ALIMONY TRUST

Under normal divorce settlements, alimony payments are deductible to the one who makes them- payments for child support are not deductible. In an alimony trust (set up to avoid some of the hassles of a wife (normally), getting payments from her ex), the income- but not the principal- is taxable to the person who received it as trust income. It is also not subject to the three year rule recapture rule for excessive front end loading of payments. Child support from the trust would also be taxable so its not suggested that a trust- or even separate trusts- be used for child support. The wife is not taxed on the portions paid from the trust corpus whereas with alimony, it would be taxable from whatever source. The husband does not get a deduction, but also does not pay tax on the income. If the husband maintains a reversionary interest, it will be includable in his estate. If he creates a remainder interest, the asset will be removed from the estate but is still subject to gift tax.

The advantage:

1. The trustee, not the husband, makes payments to the wife. Some of the emotion and bitterness is curtailed.

2. The transfer of property to the trust is not a taxable event if he remains obligated for alimony payments if the income and principal are insufficient to make the payments.

Disadvantage:

1. Unless the agreement clearly states intention, portions meant for non taxable child support may be taxed to the wife.

2. The husband receives no tax deduction for payments from principal.

3. The husband and wife cannot make of designation of taxability as is possible with alimony trusts.