Pennsylvania Prenuptial Agreements and the New Tax Law
Prenuptial agreements don’t first come to mind when one thinks of the new Tax Act. As previously discussed, the Act (signed by President Trump on December 22, 2017) will eliminate tax deductions for alimony beginning in 2019. How does this affect existing prenuptial agreements?
Many prenuptial agreements contain language about alimony in case of divorce, and these paragraphs are likely based on assumptions dependent on current tax law. As alimony deductions have been a part of U.S. tax law for almost 70 years, the discussion of alimony in previous contracts would assume, overtly or implied, the deduction of alimony payments from income of the payor and the claim of income of same by the recipient.
It’s likely they do not include language to account for rapidly changing tax law in this previously static arena.
What does this mean? If the prenuptial agreement states both parties agree to no alimony, there is no impact. But any other alimony arrangement, if it does not specifically include language to allow for recalculation based on changing tax law, could have a devastating effect.
Consider this example: A couple has a prenuptial contract that allows for alimony to be paid by the higher earner to the lower earner at a rate specified by the laws of state where they signed their contract, should they ever divorce. Spouse A, at time of divorce, is calculated to owe 4 years of monthly payments of $2,500. Under the old tax law, the annual alimony payments ($30,000) were deductible from the total income of the payor. That is a significant tax break. Commencing in 2019, assuming a 30% tax rate, the payor would have to pay an additional $9000 in taxes. Without language allowing for recalculation of alimony under any new tax law, one can see how the payor would consider this unfair.
Of course, Congress might also vote in the future to turn back the clock on alimony deductions. Given the unpredictability of politics, a proactive course would be to review your prenuptial agreement with an attorney. An attorney can determine whether a postnuptial agreement, which is legal in Pennsylvania, should be written to include language that addresses alimony and tax law changes.
If you’d like to discuss your pre-nuptial agreement I offer a first free consult. Call my Bucks County, Pennsylvania law office at 215-345-5259 to arrange for an appointment.
– Elissa C. Goldberg, Esquire
Law Office of Elissa C. Goldberg
107 North Broad Street, Suite 211
Doylestown, PA 18901
Phone: 215-345-5259
Fax: 215-345-7458