New Tax Provisions Significantly Impact Treatment of Trusts in Divorce

From JD Supra/Lathrop Gage:

Everyone knows about the income and estate tax changes included as part of the Tax Cuts and Jobs Act of 2017 (the “Act”), but there are several overlooked provisions that may significantly affect taxation in a divorce.  Some of these provisions may cause unintended consequences if not addressed as part of the dissolution proceeding or settlement discussions.

Beginning in 2019 alimony and maintenance are no longer deductible to the person making the payment or taxable to the person receiving the payment.  Unlike many other provisions in the Act, this provision does not sunset in 2026.  In addition, Prenuptial Agreements and Postnuptial Agreements are not grandfathered under the Act (there are some efforts to change this, but it is unclear whether that will happen.).  Therefore, if a Prenuptial or Postnuptial agreement signed before 2018 includes terms providing for how alimony or maintenance will be taxed, the new tax laws under the Act prohibiting the deduction or taxation of alimony and maintenance will still apply.

There is a section of the Internal Revenue Code (Section 682) that addresses “grantor trusts”, that was repealed as part of the Act.  “Grantor” trusts are trusts where the person establishing the trust (the grantor) is taxed on the income from the trust even if such person is not the beneficiary of the trust.  Prior to the Act, Section 682 provided that after a divorce, income paid to an ex-spouse from a grantor trust would be taxed directly to the ex-spouse, not the grantor of the trust.  Section 682 was repealed as part of the Act, which means that now, after a divorce, the grantor will still pay the income tax on the trust income, even though the divorced spouse will receive that income.  If this issue is not considered, this outcome may cause significant tax consequences to the grantor spouse after the divorce.

Read more here.