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December 23, 2019 Practice Points

Pre-Nuptial Agreements and the TCJA—Frenemies?

Couples who have entered or are considering entering into such an agreement now have figure out how to deal with the drastic change in the treatment of alimony.

By Jonathan W. Lounsberry

As part of The Tax Cuts and Jobs Act (TCJA), Congress eliminated the taxability and deductibility of alimony. While the elimination has caused a rift of panic (or wave glee, depending) among family court litigants and lawyers, it may also cause problems with parties who are not currently facing litigation.

Pre-Nuptial Agreements assist couples in creating a clearer picture of what each can expect should they divorce in the future. This process also allows couples to dispense with one of the most difficult issues in family court litigation: determining alimony. With the elimination of the taxability and deductibility of alimony, couples who have entered into Pre-Nuptial Agreements or are considering entering into such an agreement now have figure out how to deal with this drastic change in the treatment of alimony.

Ben Steverman wrote an article addressing this very issue:

Prenups often contain provisions about how much a partner would pay in alimony, also known as spousal support. The agreements can be thrown out if judges deem them unfair, signed too quickly or under duress. Now the tax revamp offers another avenue for challenges because courts will likely have to consider how the law has changed since the contracts were created. Starting in 2019, payers will be no longer be able to deduct their alimony payments.

In prior years, the taxability/deductibility of alimony offered parties the power to deal with the establishment of two households in an effective manner. Without the taxability and deductibility of alimony, there is likely less money to go around. With that being said, how does this aspect of the TCJA affect Pre-Nuptial Agreements?

Simply put, the future taxability and deductibility of alimony is only protected if a divorce or separation instrument was entered into before December 31, 2018. As a Pre-Nuptial Agreement is neither a divorce nor separation instrument until it is approved by a court, it is likely that the case that these agreements will not protect the future deductibility of alimony. Parties are now faced with the conundrum of how to deal with this change. As alluded to above, it may be an avenue of challenging the terms of the agreement.

The elimination is something that also should be considered by those entering into agreements are considering doing so. Steverman points out that while “[t]here aren’t hard numbers . . . it’s fair to say that prenups have become more popular in recent years as younger Americans delay marriage, and the divorce rate has skyrocketed for people over 50 who often use prenups if they remarry. More than 60 percent of divorce attorneys said they had seen a rise in the number of clients seeking prenups in the previous three years, while just 1 percent reported a drop, according to a 2016 survey by the American Academy of Matrimonial Lawyers.” So, if you are addressing these issues in a Pre-Nuptial Agreement, it is best to include a certified public accountant in the drafting process to ensure that all aspects of the elimination of the alimony deduction and taxability are addressed.

Jonathan W. Lounsberry is a senior associate at the Stevens Firm, P.A. in Spartanburg, South Carolina, where his practice focuses on the litigation of complex and international family law issues.

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