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The Divorce Encyclopedia
Property Settlement Note

Term Definition Property Settlement Note - a deferred payment in property settlement.
Application in Divorce Very often when divorcing couples negotiate the terms and conditions of a property settlement, they agree to a structured settlement, which is a series of smaller payments paid over time, as opposed to a lump-sum payment. In this routine, a series of payments over a period of time comes to more than the agreed upon settlement sum because the recipient normally receives interest to compensate for the delayed payment.

This difference reflects the time value of money, which is the concept that a dollar today is worth more than a dollar tomorrow because today’s dollar earns interest until tomorrow’s dollar is received.

Structured settlements are used in the distribution of marital property when one party has a valuable nonliquid asset, such as a house or a business that he or she wishes to keep, but little or nothing in the way in the way of other marital property to make an offsetting award. Suppose Rufus wants to keep the home he and Rhonda shared, but the agreed upon settlement sum is more than he can handle financially. Rufus can do this, however, with a property settlement note. In this arrangement, Rufus pays Rhonda a sum for a negotiated length of time at current interest rates. The money is a division of property, so it is not taxable. The recipient does pay taxes on the interest, not the principal. The note is normally collateralized. In this arrangement, Rufus gets the house; Rhonda gets an income stream.

The same basic regime applies Rufus’s buying out Rhonda’s interest in their home as would be if the he bought out her share of his business so he could keep it.

The calculation of interest may become problematic. When interest is not imposed, as can be the case, the installment payments must be discounted to their present value. Otherwise, the distribution may be based on an erroneously high award value.

Jurisdictions view interest in different ways. Some consider it mandatory; other generally award it; some say that a failure to award it must be explained; still others contend that awarding interest, either denying it or postponing it, is a factor to consider.

Unlike lump-sum settlement, which make for a clean financial break, structured settlements are a continuing financial tie between former spouses. Sometimes couples, for financial reasons, negotiate a deferred luimp-sum payment, which also includes the payment of interest.

Both lump-sum settlements and structured settlement demonstrate the variety of ways a marital estate can be divided so that former spouses both get something of what each wants because the terms and conditions of marital settlements are all open to negotiation.

See also Lump-Sum Settlement.

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