Sharan Levine, an estate planning and trust administration attorney at Levine & Levine Attorneys at Law in Kalamazoo, Michigan, in partnership with George Gregory, an estate planning tax attorney at Kemp Klein Law Firm PC in Troy, Michigan, used their legal expertise to create an irrevocable trust alimony form for fellow lawyers.
The newly-revised form can be found online at the Institute of Continuing Legal Education’s (ICLE) website, where attorneys are able to download it for their clients and create a support trust following a divorce to avoid the negative tax consequences to the payor spouse caused by the 2017 Tax Cut and Jobs Act.
The trust is for the payor who has sufficient wealth to transfer into an irrevocable trust that will generate enough income to pay to the payee for the requisite support conditions and/or time period, and for the divorcing couple who is willing to negotiate their divorce in good faith, want to benefit their children, and may even feel charitably inclined. The trust works when the payor does not intend to make payments directly to the payee or such direct payments would be ill-advised for any of a variety of reasons, including their non-deductibility; or the payee for different reasons does not want to rely on the payor to make routine periodic payments (ill or frail health, the potential for default, bankruptcy, etc.).
As noted on the ICLE’s website, the trust and its implementation are designed to have the trust income taxed to the trust. Remember, under the old rules, alimony was taxed to the payee/alimony recipient and a deduction to the payor. Now, with this new method, the income is taxed to the payee/trust beneficiary, and not a deduction to the payor/Grantor, but at least the payment avoids the Grantor Trust Rules which would have made the trust income taxed to the Payor/Grantor. To move the income the couple cannot be married when the trust is created, see IRC 672(e). There is a lot of flexibility in the distribution rules.
When using this trust, first put the Marital Settlement Agreement or the Divorce Judgment on the record. For most purposes, including tax purposes, a legal separation requires a court order and that the couple lives apart. Second, create the irrevocable trust; identify the Marital Settlement Agreement entered on the record, and refer to the divorce decree in the trust. The parties will have to agree on where and when the remainder shall be distributed.