29 Nov When Divorce and Estate Planning Collide
By: Barry E. Haimo, Esq.
November 29, 2018
When Divorce and Estate Planning Collide
Divorce can crumble all sorts of plans for your life, your family, and your finances. New tax laws can also change how your finances will look and be shaped over the next years. If you are getting a divorce in the next few months, you may have to deal with both types of changes to your financial situation.
Additionally, the Tax Cuts and Jobs Act (TCJA) is changing the way that individuals file returns, estate plans distribute inheritance, and divorced couples exchange alimony payments. If you and your spouse decide that it is time for a divorce, it is crucial to reach out to an estate planning attorney and discuss how this change will affect your estate and how you file for taxes in the next few years.
How Assets Are Divided in Florida
Before we discuss alimony payments, it is important to briefly discuss how Florida’s equitable distribution laws may affect your estate plan.
Unless a pre-nuptial or post-nuptial agreement was validly executed, Florida law dictates that marital property will be distributed to the spouses equitably not necessarily equally. Shared assets won’t necessarily be split 50/50, unless the judge believes that an even split is the most fair decision based on each spouse’s contribution to the household and overall income.
Once this is determined, it may be a good idea to update your living will and testament. If you are uncomfortable with the idea of having your ex-spouse as an executor, or you mention assets in your will that are now property of your spouse, things may get complicated in the event of your death. Some states have laws that characterize a former spouse as deceased with respect to any life insurance designations, but others do not in that context and other contexts, such as estate planning.
When you are planning your estate and updating your will, consider upcoming child custody or alimony payments and how these will affect your financial situation in the next few years.
What Are Alimony Payments?
In order to understand what your budget will look like in the next few years, you will have to consider that one spouse may have to make monthly alimony payments. These are monthly payments given to one spouse in order to help them “get back on their feet” or maintain a certain standard of living after the divorce is finalized.
The spouse that earns a higher income will have to pay alimony, but the amount is determined by factors including:
- Length of the marriage
- Wealth acquired during the marriage
- Joint assets acquired during the marriage (and distributed after the divorce)
- Child custody agreements and payments
- Contributions to the home and caring for children
- How long it will take the other spouse to “get back on their feet”
- The spouse’s current educational or training pursuits
- How close each spouse is to retirement
- Pre-nuptial or post-nuptial agreements
Alimony can be permanent, but typically only last for a few years until the beneficiary remarries or is able to support themselves.
Changes to Alimony Under TCJA
Previously, taxpayers who receive alimony payments would have to include those payments in their income. Now, these payments can go unnoticed, possibly lowering the amount of taxes that recipients will have to pay during tax season. Conversely, taxpayers that make alimony payments can not deduct these payments. This could turn out to be more expensive for people paying alimony and can ultimately affect how much money is left in your estate plan.
These expenses may be avoided if the alimony is put into a trust. Alimony trusts may be a more favorable opportunity under the TCJA, especially if the payor is creating their estate planning strategy. If the payor passes away and there is still money in the alimony trust, that money will be transferred back to the payor’s estate and use to pay off debts to be distributed.
Trusts can be used to keep inherited property from being included in equitable distribution and, except for computation of alimony, payment of alimony. More on this in a subsequent post.
Have Questions About Divorce and Estate Planning? Ask an Attorney
Couples may be able to avoid some of the tax changes if their divorce is settled before the end of 2018. If you and your spouse are considering a divorce, or you have questions about how divorce would impact your estate plan, reach out to a Florida estate planning attorney.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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