Lump-Sum or Ongoing Spousal Maintenance: Which option is right for you?

When spouses are going through divorce, maintenance can be arranged as ongoing periodic payments or settled through a lump-sum payment or transfer of property (provided both parties consent thereto in a settlement agreement). The better option depends on the parties’ needs, finances and appetite for future risk. There is no one-size-fits-all solution.

Ongoing maintenance

Periodic maintenance is usually paid monthly for a fixed period or until an agreed event occurs, such as death, remarriage or cohabitation. It can provide a regular income stream and may be varied, suspended or rescinded by a court if circumstances materially change. The trade-off is an ongoing financial relationship between former spouses and the risk of enforcement proceedings if payments are missed.

Lump-sum maintenance

A lump-sum or capitalised maintenance settlement is only available by agreement between the spouses. Section 7(1) of the Divorce Act 70 of 1979 allows a court granting a decree of divorce to make a written agreement between the parties concerning maintenance an order of court. Accordingly, the spouses must first agree to the capitalised amount and record it in a settlement agreement; the court may then incorporate that agreement into the divorce order. A court cannot impose capitalised spousal maintenance on unwilling parties after a trial.

If the parties do not settle and the maintenance claim proceeds to trial, the court’s power is governed by section 7(2) of the Divorce Act. That provision permits the court, after considering the statutory factors, to order one spouse to pay maintenance to the other until the recipient’s death or remarriage, or for a shorter period. Maintenance courts may also make the forms of maintenance order authorised by section 16 of the Maintenance Act 99 of 1998. Neither provision gives a court a general power to convert future spousal maintenance into a compulsory once-off capital amount.

How is a lump sum calculated?

Where the spouses agree in principle to a lump-sum settlement, capitalisation can be used to negotiate the amount by converting anticipated future maintenance into a present value. Factors may include the monthly maintenance need, likely duration, inflation, the recipient’s earning capacity and health, and possible termination events. The calculation is a settlement tool rather than a statutory formula available to a trial court, and actuarial or financial advice may be appropriate.

Key issues to consider

1. Affordability and liquidity: Can the paying spouse fund a lump sum without destabilising a business or requiring excessive borrowing?
2. Security and enforcement: Is immediate payment possible, or should deferred payments be secured over suitable assets?
3. Tax: Periodic maintenance is generally not taxable in the recipient’s hands and is generally not deductible by the payer. Asset transfers, shares, property and retirement interests may have separate tax consequences.
4. Businesses and trusts: Company and trust assets are legally separate and are not automatically available to satisfy a spouse’s personal obligations. Proper due diligence is essential.
5. Child maintenance: A child’s right to maintenance is separate from spousal maintenance and should be dealt with independently. You cannot capitalise a child’s maintenance claim.

Getting the agreement right

Because capitalised spousal maintenance depends on consent, a well-drafted settlement should clearly record that both spouses agree to the arrangement, identify exactly what is being settled, state the capital amount and payment dates, address tax responsibility, and provide effective remedies if payment is late. It should also deal with death, remarriage or cohabitation where relevant and expressly provide for the settlement agreement to be made an order of court under section 7(1) of the Divorce Act.

The bottom line

A lump sum can provide certainty and independence, but it is a negotiated settlement option and cannot be imposed by a court after a contested trial. If no agreement is reached, the court may determine spousal maintenance only within the powers conferred by section 7(2) of the Divorce Act and, where applicable, section 16 of the Maintenance Act. The appropriate structure should be tested with legal, tax and financial advice before any settlement is signed.

For more information on this topic, please contact our legal team for a consultation.