By now, a lot has been written about the recent changes in tax law, and how those changes could affect divorce specifically. While conventional wisdom suggests that these changes will make divorce proceedings more difficult, especially where spousal support/alimony is concerned, what you may not know is there are actually provisions in modern lax laws which may make some divorce proceedings easier. Especially if you are entering a high asset divorce, you may be able to use the current tax code to your advantage in securing a fair agreement.
Potential Advantages of the Current Tax Code
Starting in 1942, the provision regarding alimony in U.S. tax code allowed individuals paying spousal support to deduct payments on their taxes, while those receiving alimony had to claim payments as income. Under the recent changes in the tax code, however, individuals making alimony payments may no longer deduct said payments when it comes time to file their taxes, while spouses receiving alimony payments will no longer have to claim those payments as income. This change was made to account for the discrepancy in individuals claiming the deduction versus those claiming payments on their taxes.
The overall effect of the change has been to slow down divorce negotiations. Many spouses are less willing to pay alimony now, as they can no longer deduct payments on their taxes, which in turn has forced other spouses to fight harder for support than they would have had to in the past. These negotiations only become more complex in high net worth divorces, as more assets ultimately means there is more for either side to lose or gain.
Yet there is one way that the very wealthy are already getting around this change in divorce settlements. Rather than agreeing on alimony payments the old-fashioned way, some individuals are creating “grantor trusts” for their former spouses. Made up of assets that create income as a substitute for alimony, grantor trusts are established after a divorce has been finalized. Clients with substantial net worth may prefer these trusts because they do no have to pay taxes on them. While it can be difficult to persuade the receiving spouse to accept this kind of arrangement, the advantage is that unlike alimony, payments in a grantor trust continue even after the paying spouse dies. The receiving spouse will continue to receive payments from the grantor trust until it runs out, and if they pass away before this happens, their heirs are allowed to receive payments from the trust as well.
Another way the current tax code may be used to the advantage of couples entering a high net worth divorce is through the sale of real estate. As many were dismayed to see limitations on tax deductions go up alongside a rise in their overall tax bill, couples who would once have fought to hold on to assets like houses in a divorce may now be more willing to sell due to increasing property taxes on primary and second homes.
As Alvina Lo, Chief Wealth Strategist at Wilmington Trust recently told The New York Times, “When you’re counseling clients, they feel like they can control their spending and the money going out, but when you show them their number, this is not discretionary spending… These are hard dollars you owe Uncle Sam regardless of your expenses.”
“How does this help couples with significant assets?” you may be asking. In the past, the individual making more income was generally forced to surrender the family home if not other property, too to their spouse. Yet it may now be more advantageous for the spouse that would have received the home to sell, as increases in property taxes can make this asset difficult to retain. By negotiating the sale of the family home together, divorcing couples may both be able to receive significant compensation, giving each souse a decent chunk of money to invest elsewhere.
Then there is the matter of dependents. While the exemption of $4,050 per dependent has been eliminated, the child tax credit has now increased from $1,000 to $2,000. However, eligibility for the tax credit becomes limited for individuals with an income of $200,000 and ceases for individuals with an income of $240,000.
Why does this matter for high net worth couples? In essence, it may make the spouse spending the greater amount of time with the children less likely to seek a greater amount in the settlement, so they are still eligible for the federal tax credit. This can work out for both spouses, as one individual may end up paying less in support, and they other will still receive compensation for their role as primary custodian of the child/children through the tax credit.
Hire a High Asset Divorce Attorney from Ford & Friedman
In general, the recent changes in the tax code may be a mixed bag for high net worth couples. While negotiations may take longer, there is also potential for both spouses to exit the marriage with more assets. This is why it is essential to hire a skilled lawyer that will strategically advocate for your interests.
Many couples were surprised this year to find out their joint tax filings left them with a smaller return. At Ford & Friedman, our experienced family lawyers may be able to help you determine if you can hold on to more in a separate tax filing, and begin negotiating your divorce now so you can receive a higher return in 2019. We know that divorce can be an emotional process, but it is still important to protect your financial future. For attorneys that will work tirelessly to ensure you receive everything you deserve, contact Ford & Friedman today.
Ford & Friedman is available during business hours at (702) 904-9898, or you can contact us online to schedule a consultation anytime.