Alimony Trusts Grandfathered In
The TCJA changed alimony taxation to take away the deduction for the spouse paying alimony and to make alimony not taxable to the recipient. This provision has a prospective date, to apply only to agreements or orders that become effective after 2018. The IRS has indicated in a recent Notice that it intends to issue regulations explaining that alimony trusts set up before 2019 are grandfathered in under the old rules unless the instrument creating the trust is modified after that date and the modification adopts the TCJA changes. An alimony trust is a legal arrangement where the spouse required to pay alimony sets up a trust with the income from the trust going to the payee spouse as alimony. Under the pre-TCJA rules, the payor spouse cannot claim an alimony deduction on the income but is not taxed on that income. The recipient spouse is taxed on the income but not on the principal.
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