New Tax Law May Undermine Prenups

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By Angel McCall CFP®

As a regular part of your family law practice, you may have created or reviewed many prenuptial agreements in the past. They have been filed away by your former client never to be looked at again unless a “situation” arises.

However, in light of the new tax law, these contracts should probably be pulled out and reviewed. Certain provisions may no longer achieve what was intended by your client. Certain terms may now be disadvantageous to the very party who sought protection in the first place.

I suggest that you contact clients who have prenuptial agreements to determine how they may be impacted by the recent tax bill.  At the very least, this will be an opportunity to reinforce you as a valued resource for future work and referrals.

Most prenuptial agreements were prepared with the assumption that maintenance would always be tax deductible by the payer spouse (often this is the person who desired a prenuptial agreement for protection) who will not be bound to unfavorable terms. This could present a sizeable problem.

Barring compelling reasons to invalidate the agreement, the payer spouse may be stuck with an unanticipated burden. You and your client ultimately should determine whether modifying the existing agreement is necessary or whether a new agreement may be worthwhile. Of course, either option would require potentially reluctant participation by the recipient spouse.

But by failing to act before December 31, 2018, your client could be doomed by the very instrument that was put into place for financial protection.