Will Tax Reform Undermine Marital Settlement Agreements Containing Alimony?

[tax reform]

Will Tax Reform Undermine Marital Settlement Agreements Containing Alimony?

With Congress acting quickly to pass tax reform, which may include repeal of the alimony tax deduction, family lawyers might need to know how to protect their clients’ marital settlement agreements.  Years ago, two of the most prominent Fellows of the American Academy of Matrimonial Lawyers supplied model language for marital settlement agreements, anticipating changes in tax law.  Although the wording is somewhat different, both clauses implement the same solution:  if tax reform should undermine the alimony provisions of a marital settlement agreement, the parties should re-negotiate their deal or submit the matter to dispute resolution.  From Appendix Fourteen of my book, Frumkes & Vertz on Divorce Taxation, here are the two useful tax reform clauses:

APPENDIX FOURTEEN – Useful Clauses

INTENDED TAXABLE/DEDUCTIBLE ALIMONY ADJUSTMENT; INTENT OF PARTIES.

In the event that all or any part of the payments required by this Article are not so includible in the Wife’s income and are not so deductible by the Husband in the determination of their respective taxable incomes, whether by reason of Internal Revenue Service interpretation, amendment or repeal of existing revenue statutes, or otherwise, then the payments required by this Article shall be adjusted by agreement of the parties to carry out the intention of the parties with respect to after-tax dollars paid and received. In the event the parties are unable to agree as to the amount of said adjustment, as to the manner of effecting said adjustment, or as to any other aspect thereof, said issue may be submitted to a court of competent jurisdiction for determination upon proper notice, petition and hearing.

Clause submitted by Joseph N. DuCanto, Esq. of Shiller, DuCanto and Fleck, Chicago, Illinois.

LAW CHANGE

This Agreement has been negotiated and executed on the assumption that the payments described in this paragraph will be deductible to xx and taxable to xx. If, as a result of a final and binding judicial determination or because of a subsequent change in the governing law or its authoritative interpretation, it is established that any or all of said payments are not deductibe by xx, the parties agree to renegotiate the amount of the alimony payments so that this amount is consistent with the intention of the parties. If they are unable to agree, they shall resolve the issue by binding arbitration.

Clause submitted by Joanne Ross Wilder, Esq. of Wilder & Mahood P.C., Pittsburgh, Pennsylvania.

Tax issues arise with great frequency in family law cases involving alimony.  Whether or not tax reform is afoot, divorcing spouses and their lawyers must handle tax issues with skill and care.  My law firm has been staying on top of family law tax issues for decades.  To schedule a callback with me, send me an email, call my law firm at 412-471-9000, or use the contact form.