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The payments must be by check, money order, or cash, pursuant to a divorce or Separation Agreement signed by the parties. The agreement or court Order cannot state that the payments are not taxable to the payee and not deductible to the payor. Additionally, the parties cannot be members of the same household and the liability to make such payments must cease on the death of the payee. The money must be paid to the spouse and cannot be paid as child support for the children. At the end of the year, the parties, if married, cannot file a joint income tax return. If these requirements are met, the payments can be deductible by the payor and will be included as taxable to the payee.

Although it seldom happens, another consideration exists concerning the Internal Revenue Code requirements which is that the payments cannot be “front-loaded” and decreased by more than a specified amount during the first three post separation years. If the payments do fall in this trap, it will result in a recapture of the excess payments to the payor in the third post separation year, resulting in devastating tax consequences. This very seldom happens, but can occur if someone drafts an agreement that attempts to be too clever in arranging payments and deductions in high income divorce cases. A violation can occur requiring the payor spouse to include the excess amount in gross income in the payor spouse’s third post separation year. Such a result should be avoided whenever possible.

An “alimony trust” is available to divorcing spouses and can be a very useful tool in certain circumstances. The trust is used to make payments to a spouse who is divorced or who is legally separated under a Decree of Separation Maintenance or a written Separation Agreement. In such case, the spouse receiving the payments from the trust is considered the beneficiary. The trust can also be created in part to pay child support for the obligor spouse’s minor children, in which case the children will also be considered a beneficiary of the trust. Alimony trusts are used frequently to avoid certain pitfalls concerning the spousal support requirement set forth in the Internal Revenue Code. However, the trust can only be successful where there are sufficient funds available to produce the required income to pay the beneficiary spouse, in which case, the recipient beneficiary spouse will be guaranteed the payments from the funds that are set aside in the trust. If a payor spouse is irresponsible or incapable of managing monies, a trust can greatly benefit the payee spouse who needs a steady stream of income in order to meet fixed monthly living expenses.