Alternatives to Traditional Alimony
Recent changes to the federal tax code have had a significant effect on how alimony payments are handled during divorce, as former spouses who make spousal maintenance payments no longer qualify for a tax deduction. Furthermore, alimony recipients must now pay income taxes on all payments that they receive from a former spouse. Both alimony payors and recipients are now finding themselves in higher tax brackets as a result of these changes, so many couples are looking to alternative ways to minimize their tax burden while still providing spousal maintenance. These matters tend to be complicated, so if you are considering divorce, you may want to speak with an experienced alimony attorney who can help you determine what type of impact a spousal maintenance award would have on your own finances after divorce.
Transferring Funds to a Retirement Account
One strategy that many divorcing couples have pursued to avoid the new alimony tax is to transfer pre-tax funds contained in a retirement account to the former spouse who would otherwise be entitled to alimony payments. One of the most significant benefits of this option is that the recipient will only have to pay taxes on the funds that they withdraw. Recipient spouses, on the other hand, while they will still need to pay taxes on their retirement withdrawals, will also have more assets to draw income from and increased control over the funds. The latter is largely due to the fact that, unlike alimony payments, these funds are not subject to restrictions, such as the risk of the payor’s untimely death.
It’s important to note, however, that recipients who are under the age of 59 and one-half years old will be subject to a ten percent withdrawal penalty if they withdraw funds from a 401(k) or IRA, so couples should be careful to keep this in mind when drafting a settlement agreement.
Creating a Charitable Remainder Trust
Since the new tax code went into effect, more and more divorcing couples have begun creating charitable remainder trusts in lieu of making alimony payments. Generally, these trusts are funded with initial lump sums that are payable to the beneficiary, or in this case, a former spouse, on a periodic basis. These types of trusts can be created for a specific amount of time, usually a term of years, for the recipient’s lifetime, or until a certain event occurs, such as the beneficiary’s remarriage. Any funds that are left in the trust after a predetermined amount of time will then be transferred to a designated charity.
Paying spouses who choose this option will still be eligible for a tax deduction that is calculated based on the value of the contributed assets. The annual income created by the trust, however, will be considered taxable income for the recipient spouse. These types of trusts also have the added benefit of being funded with low risk investments. This means that once the appreciated assets are in the trust, they can be sold and diversified without the parties owing taxes on any gain in value.
Call Today for Legal Advice
Please contact dedicated Fort Lauderdale alimony attorney Sandra Bonfiglio, P.A. at 954-945-7591 to learn more about your own alternatives to traditional spousal maintenance.