When one or both spouses have significant wealth and decide to get a divorce, the consequences of proceeding with the separation can be magnified, particularly when it comes to how assets are divided.
What many couples don’t realize is that the Tax Cuts and Jobs Act of 2017 changed some of the rules regarding who pays for what following a divorce. While not the most romantic of notions, both married couples and those who have yet to walk down the aisle should consult with their financial advisors and take a fresh look at their trust and estate planning, says Marcia Urban, Wealth Strategist with Cresset’s Minneapolis office. The following are key aspects of the new tax law that couples should be aware of:
- For divorce and separation agreements executed after 2018, alimony is no longer tax deductible for the spouse making the payment, nor is it included as income for the spouse receiving the payment. It has now been placed on the same footing as child support.
- Taxes on the income of many irrevocable trusts created by one spouse for the benefit of a current, or soon-to-be, ex-spouse must now be paid by the creator of the trust. Prior to the tax law changes, those taxes were paid by the beneficiary. Regardless of whether a trust was created before the tax law changes or if the marriage dissolved prior to the new tax law being enacted, the trust creator may now be responsible for paying the income taxes on that trust.
What does it all mean?
Urban recommends couples and their advisors take a close look at the terms of their trust and estate planning documents. For example, under the new law, the creator of a trust may want to stipulate in the terms that in the event of a divorce, the income produced by the trust will no longer be distributed to the ex-spouse beneficiary.
While no one wants to plan for divorce, all couples should be aware that the recent tax law changes may require rethinking of their plans, such as an asset settlement alternative to alimony, or amending, revising, or decanting existing wealth transfer agreements and/or entities where possible.