Ultimate Alimony Arrangement

[Corduroy Frog]

A tax pro friend of mine shared this with me, she had never run into such a thing, neither had I.

Some brilliant Tennessee lawyer (you can cast lots as to whether the antithesis to brilliant is "Tennessee" or "lawyer") came up with this alimony arrangement. Alimony of $$$$$ annually is to be paid until BOTH PARTIES are deceased. Death of either party does not stop the payments.

Sorta blew me outa the chair. Obviously, the taxability/deductibility of the alimony cannot continue if one of the parties dies, but my friend told the client that such an arrangement jeopardized the deductibility of the entire arrangement from day 1. Upon hearing this, the client scurried back to his lawyer to have the divorce papers re-negotiated.

My opinion (for what it's worth) is I would deduct the alimony if the divorce papers were approved by the court retroactive to the date of first payment, but would only deduct future alimony if the arrangement was not retroactive.

Any comments from the group for this situation? I don't think we could ever find an answer in code or regs, and I sorta doubt there has been a court case with this situation.

[ATSMAN]

Not sure how many years they have been deducting alimony but a client of mine had his alimony payment increased for previous years retroactively because his lawyer some how screwed up! The court document listed the prior 5 years. Based on calculations he had higher income in the previous 3 years so we went back and amended those 3 last year, instead of deducting all the arrears in 2013 (He was laid off half of 2013). So far no issues.

He told his ex that he was amending so she should do it as well and I think she did. They have a decent relationship for exes!

[Burke]

Alimony of $$$$$ annually is to be paid until BOTH PARTIES are deceased. Death of either party does not stop the payments.

Obviously, the taxability/deductibility of the alimony cannot continue if one of the parties dies, but my friend told the client that such an arrangement jeopardized the deductibility of the entire arrangement from day 1.

So...., assuming payor is A and payee is B:

If A dies, payments continue from A's estate until B dies? And if B dies first, A still pays to B's estate until A dies? What a deal. However, one of the requirements of alimony is that "payments are not required after the death of the recipient spouse." TTB 12-12.

[Corduroy Frog]

Burke, I think so

Burke, from what I understand from my friend, all you have written is correct. Kinda ridiculous when you stop and think about it.

My friend is quite sharp, and has already told the guy the "after death" clause invalidates his deductibility from the start. She anticipates her client will return to the brilliant lawyer and get the judge to approve a re-written document.

As I understand the IRS treatment of alimony, if the guy pays alimony for 5 years, then dies and his estate continues to pay it, he cannot deduct any payments, even in year 1.

[taxea]

I think that IRS law overrules court agreements in relations to divorce. I doubt the estate of the payer would be responsible for alimony or if the payer would be responsible to pay/expense alimony if the regulation doesn't agree with this. Does the court agreement say the payer still pays if the receiver remarries? Is this attorney familiar with tax law?
It would make more sense to create a trust.

[Gary2]

I think that IRS law overrules court agreements in relations to divorce. I doubt the estate of the payer would be responsible for alimony or if the payer would be responsible to pay/expense alimony if the regulation doesn't agree with this. Does the court agreement say the payer still pays if the receiver remarries? Is this attorney familiar with tax law?
It would make more sense to create a trust.

The IRS regs don't supersede the details of the agreement. They just affect the tax treatment of the agreement. If a divorcing couple want an agreement where A pays B or B's estate a fixed amount for ten years, they can do that, and the beneficiaries of the estate can enforce it. But A can't deduct it as alimony paid.

[Burke]

Exactly. If that is the desired result, then it is more of a financial settlement arrangement. It just does not qualify as alimony, so it is neither deductible to the payor nor taxable to the recipient.