amount per month over a set duration of time. Most people would simply prefer to be finished with their ex-spouse instead of paying their ex-spouse monthly or, conversely, the ex-spouse hoping they will be paid every month.
In lieu of entering into an agreement for monthly maintenance payments, the parties to an Illinois divorce may arrange for the maintenance payor to “buy out” the maintenance receiver with a lump-sum payment. Not only does this eliminate ongoing contact between the parties but it also removes the possibility of future litigation over maintenance modification while providing significant tax benefits to the maintenance payor.
How Is Maintenance Calculated In An Illinois Divorce?
An Illinois divorce court must first determine if maintenance is appropriate in the divorce before them. A variety of factors are listed that the court may consider…but, in general, maintenance is always deemed appropriate so long as the parties only recently separated.
“[I]f the court finds that a maintenance award is appropriate, the court shall order guideline maintenance” 750 ILCS 5/503(b-1)
“Guidelines maintenance” is the official formula by which maintenance is to be calculated in amount and duration.
“Maintenance…shall be calculated by taking 33 1/3% of the payor’s net annual income minus 25% of the payee’s net annual income.” 750 ILCS 5/503(b-1)(1)(A)
The 25% deduction from the payee’s income almost never makes a significant difference (their income is way smaller) but the relative size of the payee’s income creates a huge stopgap.
“The amount calculated as maintenance, however, when added to the net income of the payee, shall not result in the payee receiving an amount that is in excess of 40% of the combined net income of the parties.” 750 ILCS 5/503(b-1)(1)(A)(emphasis mine)
Only if the maintenance payor makes three times the income of the payee will the maintenance payor’s payment not be impacted by this 40% cap.
These maintenance guidelines only apply to divorcing couples making less than $ 500,000 annually combined.
Guidelines maintenance does not apply “[i]f the combined gross annual income of the parties is less than $500,000 and the payor has no obligation to pay child support or maintenance or both from a prior relationship” 750 ILCS 5/504(b-1)(1)
What amount of maintenance is required do couples who make in excess of $ 500,000 annually combined? There is no calculated amount. The court awards a maintenance amount that it believes is just after reviewing the same 14 factors that allowed maintenance to be acceptable. “Any non-guidelines award of maintenance shall be made after the court’s consideration of all relevant factors.” 750 ILCS 5/504(b-1)(2)
Once the monthly maintenance amount is determined, the court can then determine the duration of that maintenance.
The duration of maintenance is based on the length of the marriage (at least up until the filing of the Petition for Dissolution of Marriage)
“The duration of an award [of maintenance] shall be calculated by multiplying the length of the marriage at the time the action was commenced by whichever of the following factors applies: less than 5 years (.20); 5 years or more but less than 6 years (.24); 6 years or more but less than 7 years (.28); 7 years or more but less than 8 years (.32); 8 years or more but less than 9 years (.36); 9 years or more but less than 10 years (.40); 10 years or more but less than 11 years (.44); 11 years or more but less than 12 years (.48); 12 years or more but less than 13 years (.52); 13 years or more but less than 14 years (.56); 14 years or more but less than 15 years (.60); 15 years or more but less than 16 years (.64); 16 years or more but less than 17 years (.68); 17 years or more but less than 18 years (.72); 18 years or more but less than 19 years (.76); 19 years or more but less than 20 years (.80). For a marriage of 20 or more years, the court, in its discretion, shall order maintenance for a period equal to the length of the marriage or for an indefinite term.” 750 ILCS 5/504(b-1)(1)(B)
The total maintenance owed over the course of the parties’ lives can now be accurately calculated.
(Monthly Maintenance Amount) X (Number Of Months Maintenance Is To Be Owed)
Determining The Maintenance Buyout Amount In An Illinois Divorce
The total amount of maintenance to be paid can be used to calculate the net present value of the maintenance.
Net present value is “the present value of a net cash flow from a project, discounted by the cost of capital.” Black’s Law Dictionary (11th ed. 2019)
Net present value = cash flow(1+i)t, where i=discount rate and t=number of time periods.
No one calculates net present value by hand. Everyone uses an Excel function. This is why Excel exists…to estimate the financial future.
For example, 5 years of $ 1000 monthly maintenance may be $ 60,000 total. But, the present value at a 7% interest rate is $ 50,506.81
Note: The discount rate often parallels the rate of inflation. If inflation is relatively high (like it is as of the date of this writing) make a buyout offer now as the higher discount rate reduce the buyout amount.
Once the net present value of the maintenance payments is determined and offer can be made to buy out those payments based on the net present value. Typically, the buyout is made from a portion of the share of marital assets the maintenance payor would have been awarded.
A maintenance buyout will be approved by the court because maintenance can be deemed inapproptiate based on the “property of each party, marital property apportioned and non-marital property assigned to the party seeking maintenance” 750 ILCS 5/504(a)(1)
Likewise, Illinois divorce courts will approve a lop-sided property settlement in lieu of maintenance by considering “whether the apportionment is in lieu of or in addition to maintenance” 750 ILCS 5/503(d)(10)
While property transfers in lieu of maintenance almost always happen by agreement, transfers of marital property in lieu of maintenance can be ordered by the court.
“The trial court has broad discretion in applying the factors enumerated and is authorized to award either property or maintenance, both property and maintenance, or property in lieu of maintenance.” In re Marriage of Jones, 543 NE 2d 119 – Ill: Appellate Court, 1st Dist. 1989
However, there is subsequent case authority that says courts should NOT order a property division in lieu of maintenance. “[T]he [Marriage and Dissolution of Marriage] Act implicitly provides for an award of property in lieu of maintenance, but it does not provide for an award of maintenance in lieu of property. We hold that an award of maintenance in lieu of property is improper.” In re Marriage of Brackett, 722 NE 2d 287 – Ill: Appellate Court, 2nd Dist. 1999 (Citations omitted)
The maintenance payor will further discount the offer because they may die, lose their job or their ex-spouse may remarry or gain better employment.
The maintenance receiver will scoff and suggest that a maintenance buyout creates a tax windfall for the maintenance payor and the two parties should share in that windfall.
The Tax Implications Of A Maintenance Buyout In An Illinois Divorce
A maintenance buyout is a “transfer of property incident to divorce.” Such transfers have zero tax consequence to either party.
“No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)
a former spouse, but only if the transfer is incident to the divorce.” 26 U.S.C. Sec. 1041(a)(2)
The payments of maintenance get no tax deduction for divorces entered after January 1, 2019. This is in stark contrast to when maintenance payments used to be deductible to the payor.
“In the case of an individual, there shall be allowed as a deduction an amount equal to the alimony or separate maintenance payments paid during such individual’s taxable year.” 26 USC § 215(a) (2011)
Also, pre-2019, maintenance payments were taxable to the maintenance payee.
“Gross income includes amounts received as alimony or separate maintenance payments” 26 U.S. Code Section 71(a)(2011)
Both of those provisions of the tax code have been struck leaving the maintenance payor with the burden of paying taxes on their income even if they subsequently pay out that income to their ex-spouse.
This is a tax on money the maintenance payor does not even get to keep. The maintenance receiver is not impacted tax-wise at all if they are paid in a lump sum or on a monthly ongoing basis.
The wise maintenance receiver will therefore want to increase their lump sum amount in exchange for saving the maintenance payor thousands in future taxes.
The Finality Of A Maintenance Buyout In An Illinois Divorce
The wise maintenance receiver will also accept a maintenance buyout because they will truly know their financial situation as the maintenance has become a property distribution…which is non-modifiable.
“The provisions as to property disposition may not be revoked or modified, unless the court finds the existence of conditions that justify the reopening of a judgment under the laws of this State.” 750 ILCS 5/510(b)
“Property provisions of an agreement are never modifiable.” 750 ILCS 5/502(f)
“A property settlement in lieu of maintenance is nonmodifiable.” In re Marriage of Rowden, 516 NE 2d 1041 – Ill: Appellate Court, 3rd Dist. 1987
Even non-modifiable maintenance stops if either party dies.
“[T]he obligation to pay future maintenance is terminated upon the death of either party” 750 ILCS 510(c)
Virtually all long-term maintenance amounts get modified in the future.
“Under Illinois law, all maintenance awards are reviewable.” In re Marriage of Kasprzyk, 2019 IL App (4th) 170838, ¶ 23
Retirement or job loss of the payor reduces maintenance. Likewise, cohabitation or job gain of the payee also reduces maintenance. Almost nothing modifies maintenance upwards.
Can You Buyout Child Support In An Illinois Divorce?
Child support is an ongoing obligation for the benefit of the child(ren).
“Both parents have the financial responsibility to support a minor child.” In re Marriage of MacZko, 263 Ill. App. 3d 991, 994 (Ill. App. Ct. 1992)
Child support is always modifiable and child support is, in part, based on “the financial resources and needs of the child” 750 ILCS 5/505(a)(2)(A)
Because the child’s needs change over the life of the child, child support is ALWAYS modifiable upon a finding of a substantial change in circumstances.
“A substantial change in circumstances typically means that the child’s needs, the obligor parent’s ability to pay, or both have changed since the entry of the most recent support order.” Verhines v. Hickey (In re Marriage of Verhines), 432 Ill. Dec. 293, 310 (Ill. App. Ct. 2018)
Any lump-sum settlement cannot include a payment for child support because of the eternal modifiability of child support.
“[T]he balance of the payment represents a disposition of property between the parties, that portion of the payment is not modifiable…However,…the portion of the payment attributable to child support is modifiable.” In re Support of Burks, 427 NE 2d 353 – Ill: Appellate Court, 1st Dist. 1981
You cannot buyout child support in an Illinois divorce. Any lump-sum payment will be considered a prepayment towards the ongoing obligation that is child support.
A maintenance buyout is often the final negotiated point for both parties to an Illinois divorce. As the old proverb advises, “a bird in the hand is worth two in the bush.”
If you would like to negotiated a maintenance buyout in your Illinois divorce contact my Chicago, Illinois family law firm to speak with an experienced Illinois divorce attorney.