Estate Planning and Prenuptial Agreements: Tax Implications of Alimony

When contemplating marriage and estate planning, frequently, individuals will enter into prenuptial (premarital) agreements to address their rights and obligations during the marriage and in the event of a divorce or death. A prenuptial agreement is a very useful tool to create a clear understanding and avoid future conflicts in either the event of divorce or death. The requirements for the enforcement of a prenuptial agreement vary from state to state, and the rules governing the rights and obligations between spouses during marriage and at death are state specific. However, in addition to the state laws, there are federal requirements for certain matters that are involved in a marriage, such as alimony.

Alimony (also referred to as spousal support) is deductible on the payer spouse's personal income tax return and considered income to the recipient spouse and includible on their personal income tax return. Section 71 of the Internal Revenue Code sets forth the requirements for payments between individuals to qualify as alimony. Some state statutes allow for different forms of alimony. In South Carolina, there are several options for alimony: periodic, lump sum, rehabilitative and reimbursement alimony. To qualify as alimony under federal law, amongst other requirements, the payments must cease at the death of the recipient spouse. While a State Court may approve or enforce an agreement in a divorce setting that allows for payments beyond the death of the recipient spouse, if agreed to by the parties, these payments will not meet the qualifications for alimony under federal law.

Each state differs on their laws governing marriage, divorce and prenuptial agreements. Careful attention should be paid to both state and federal requirements when entering into prenuptial agreements and estate planning.

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