Divorce and Taxes - Minimizing Your Tax Obligations without the Alimony Deduction

 Posted on August 01, 2019 in Spousal Maintenance

At the start of 2019, the federal government eliminated the 70-year-old tax deduction associated with alimony payments. For receiving spouses, it may seem beneficial to no longer have to claim alimony payments as income, but the change actually leaves less money for the entire family. That is because paying spouses, who remain at the same tax bracket, may need to decrease their support amount to balance out their financial obligations. Thankfully, there are some alternative strategies that families can use to preserve their wealth after a divorce.

Trading Alimony Payments for a Transference of Retirement Funds

Depending on the ages of the divorcing parties, a transference of retirement funds may be preferable to alimony payments. In this option, the paying spouse makes a tax-free exchange of money by directing some of their retirement funds to the lower-earning spouse. The receiving spouse may also withdraw from the amount without tax penalty, so long as they are age 59.5 or older. If the receiving party has not yet surpassed the age threshold, divorcing parties may want to consider another alternative, as the 10 percent early withdrawal penalty may outweigh any potential benefits for the family unit.

Using a Trust Account in Lieu of Alimony Payments

Another potentially viable alternative to alimony payments is the use of a trust account. The most commonly used versions are the CRT (charitable remainder trust), QTIP (Qualified Terminable Interest Trust), ILIT (Life Insurance Trust), and Alimony Trusts.

While the concept remains the same for each option (the paying spouse transfers money into a trust account which is then disbursed to the receiving spouse), the individual nuances of each type of trust should be carefully considered by each of the divorcing parties. The rules dictate when a disbursement is made; in some cases, the wait may be prohibitive. Each type of account also presents its own set of challenges and potential drawbacks.

In most situations, the trust must be established prior to the divorce to avoid any taxation for the paying party. As such, divorcing couples are encouraged to speak with their attorney about potential options, prior to filing for a dissolution of their marriage. It is also advised that parties seek guidance from a financial advisor, prior to making any transference of funds.

Contact Our Wheaton Alimony Lawyers

At Davi Law Group, LLC, we recognize that every family is unique. We respond to each case with a personalized approach to ensure the needs, concerns, and goals of each client is met. Schedule your consultation with one of our seasoned DuPage County divorce lawyers to get started. Call 630-657-5052 today.

Sources:

https://www.forbes.com/sites/heatherlocus/2019/07/12/minimizing-taxes-in-divorce-without-the-alimony-deduction/#768046968344

https://greenleaftrust.com/viewpoints/divorce-settlements-using-trusts-deal-distrust/