Tax Changes & Prenups: How Will This All Work?
By Amanda Singer
There’s been a lot of talk going on around the recent tax changes as it relates to alimony payments. These changes go into effect after the end of this year. However, there’s been much less talk about how this might affect previously entered into pre-marital agreements (or prenups as they’re commonly referred to) that deal with alimony.
Prenups often contain provisions about how much one partner would potentially pay in spousal support if they get divorced. Agreements can be thrown out of the judge deems them unfair, signed too quickly or under fraud or duress. The tax law may also offer a new avenue for challenges because starting in 2019 payors of spousal support will no longer be able to deduct their payments on their taxes. The change could make it so that payors in the top tax bracket could pay double in post-tax costs compared to what they have previously agreed to in their prenups. These prenups were most likely negotiated based on the law at the time so that the payor believed they would be able to deduct the payments meaning they could pay more than they will be able to now.
So the question at this point is what do you do? The obvious fix would be for couples with a prenup to revisit and amend their agreement. However, that’s not always a smart idea. Most people enter into a prenup before getting married and put it away and never want to think about it again. The last thing you want to do when you’re happily married is starting to talk about what your divorce might look like. So, for most couples, this means that they probably won’t discuss it unless and until it becomes necessary to use it.
The issue will become IF they do get divorced and are trying to enforce the prenup what will happen. It’s very likely that the person receiving support might want to keep the payments as they were before because they agreed to that amount and now they don’t even have to pay taxes on it. However, the higher earning spouse paying the support could in some cases be paying 20-50% more than they had initially agreed to. Nobody enjoys paying spousal support and now having to pay more than you initially agreed to would be even more painful and in some circumstances not plausible. The change could also hurt the recipients because the payors could argue in front of a judge that they need to revise their obligations because of the change in the law.
If you do have a prenup and want to discuss how the changes to the tax law might affect your spousal support agreements, make an appointment to discuss it with us. Call us at (858) 736-2411 or fill out our online contact form.