Just a few years ago, Zack was pulling down a six-figure salary working at a hedge fund. He and his fiancé, Gillian, signed a prenuptial agreement that said Zack would pay Gillian a specific amount of spousal maintenance (aka alimony) if they divorced. Zack would likely always be the primary bread winner in the family, and they intended for Gillian to stop working when they had children.
The amount of maintenance was based on the federal tax law in place at that time, which allowed the payor to deduct payments from their taxable income. The recipient paid income taxes on that amount they received.
Fast forward to December 2017. Congress enacted a new tax law and turned this scheme on its head. Starting on January 1, 2019, maintenance will no longer be deductible to the payor spouse, unless the parties enter into a separation agreement or a court signs a divorce order providing for the payment of maintenance before December 31, 2018.
What does this mean for Zack and Gillian and the countless others who have prenuptial agreements? These agreements, which were supposed to provide for a fair settlement in the event of dissolution, could result in a windfall for recipient and a significant and unanticipated liability for the payor. In other words, these prenuptial agreements could be a ticking time bomb.
Will these agreements be enforceable?
What Washington courts are going to do with these agreements is uncertain. On one hand, courts tend to hold parties to their contractual obligations. If they bargained for a specific maintenance payment, courts might hold parties to their bargain. On the other hand, there is a mutual mistake. Both parties assumed that the spousal maintenance payment would be a deduction to the payor and income to the recipient. As a result, courts might choose to invalidate this provision of the agreement.
What should I do if I have a prenup that provides for spousal maintenance?
You entered into a prenuptial agreement to eliminate the uncertainty of divorce. But this significant and unanticipated change in the law up-ended your divorce planning.
One way to eliminate the uncertainty surrounding the change in the tax law would be to sign a new postnuptial agreement. In this agreement, you could address this change in the law and provide for a new “tax neutral” maintenance payment.
Be mindful, however, that this cure could have unintended side effects. Proposing a postnuptial agreement could result in the reconsideration and renegotiation of other prenup provisions. Everything could be on the table. And, in cases where a marriage is already in trouble, revisiting the prenup could result in divorce.
If you have a prenuptial agreement that provides for spousal maintenance, it is worth talking to a family law attorney to determine if and how the ticking time bomb should be diffused.