If you signed a prenuptial agreement before you got married, and believe there is any chance you and your spouse may divorce in the future, the Tax Cuts and Jobs Act that was signed into law on December 22, 2017 could seriously affect the deal you bargained for.
One major change that occurred when that law was passed was that spousal support, which is also known as alimony or spousal maintenance, will no longer be tax deductible after 2018 to the spouse who is paying it, and will no longer need to be claimed as income by the person receiving it. Under the new law, a separation agreement must be signed within the calendar year of 2018, or there needs to be a judgment of divorce signed in 2018 directing that spousal support will be considered tax deductible in future years.
Prenuptial agreements often address spousal support in a few different ways:
- Both Parties Waive Spousal Support – Some agreements have both parties waiving spousal support altogether. If this describes your prenup, then the new law will not have an impact on you.
- Spousal Support is Waived Unless a Certain Event Occurs – If your agreement states that the lower earning spouse may or will be entitled to support if there are children or if some other event has happened in your marriage (such as a certain discrepancy in income between you and your spouse), this new law may have an impact on you.
- Spousal Support Will Be Awarded – If your agreement is very specific and states that spousal support will be paid and/or states how the amount or duration of support will be determined, this law will definitely have an impact on you.
In the last two scenarios, when you signed your prenup, you were advised that support would be tax deductible and you agreed to terms based on that understanding. Now, if you get divorced after 2018, this tax break will not be available to you.
If the fact that spousal support was going to be taxable is important to you and did influence your agreement to pay (how much or for how long), then you may want to consider asking your spouse to sign a postnuptial agreement renegotiating the spousal support terms.
A postnuptial agreement could address the change in tax law and allow you and your spouse to equalize the difference between what you expected to pay, and what you will be paying if you separate or divorce after 2018. Take this example: You agreed in the prenup to pay $100,000 per year as spousal support and you assumed you would be paying about $50,000 out of your pocket after deducting it from your taxable income. Your spouse knew she or he would be receiving $100,000 per year, but would only be keeping $70,000 of it after paying income taxes. With the new laws in place, your spouse would keep the full $100,000 per year because the payments are no longer taxable income. And you’re paying $100,000 per year out of pocket, rather than $50,000, since the payments are no longer deductible. Your spouse is receiving more than what she or he bargained for, and you’re paying more.
This major change in the tax law will result in an inequitable outcome for couples who thought they were entering into an equitable agreement. I’m suggesting to my prenuptial clients (and anyone else who currently has such an agreement) to look at their prenup to see how the new law may or will affect you. If you have any questions, speak with your attorney and figure out how to have a conversation with your spouse about renegotiating the terms of your prenuptial agreement, and signing a postnuptial agreement that feels equitable to both of you. A court will not be able to change your prenuptial agreement — it’s up to you and your spouse to have a conversation. I advise couples to talk about this issue now when they are still happily married or only possibly considering divorce, rather than later as part of an adversarial process.
If you want to discuss your prenuptial agreement and whether the new tax law affects you, contact us.
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