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Do 2017 tax law changes affect estate plans for divorced people?

On Behalf of | Mar 18, 2020 | Estate Planning

Georgia residents who divorced after December 31, 2018, may find that the tax consequences for trust distributions have changed. The Tax Cuts and Jobs Act of 2017 eliminated a section of law governing who pays taxes on money they receive from a support trust, even if the divorcing spouses created the support trust before the end of 2018.

Divorced distributors of support trust money may owe new taxes

Before the TCJA, divorced spouses who received money from their ex-spouse through a support trust paid taxes on that income. Now, however, the spouse who distributes money to an ex-spouse through a support trust may have to pay all taxes on the support trust income if the divorce took place after December 31, 2018. This is true even if the spouses created the support trust before that date.

People create support trusts for many reasons

People create support trusts as estate planning instruments, as divorce settlement instruments and for marital planning purposes. Spouses often create such trusts to minimize interaction after a divorce, because support trusts rely on an independent and neutral trustee who is responsible for making support payments independently of both spouses.

Why Congress changed the law

Congress likely eliminated the section of the law requiring the recipient of support trust money to pay income taxes on the money to prevent spouses with money from shifting income to an ex-spouse in a lower tax bracket. For this reason, many people with pre-existing support trusts may need to modify them to account for changes under TCJA. The bottom line is that divorce may be more expensive for spouses who pay their ex-spouse through a support trust.