Eric S. Neumann, APLC
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Prenups challenged by new tax law

The new tax law recently enacted by Congress has changed financial planning for businesses and individual taxpayers. Its provisions may now require review of prenuptial agreements that govern property division and support for Louisiana couples. Tax changes may invalidate parts of prenups or surprise couples during divorce.

Prenuptial agreements are being used more because younger Americans have delayed getting married and divorces have rapidly increased. Over 60 percent of divorce attorneys reported an increase in the number of clients asking for prenups over a 3-year period, according to a 2016 survey conducted by the American Academy of Matrimonial Lawyers.

Prenups traditionally established a payment amount of support based on the time that a couple was married. Others used a formula based on a percent of a spouse's income. If prenups do not address recent tax changes, couples will need to renegotiate or a judge will need to decide how these agreements will work.

The tax deduction for spousal support also played a role in negotiating prenuptial agreements. Couples in higher income tax brackets, in particular, relied on this deduction while entering these agreements. Beginning in 2019, however, alimony will not be deductible for paying spouses and recipients will not need to declare it as taxable income. Spouses in higher brackets who lose this deduction may face marginal rates as high as 50 percent on the money that was saved.

Loss of this deduction may also harm recipients even though they do not need to report alimony as income. Paying spouses may ask courts to lower their payments under the new law because the prenuptial agreement identified these payments as being tax deductible. Lower support payments may erase any tax benefits to recipient spouses who are usually in lower tax brackets than paying spouses.

Additionally, prenuptial agreements should be reviewed because the new tax law may make divorce more contentious. Couples may delay or rush negotiations or litigation in anticipation of the tax changes that take effect in 2019. There may be less money to be shared among the parties.

Review of the prenuptial agreement will not only address the new tax law, but may also deal with changes in the couple's situation and lives since they were engaged. Each spouse should seek advice from their own attorney to assure that they can reach a fair and valid agreement.

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