As a family law practitioner, you likely have seen an upswing in pre-nuptial agreements in recent years, particularly among your high-asset clients. Many such couples desire to agree on financial rules and boundaries prior to their marriage in the event of a future divorce. Your CFL Designation for Divorce Practitioners gives you the requisite financial knowledge to draft fair and equitable pre-nups that protect your client’s financial interests while also providing for the other spouse.
However, the Tax Cuts and Jobs Act, signed into law last December, has a negative impact on many existing pre-nuptial agreements, especially those that set out the amount of alimony payments should the couple divorce. As you probably know, the new tax law eliminates the alimony deduction for alimony payors finalizing a divorce after December 31, 2018. It likewise eliminates the requirement that alimony receivers declare it as income and pay tax on it.
While some provisions of the new tax law could be temporary and revert back to pre-2018 laws in 2026, the alimony changes are permanent. Thus the new tax consequences for couples with existing pre-nuptial agreements turn the laws they relied on when signing their pre-nup upside down.
Consider this example: a couple has a pre-nuptial agreement calling for one spouse to pay the other spouse $2,500 per month for four years in the event they divorce. Under the new tax laws that disallow the paying spouse to deduct his or her alimony payments, (s)he will pay an additional $9,000 in federal taxes alone on this $30,000 amount. (S)he could pay more depending on the state in which (s)he lives and its laws regarding the alimony deduction. Clearly, none of this is what (s)he had in mind when (s)he signed the pre-nup.
Revising Current Pre-nuptials
If you have not already done so, you should alert your clients for whom you drafted a pre-nuptial agreement in the past that their pre-nup may no longer work the way they intended it to due to the new tax laws. At the very least, all existing pre-nups should be reviewed with an eye toward discovering provisions that are now detrimental to the parties who signed it. A new post-nuptial agreement may well be called for.
Nevertheless, many couples are hesitant to “mess with” the pre-nuptial agreement they signed by now negotiating and signing a post-nuptial agreement. One possible way around this hesitancy is to suggest that the post-nuptial agreement contain specific language to the effect that the couple wishes the alimony provisions of their existing pre-nup to be grandfathered in should they divorce any time after January 1, 2019.
Overturning Current Pre-nuptials
If one of your clients whose divorce likely will not be finalized this year has a pre-nuptial agreement which has become unfavorable under the new tax laws, your only option may be to petition the court to overturn it. Overturning a pre-nup is a difficult undertaking and rarely successful since courts are loathe to void an existing contract without extraordinarily good reason. In addition, the Uniform Premarital Agreement Act, which 27 states have adopted, has drafting guidelines for pre-nups and strengthens their enforceability.
Nevertheless, given that a pre-nuptial agreement is a contract, overturning one is possible, especially if you can prove one or more of the following:
- Coercion or duress
- Lack of capacity
- Lack of legal counsel before signing
For more information on financial issues you need to be aware of, how gaining your CFL Designation for Divorce Practitioners will give you the financial knowledge and skills you need to attract additional high-asset clients, and the other benefits of AACFL membership, please visit this page on our site.