Prenuptial Agreements Could be Affected by New Tax Laws
San Diego, CA – In January, we shared information about new divorce laws taking effect in 2019, and mentioned briefly the changes to alimony and separate maintenance payments.
Now it’s time to dig a little deeper into the alimony repercussions of the Tax Cuts and Jobs Act. The tax changes also may affect prenuptial agreements, and that has many family lawyers testing the waters on potentially uncomfortable conversations with happily married clients.
Tax Reform and Alimony
For agreements executed prior to Jan. 1, 2019, spousal support is tax deductible for those who pay it to former spouses. Spouses who receive the support payments are required to report it as taxable income. But come 2019, those payments no longer are tax deductible under the new tax law, and those who receive spousal support no longer will be required to report it as income.
That means alimony is about to get more expensive for the spouses who are required to pay it.
Tax Reform and Prenups
Alimony is one of the most common elements in prenuptial agreements. These upcoming tax changes have opened the door to court challenges “because courts will likely have to consider how the law has changed since the contracts were created,” Bloomberg reported.
Some people may want to revisit their prenuptial agreements, the Bloomberg article stated. The tax changes can mean that people who fall within the top tax bracket could face twice as much in tax costs under the new laws than they would have when they originally signed their prenuptial agreements.
An important caveat for prenuptial agreements is that once the contract is complete, meaning that the couple marries, the prenup can only be changed by mutual agreement, said San Diego divorce lawyer John Griffith.
“That’s a tough topic to bring up when a happily married couple signed their prenuptial agreement years ago,” Griffith said. “The discussion of a prenuptial agreement can be uncomfortable prior to marriage, and couples who enter into them often are relieved once they’re signed and over with. Who wants to bring it up again when your marriage is sailing along smoothly?”
Still, it’s a conversation that many family lawyers are encouraging clients to have. One attorney interviewed for the Bloomberg article said she has provided the information to clients in an electronic newsletter, rather than risk an unexpected call from a divorce attorney.
Sometimes prenuptial agreements set a specific amount that will be paid in the event of divorce. Other times, alimony amounts are determined according to an income-based formula.
If agreements aren’t reviewed and updated to consider the new tax laws, “it will be up to divorce attorneys to settle — or judges to decide — whether the amounts or formulas still stand for couples who divorce starting next year,” according to Bloomberg.
“Check with the attorney who drafted your prenuptial agreement to see whether or not the new tax code will have a substantial effect on the spousal support provision,” Griffith said. Your attorney will be able to advise you of your options.”
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