Prenuptial agreements provide protection for spouses in the event of a future divorce and also play a role in estate planning for the eventual death of one spouse. Prenups are most common for spouses who enter a marriage with a significant difference in their assets or income or for high-asset couples.
A well-executed prenuptial agreement protects both parties by establishing a structure for asset division should the marriage end. One important consideration in drafting a prenup is the tax implications for both spouses under the enforceable terms of their prenuptial agreement should they later divorce. For a free consultation, contact our prenuptial agreement lawyers in Denver today.
Most prenuptial agreements include an income tax clause. The central focus of this clause is to delineate each spouse’s separate assets so they remain separate after the marriage instead of becoming part of the marital pool. Even if the spouses file their taxes jointly, it doesn’t mean that their separate assets become marital assets. This allows spouses to enjoy the tax benefits of joint filing while keeping their separate assets legally defined and outside of the marital pool.
A prenuptial agreement may include terms for how the spouses file their taxes during the marriage but the largest implications for the tax consequences of a prenup don’t impact spouses until there is a “triggering event” like legal separation, divorce, or death, activating the contract’s terms.
When a prenuptial agreement allocates some properties as marital property after the marriage—such as the marital home—that property remains subject to equal division after a divorce and the spouses share tax liability on the property. Depending on the terms of the prenup, each spouse must pay taxes and report income on properties specified as separate property by the prenup’s terms.
A well-executed prenuptial agreement should stipulate that any substantial transfer of assets occurs after the marriage. Assets transferred between spouses after marriage aren’t subject to income tax or a gift tax. There is no legal recognition of gain or loss between spouses because married couples enjoy unlimited marital deductions.
Most prenuptial agreements include stipulations about alimony (spousal support or spousal maintenance) unless one spouse waives their right to receive alimony. In 2019, a new federal tax reform law states that alimony is no longer treated as income. Conversely, this means the paying spouse cannot use it as a tax deduction. Unless the IRS repeals this provision, those with prenups drafted before 2019 may find that the alimony portion of their prenup is no longer applicable under the law.
The court considers it a “mutual mistake” and subject to litigation. Spouses with a prenuptial agreement signed before 2019 may address this problem by agreeing to adjust this portion of their prenup. It’s crucial to consult with a family law attorney because this may open the door to re-negotiating other aspects of the prenup.
Tax laws frequently change, making it wise to review your prenuptial agreement with your attorney every few years. It is legal to change the terms of a prenup when both spouses agree to the change and sign the new contract with the legal counsel of their separate attorneys.
Call the experienced prenuptial agreement attorneys at Ciancio Ciancio Brown, P.C. for legal counsel and representation.
