The recent overhaul of the federal tax code has led to many unforeseen changes. One has been a change in the uses of revocable trusts, also known as living trusts in divorce.
One of the most popular reasons people set up a trust is to avoid probate. Assets held in trust are generally not considered to be part of a person's estate, and so they don't have to go through the sometimes arduous probate process. However, there are many types of trusts. Revocable trusts can go into effect during your lifetime and continue to help you manage and protect your property for many years to come.
Revocable trusts are highly adaptable and can accomplish many tasks. In some cases, they can help people avoid tax burdens that might otherwise affect them at tax time.
This is where divorce comes into the picture. Because of recent changes in the federal tax code, for divorces that are concluded this year and later, ex-spouses who pay alimony will no longer be able to deduct the cost and ex-spouses who receive alimony must declare it as income.
In order to manage the new tax implications of alimony, some wealthy people going through divorce are setting up trusts to manage payments to their exes. Rather than mailing their ex a check every month, these individuals are moving assets into a trust, where a trustee will manage the assets and send checks to the receiving spouse at regular intervals. The idea is to reduce the paying spouse's tax exposure. The receiving spouse likely will still have to declare the payments as income.
The law around these trusts is still developing, and it's not at all clear whether these will turn out to be good ideas for many people. However, they help illustrate the many ways trusts can be adapted and used in ways outside of the usual estate planning world. An experienced estate planning attorney can help people understand their options with trusts and more.