Spousal support under the new tax laws
Updated: Sep 25, 2020
Mr. Trump’s tax act has taken a valuable tool away from family law by ending the deductibility of spousal support by the payer and taxability to the recipient.(The tax cut and jobs act (TCJA) of 2017). So after December 31st 2018 there will be no tax relief to the payer for payment of spousal support in new cases. In orders that were entered in 2018, or prior years, or that get amended in subsequent years, are still under the old law provided the order makes the claim to be under the old law.
This is a reality, that having lost a wonderful tool, we need a solution for substitution.
The solutions I am about to describe are not available in a number of cases that come before us; however, there are cases that might fit into the solutions herein presented. Further, the solutions described here are not new. It is just that there is now more reason to use them.
Assets are divided and now the question of spousal support needs to be fashioned. Some of the assets that the future payer is receiving are income producing and if left in the ownership of the payer the income would normally be includable as taxable income by the future payer of spousal support.
Depending on the nature of the income producing assets allocated to the payer, the creation of a life estate and/or an estate of a number of years in some form for the recipient of support, the taxable income is now taxable to the recipient and not includable in the taxable income of the potential spousal support payer. This is the result we want.
The trick is how do we do this?
If the income producing asset is real estate the simple transfer of a life or, term of years, estate to the possible recipient of support might do the trick. If done before the divorce is final the transfer between spouses is not a taxable event. Or the transfer could be done in the divorce judgment itself as a nontaxable event. A life estate or an estate of years is an asset that can be part of the property division. The estate can be set up so that the recipient can do whatever she or he needs to do to be assured that the estate always delivers to the recipient a certain amount of income; no more and/or no less.
If the income producing asset is in a form that doesn’t lend itself to a simple transfer a trust can do the same thing. A trust funded with income producing assets naming the recipient as a beneficiary of the trust income could be fashioned to do the same thing as an estate with a term of years. Questions as to whether the trust needs to be irrevocable or revocable, or what additional terms would be necessary should be left to a qualified CPA.
It is my thought that with a little bit of ingenuity sub S corps, LLCs, or other such entities should be able to be used to do the trick depending on the asset. Think of a wholly owned business having the stock transferred in some form to produce the income necessary. With stock of a wholly owned company many forms can do the trick.
In my years of structuring a corporate businesses I would create a buying corporation; a manufacturing corporation, a packaging corporation, a selling corporation, an advertizing corporation all for one business so that we could separate the income and allocate it to different members of the owner’s family. We should be able to do it in family law as well.
Two cautions in doing any of the above: (1) always have a tax expert help you in the design and (2) Remember to caution your client that the IRS has the right to redesign your efforts if it is concluded by them that the design is only for the purposes of avoiding taxes and for no other reason. Criminal fraud charges are possible. However, I remember my tax law professor telling me that if the law gives you two roads to go from point A to point B there it is no crime to choose the best road for you. One road is non deductable spousal support and the other is distribution of property rights. Careful drafting and written cautions for protection of your license to practice law is a necessity.
Please excuse the ramblings of an old man who spends his day looking for ways to further frustrate the IRS and Donald Trump. The question in my mind is, would Trump have approved of this change had he realized that the change was for the purpose of making sure that the taxable income is taxed at the high income earners tax rate and not taxed at the lower rate of the recipient and thus not a tax cut?
Ross F. Stancati with help from William VanderSalm CPA
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