Dear Quentin,
I’m looking for feedback in Illinois. My ex-husband has just reached out after not paying child support for two months and is suggesting paying the remainder of my son’s child support in one lump sum (“no loopholes, no strings attached”) of about $30,000.
My son will be 15 next month. He has not paid the last two months, and it is not court-ordered; it has been an agreement between us that he pays monthly, and he has done fine up until recently.
What are the pros and cons of receiving the remainder in a lump sum? Taxes? Legal considerations? What type of account should I put it in so it can accrue interest, but I can still access it each month to withdraw the monthly amount for child support?
I’m already feeling anxious. Also, I have flashbacks of panic due to his previously unstable financial behavior. I’m not enjoying this feeling — I’m leaving his text message as “unread” until I figure this out. What do you think?
Ex-Wife & Mother
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.
Dear Ex-Wife,
I have one question: Is $30,000 enough?
My main problem with your plan is that you have nothing on paper. That works against him as much as it works against you. If your child had an emergency or wanted to attend college and needed help with fees and/or living expenses, what happens then? I assume this $30,000 will cover joint expenses until he reaches the age of 18, so that’s for the next three years. The average cost of raising a child — something you would know best — costs anywhere from $15,000 to $30,000 a year. So your ex’s offering is modest. Check the guidelines in Illinois before agreeing to anything, and talk to a lawyer.
Your anxiety may come from the ad-hocness of this arrangement. A generous interpretation: It may be that your ex finds the monthly payments stressful. But when child support is set through a court order or a child-support agency, there are legal avenues to address missed payments, including wage garnishment. With an informal arrangement, there is often no immediate remedy if your ex changes the amount overnight. Basically, child support is easier to enforce once a formal order exists. I assume this payment is intended to satisfy all future support obligations.
Child support can be modified if there has been a significant change in a parent’s circumstances.
A question mark hovers over this $30,000 offer. Why does he want to give a lump sum? What about unexpected expenses? Is he off the hook? If you are happy with the amount, you are also hedging the risk that he could fail to make future payments. And now a warning: In Illinois and many other states, child support can be modified if there has been a significant change in a parent’s circumstances. If your ex is sitting on a bonus, inheritance or proceeds from a house or business sale, it may be in his interest to pay a larger sum now and draw a line under future child-support obligations.
In Illinois and other U.S. states, child support is not considered taxable income for the recipient or the donor, regardless of whether it’s paid in regular monthly installments or as a single lump sum. If you placed the money in an index fund or some other account, the interest earned would be taxable. You could also put it into a tax-advantaged 529 plan. Alternatively, may want to keep at least part of the money in a high-yield savings account or money-market account to safeguard it from the corrosive powers of inflation. From an investment perspective, there are advantages to having it all now.
But without the proper documentation or court-ordered child support, the Internal Revenue Service could characterize this money as a gift or settlement. The bigger concern, however, is not how the IRS would classify the payment, but whether the two of you later disagree about what the money was intended to cover. Without a written agreement, this could be just the start of the child-support debacle, not the end of it. If there is no formal agreement in place, it’s hard to know what this money is for and whether it’s even enough to cover expenses like food, clothing, school trips, and other leisure activities.
There are no discounts for lump-sum payments.
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