President Trump’s tax reform could wreak havoc across the country – and maybe even his own.
Marriage contracts often contain provisions on how much support a partner would pay, also known as spousal support. The agreements can be thrown out if judges consider them unfair or if they were signed too quickly or under duress. Now the tax reform offers another avenue of appeal, because the courts have to consider how the law has changed since the treaties were drawn up. As of 2019, payers will no longer be able to deduct their maintenance payments.
For divorced people in the top tax bracket, the change could mean they are effectively paying double the post-tax cost compared to what they have stipulated in their marriage contracts.
“We struck a deal and now Congress screwed it up,” said Linda Ravdin, partner at Pasternak & Fidis law firm, which has written reference books on premarital agreements.
Divorce lawyers are in a difficult position and are weighing whether to inform happily married clients with decades-old marriage contracts of the change. Ravdin said she was concerned that an unexpected letter or phone call from a divorce lawyer might be undesirable. Instead, she included the information in a customer newsletter sent by email.
The obvious solution for married couples is to change their arrangements, but that’s almost always a bad idea, said Christopher Melcher of Walzer Melcher, who specializes in divorcing ultra-rich Californians.
“It is questionable whether anyone would want to mess with that thing,” if they are happily married, said Melcher. “It would open a huge can of worms.”
While Trump told New York Magazine in 2006 that his marriage to Melania Trump had strengthened his marriage despite being a “hard, painful, and ugly tool,” he did not reveal details of the agreement. A White House spokeswoman did not respond to a request for comment.
There aren’t any hard numbers, but it’s fair to say that marriages have grown in popularity in recent years as younger Americans delay marriage and the divorce rate has skyrocketed for people over 50, who often get married when they do marry again. According to a 2016 survey by the American Academy of Matrimonial Lawyers, more than 60% of divorce lawyers said they had seen an increase in the number of clients seeking marriage partnerships over the past three years, while only 1% saw a decrease .
Some marriage contracts may specify that in the event of divorce, for example, a spouse should be owed $ 10,000 per month for half of the couple’s marriage period. Other agreements determine maintenance based on a formula, e.g. B. a percentage of the payer’s income. Child support is often calculated together with child support. If the arrangements are not changed to reflect the tax changes, divorce lawyers – or judges – will have to decide whether the amounts or formulas will still apply to couples divorcing from the next year.
Even if both parties agree to adjust the maintenance, they must agree on how much the payer’s obligations should be reduced. Divorced couples could end up hiring competing accountants as experts to influence judges.
“Nobody knows the outcome of this kind of argument,” said Ravdin. “Going to court is like throwing the dice.”
For those in the top income tax bracket – most likely to have a prenuptial agreement – being able to deduct the payout from taxable income was a huge saving, as every dollar of maintenance reduces the payer’s taxable income by the same amount. Top earners in high-tax areas like California and New York City can face marginal tax rates of nearly 50%. Without the deduction, a spouse who agreed to write a check for $ 10,000 each month could end up on the hook with input tax income of nearly $ 20,000.
“People don’t like to pay child support anyway, so it would be painful to double the real cost,” said Chris Chen, a financial planner who specializes in divorce issues with Insight Financial Strategists.
Republican lawmakers said they had abolished the alimony allowance to end what they called “divorce allowance” under the old law. The change, which is expected to gross $ 6.9 billion over the next decade, will not affect divorces and separation agreements that were finalized before the end of 2018. From next year onwards, new divorces will not be able to deduct maintenance payments, but recipients will receive the money tax-free (previously the payments had to be shown as part of their taxable income).
Ultimately, the change could harm the maintenance recipients. Payers could ask judges to revise their obligations in light of the new law – a valid legal argument as many spouses specifically mention that the payments are deductible. These potentially reduced payments are likely to overwhelm the beneficiaries who result from being able to receive the payments tax-free as they are typically in lower tax brackets than the payers.
Divorce attorneys have already warned that abolishing the alimony allowance could make the breakup more bitter.
The alimony allowance “relieves the pain of paying alimony,” said Melcher. “If that goes away, it will be more difficult. There is less money to distribute. “
Steverman writes for Bloomberg.