Protect Support Payments After Divorce

Are you concerned about financial security, yours and your children's, after your divorce? A trust may be the answer. Create it with a legal document that describes the terms and the transfer of cash, stock or other assets to the trustee. It can benefit you or your children. Yet in any case, learn the tax effect of the document.

Trust for Children. Many divorcing parents want to be reassured their children will continue to receive support payments. Solve this with a trust. Without one, the children may be runnersup in a race for assets with a new spouse or new offspring.

The funds could be available for the child's support or limited to her education. After she completes her education or reaches a certain age, the remaining assets could be distributed to her or to either spouse.

Trust for Wife. Sometimes a wife who will receive alimony is concerned about her husband's future illness or death or that his creditors will take his assets. A trust funded by her husband could alleviate these fears. The document would say when the alimony payments end and where the remaining assets go; like to the children, another trust or back to the husband.

In the case of a lump-sum payment by a husband, he may prefer a trust rather than paying his wife outright. He might be concerned about her potential creditors or her inability to manage the funds. Also with a trust, he decides who gets the assets upon her death or remarriage.

Usually during negotiations that accompany a divorce, trusts are an under used resource and taxes a forgotten problem.

Tax Effect. You should ponder at least these four taxing points in setting up a trust:

1. Will the spouse setting up a trust be subject to capital gains tax or gift tax on the transfer of cash or other assets?

2. Can the instrument be drafted to reduce gift tax to the generous spouse?

3. Who will be taxed on its income: the creating spouse, the receiving spouse, the child or the trust?

4. Will trust assets be subject to estate taxes on the death of either spouse?

The moral: There's more to trust than meets the eye.