Tax Issues in Divorce: Before and After Tax Reform – Part III

By Justin T. Miller, J.D., LL.M., TEP, AEP®, CFP®


This is the final part in a three-part series focusing on tax issues in divorce before and after tax reform. To view the first part, please click here. To view the second part, please click here.                                   



Qualified Retirement Plans and Qualified Domestic Relations Orders

A qualified retirement plan typically is set up by employers as an employee benefit.[1] These plans are subject to federal tax and labor laws—that is, both the Code and the Employee Retirement Income Security Act of 1974 (ERISA)[2]—and are overseen by the Service, the Pension Benefit Guaranty Corporation, and the Department of Labor. The transfer of all or part of a qualified retirement plan in a divorce or marital dissolution requires a Qualified Domestic Relations Order (QDRO), which is a judgment, decree, or court order pursuant to a state domestic relations law.[3] A state authority, generally a court, must issue a judgment, order, or decree, or otherwise formally approve a property settlement agreement, before it can qualify as a QDRO under ERISA.[4] A QDRO provides for an alternative payee or payees to whom plan assets can be transferred—such as a former spouse or children—without penalties or taxes.[5]

The qualified retirement plan administrator must assure that the QDRO is properly drafted because failure to comply with format, content, and procedural requirements may cause immediate tax consequences or jeopardize the qualified status for the entire plan.[6] Accordingly, the plan administrator should be included in drafting and reviewing the QDRO.

If structured appropriately, there are no tax consequences if the transfer from a qualified retirement plans is subject to a QDRO and is an “eligible rollover distribution.”[7] The alternate payee—that is, the non-employee spouse—generally is subject to ordinary income tax on distributions or withdrawals.[8] If the qualified retirement plan consists partially, or entirely, of after-tax contributions, the original basis is allocated pro rata between the original employee spouse and the alternate payee spouse.[9] One of the most important benefits for the alternate payee spouse—if under the age of fifty-nine and one-half—is that the 10% penalty for early distribution is waived.[10]

There are a number of advantages to rolling the former spouse’s qualified retirement plan to an IRA. This typically is the optimal choice, as it generally provides: (1) distance from the former spouse; (2) greater control over funds and investment choices; (3) more options for beneficiary designations; (4) the potential to deduct fees (prior to 2018 and after 2025); and (5) no mandatory withholding.[11] Note that a rollover of a distribution to the alternate payee spouse’s IRA does have a 20% withholding requirement, although a direct trustee-to-trustee transfer from the qualified retirement plan to the IRA will avoid the 20% withholding requirement.[12]

However, there also may be advantages to keeping the funds in a former spouse’s qualified retirement plan, including: (1) access to funds, if under fifty-nine and one-half years old, without a  10%  penalty;  (2) additional  creditor  protection;  (3) loans  or  hardship  distributions;  and (4) possible life insurance retention. To the extent a spouse is interested in moving the funds to an IRA but wants to retain some flexibility to withdraw money while that spouse is under fifty- nine and one-half years old without a 10% penalty, the spouse could transfer some of the funds to an IRA and keep the remaining amount in the qualified retirement plan—because withdrawals from the qualified retirement plan pursuant to the QDRO are not subject to the 10% penalty.[13] Moreover, there is no time limit on when the amount received under a QDRO must be rolled over to an IRA.

Example 1. Carrie and Dan are getting a divorce. Dan has a significant qualified retirement plan with $2,000,000 in assets and has agreed to transfer $1,000,000 of the plan to Carrie pursuant to a QDRO. Carrie would prefer not to keep any of the assets in the qualified retirement plan managed by her ex-husband’s employer and would like to transfer the assets to an IRA. However, Carrie is fifty years old and is afraid she might need access to some of the funds before she is fifty-nine and one-half years old. Accordingly, Carrie could leave some of the assets in the qualified retirement plan—perhaps $250,000 that she might need before the age of fifty-nine and one-half—and could transfer the remaining assets to an IRA. Once she is fifty-nine and one-half years old, she could then transfer the remaining assets to her IRA without fear of a 10% penalty for withdrawing any funds.[14]

It should be noted that a QDRO also may be used as collateral and is exempt from the anti-alienation and anti-assignment provisions of ERISA.[15] A divorce judgment could assign a security interest in a participant spouse’s QDRO to the alternate payee spouse to secure equitable distribution, alimony, child support, education funding obligations and, potentially, attorney fees—depending on state law.[16]


IRAs are governed by the Code[17] and are not subject to ERISA; in other words, QDROs are not appropriate. A spouse may transfer an IRA tax-free only during a divorce situation;[18] a spouse may not transfer an IRA tax-free to another spouse during marriage outside of the divorce context.[19] The transfer is not taxable if it is (1) pursuant to a decree of divorce or separate maintenance or a “written instrument incident to such a decree;”[20] and (2) transferred directly (trustee-to-trustee transfer) to the donee spouse’s IRA.[21] Unfortunately, “written instrument incident to such a decree” is not defined in the Code or Treasury Regulations. Accordingly, the following should be considered when dealing with a written instrument: (1) a written agreement requiring that the transfer should be referred to, incorporated into, or approved by the court entering the decree of divorce or legal separation to confirm it is the intention of parties that the transfer of the IRA be tax-free under section 408(d)(6);[22] and (2) a spouse should not transfer the IRA—that is, he or she should wait—until the final decree. The reason for waiting is that the divorce may never be finalized; for example, one of the parties could die prior to the divorce decree, or the spouses could reconcile, in which case the transfer would be a taxable event.

The donee spouse is treated as the owner after transfer,[23] so the IRA will be treated as the donee spouse’s IRA for all purposes. This means that (1) the regular income tax treatment for IRAs applies—in which case, the donee spouse is taxed on distributions;[24] (2) the donee spouse can name his or her own beneficiary(ies); (3) the 10% penalty applies if the donee spouse receives distributions under fifty-nine and one-half years old;[25] (4) minimum required distributions occur at age seventy and one-half;[26] (5) the donee spouse is not bound by the former spouse’s election to receive “substantially equal periodic payments;”[27] and (6) the donee spouse can contribute more funds annually if he or she has sufficient earned income—note that alimony is treated as “earned income.”[28]

When transferring an IRA, the owner should not do a “rollover” or “distribution,” rather, the owner should do a trustee-to-trustee “transfer.”[29] If an IRA owner withdraws an amount from an IRA and endorses the check to the former spouse who is entitled to the IRA under the divorce agreement, it will not qualify as a “transfer” and the IRA owner will be subject to tax on the withdrawal plus an additional 10% penalty.[30]

There is an exception under the IRA rules to avoid the 10% penalty for withdrawals under the age of fifty-nine and one-half if the owner elects to receive “substantially equal periodic payments” (SEPP).[31] However, if the SEPP status is ever modified, there is a retroactive 10% penalty plus interest imposed on the IRA owner.[32] The good news in a divorce situation is that the Service has issued a number of private letter rulings allowing an IRA in SEPP status to be divided pursuant to a divorce without being treated as a SEPP modification subject to a 10% penalty plus interest.[33]  Because private letter rulings only may be relied upon by the taxpayer requesting the ruling, it is generally recommended that individuals seek a private letter ruling if dividing an IRA that is in SEPP status.

B. Beneficiary Designations

The beneficiary designations for qualified retirement plans and IRAs always should be reviewed and updated, if necessary, following a divorce.

As a general rule with qualified retirement plans, the beneficiary designation on file usually controls who receives the funds.[34] ERISA, which governs qualified retirement plans, is a federal statute that pre-empts state laws.[35] In addition, ERISA trumps contractual law, even if a spouse waives a right in a settlement agreement—although the spouse may be sued under a separate state contract claim.[36]

The beneficiary designation on file for an IRA typically will control who receives the funds.[37] However, many states do have laws that override the IRA beneficiary designation of a former spouse post-divorce.[38] At the same time, it is possible that the IRA owner could move to another state that does not override designation post-divorce, in which case the former spouse could receive the IRA funds as a result.

Accordingly, advisors should be certain to help their clients review and update their beneficiary designations for qualified retirement plans and IRAs after a divorce. In addition, advisors also should help clients make the necessary changes to all of their estate planning documents, such as: (1) executor/personal representative; (2) trustee; (3) trust beneficiary(ies); (4) attorney-in-fact; (5) health care agent; and (6) insurance policy beneficiary.


Transfers of property from one spouse to another spouse during marriage, or incident to a divorce, generally are non-recognition events for income and gift tax purposes.[39] If provisions in a premarital agreement require a transfer—for example, the need to give a spouse certain assets in a divorce—it is recommended that the premarital agreement require that the provision also be included in a divorce decree to maintain tax-free treatment of the transfer for both income tax and gift tax purposes. While the tax treatment of non-U.S. persons is beyond the scope of this article, it should be noted that there may be additional income and gift tax issues if either of the spouses is a non-U.S. person.[40]

Income Tax Consequences                                                                                                                                                                                                                                                                   

Transfers of property between spouses or “incident to divorce” generally are income tax free—that is, a non-recognition event—under section 1041.[41] A transfer is considered “incident to divorce” if (1) the transfer occurs within one year after the marriage ceases; or (2) it is “related” to the cessation of marriage, which generally means that the divorce or separation instrument requires the transfer and the transfer happens within six years after the marriage ceases.[42] In other words, the Service increases scrutiny for income tax purposes if the transfer occurs more than one year after the marriage ceases.[43] If the transfer occurs more than six years after the marriage ceases, then there is a rebuttable presumption, which may be rebutted with sufficient documentation, that the transfer is unrelated to the marriage ceasing and is thus outside of section 1041.[44] The presumption may be rebutted “only by showing that the transfer was made to effect the division of property owned by the former spouses” at the time their marriage ceased.[45] Accordingly, even if a transfer occurs more than six years after a marriage ceases, a transfer may still be tax-free if there is a good reason for the delay, such as “legal or business impediments” or “disputes concerning the value of property.”[46] In addition, a transfer of property may be made to third parties on behalf of a spouse or former spouse without income tax consequences if (1) the transfer is required by divorce or separation agreement; (2) the transfer is pursuant to a specific written request of the spouse or former spouse; or (3) the transferor receives a written consent or ratification of the transfer from the other spouse or former spouse.[47]

In limited circumstances, divorcing spouses may want to avoid a tax-free transfer and have a true sale. In such a case, it is especially important to carefully arrange such a transaction with competent tax advisors. Unfortunately, there is no opt-out provision similar to the alimony rules under section 71.[48]                                                                                                                                                              

Example 1. Emily and Fred are divorcing and own a vacation home in Hawaii, each having a 50% interest in the home. They purchased the Hawaii home three years ago for $500,000 (they each have a $250,000 basis), and the home is now worth $1,000,000. Emily would like to purchase Fred’s 50% interest in the home for $500,000. If this transaction is structured as a tax- free transfer pursuant to a divorce or separation agreement, as opposed to a true sale, Emily’s basis would remain $500,000—that is, she would carryover Fred’s $250,000 basis and keep her $250,000 basis. If she later sells the property for $1,000,000, she would have a gain of $500,000.

Example 2. Alternatively, Emily and Fred could structure the transaction as a valid sale rather than a tax-free transfer incident to divorce or pursuant to a divorce or separation agreement. Presumably, they would need to wait more than a year after the divorce to avoid the non- recognition treatment under section 1041.[49]  If properly structured as a sale transaction, then (1) Fred would have a $250,000 gain upon selling his interest to Emily; and (2) Emily would have a stepped-up $750,000 basis in the property—her original $250,000 basis plus a new $500,000 basis from the purchase. If Emily later sells the property for $1,000,000, she would have a $250,000 gain instead of a $500,000 gain, as in the previous example.

It should be noted that cohabitating couples do not qualify under section 1041—assuming it is not a lawful marriage under common law—because the tax-free transfer rule only applies to married couples or previously married couples.[50] Accordingly, division of property for cohabitating couples is taxable as a sale for fair market value, even if there is no exchange of money; the transferor would have taxable income without receiving funds to pay the tax. In limited circumstances, when dividing property due to the end of cohabitation, it may be beneficial for the individuals to get married and then divorced for non-recognition treatment under section 1041.[51]

A. Gift Tax Consequences

Transfers between married spouses generally are free of gift taxes under the unlimited marital deduction.[52] In a divorce context, there generally are seven ways in which a property settlement may be accomplished without the transfer being deemed to constitute a taxable gift to the spouse, former spouse, or child—assuming both spouses are U.S. citizens:

  1. The transfer of property is accomplished prior to the legal termination of the marriage, and the transfer meets the requirements of the unlimited gift tax marital deduction under section 2523;[53]
  2. The transfer of property satisfies the requirements of section 2516, which provides a special exception from gift tax.[54] The transfer can happen any time for gift tax purposes, so long as a written agreement is entered within the applicable three-year period under section 2516.[55] Specifically, the requirements under section 2516 include:
    1. A written agreement—it is not necessary for the agreement to be approved by the divorce court or incorporated or referred to in the divorce decree;[56]
    2. The  transfer  must  be  for  the  reasonable[57]   support  of  minor[58]  children  or  in settlement of a spouse’s marital or property rights;[59]
    3. There must be a final decree of divorce;[60]
    4. Payments of cash or property must be required and designated by the agreement;[61] and
    5. The divorce must occur within a three year period, beginning one year before the execution of the agreement—in other words, there must be an agreement within two years before the divorce or one year after the divorce.[62]
  1. The transfer of property is pursuant to a court order;[63]
  1. The transfer of property is made in exchange for the relinquishment or waiver of obligations of support—for example, alimony or the support of minor children.[64] Note that transfers in exchange for the relinquishment of other marital rights, such as “dower or curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in the spouse’s property or estate,” do not constitute adequate consideration in money or money’s worth for gift tax purposes;[65]
  1. The transfer qualifies for the annual gift tax exclusion—$15,000 in 2018;[66]
  1. The transfer is covered by the lifetime exclusion amount from gift and estate taxes—$11,180,000 per individual in 2018;[67] and
  1. The transfer qualifies as a direct payment for medical or educational expenses.[68]


Note that a transfer made before the marriage—even if pursuant to an antenuptial agreement—is subject to gift tax at the time of the transfer, and the gift tax marital deduction is not available because the donee is not yet married to the donor.[69] However, if an antenuptial agreement becomes enforceable only upon the marriage of the two parties and the transfer occurs after the marriage pursuant to the agreement, then the transfer is eligible for the gift tax marital deduction—assuming the requirements for the gift tax marital deduction, discussed above, are satisfied.[70] In other words, gift tax typically can be avoided with an antenuptial agreement if the agreement is conditioned upon—and all transfers occur after—the marriage of the parties to the agreement.

It also should be noted that, without careful planning, section 2702 could cause a draconian gift tax result—that is, a taxable gift equal to the full value of the transferred property—to the extent anyone other than the spouses will receive a current or remainder interest in a transfer to a trust for the support of a spouse.[71] Fortunately, such a negative result may be minimized, or even avoided, with prudent planning, such as providing the beneficiary spouse with: (1) a qualifying income interest in an inter vivos QTIP trust that qualifies under section 2056;[72] (2) a qualified annuity or income interest pursuant to section 2516;[73] or (3) a power of appointment over the remainder of the trust limited to the spouses’ issue.[74]



A. Overview

In a typical divorce, it is very common for one spouse (the Moneyed Spouse) to end up paying the other spouse (the Non-Moneyed Spouse) spousal support in the form of alimony[76] over a given term. However, alimony may not always be the best solution for both parties. In certain situations, a better settlement solution for both parties prior to 2019 may be the creation of an irrevocable trust by the Moneyed Spouse for the benefit of the Non-Moneyed Spouse in lieu of alimony (a support trust).

It is important to note that support trusts no longer may be an efficient solution if there is a divorce or separation agreement after 2018, because the Tax Cuts and Jobs Act (TCJA) repeals section 682[77] beginning in 2019.[78] In general, section 682—which is discussed in more detail below— provides that the Moneyed Spouse will not be required to pay taxes on income that is distributed from the support trust to the Non-Moneyed Spouse after a divorce. Instead, section 682 requires the Non-Moneyed Spouse to pay taxes on the income he or she receives from the support trust after a divorce. The elimination of section 682 could have a huge impact on support trusts if the spouses finalize a divorce or separation instrument after December 31, 2018, even if the support trust was created before January 1, 2019. In other words, a Moneyed Spouse could be required to pay all of the taxes on a support trust’s net income if there is a divorce or separation instrument after December 31, 2018, even if the support trust was created 20 years ago and the support trust is required to make payments to his or her ex-spouse for the next 50 years. To the extent a divorce or separation instrument will be finalized prior to 2019, a support trust may be preferable to alimony in the following situations:

  1. The spouses may have a hostile relationship and want to minimize their need for any future interaction, which otherwise would be necessary with the payment of alimony;
  2. The Moneyed Spouse may have limited liquidity and want to prevent the sale or transfer of a closely held business, which otherwise might be necessary to fund alimony payments;
  3. The Non-Moneyed Spouse may want to ensure that support payments continue even in the case of the Moneyed Spouse’s financial insolvency or bankruptcy, especially if the Moneyed Spouse has a profession—such as a professional athlete[79]—with a high risk of financial insolvency or bankruptcy, which could prevent payment of future alimony;
  4. The Non-Moneyed Spouse may want to ensure continued support payments in the event of the Moneyed Spouse’s death—which may not be practical or possible with life insurance due to the health condition of the Moneyed Spouse or the cost of premiums;
  5. Ongoing professional asset management may be necessary to protect a financially unsophisticated Non-Moneyed Spouse, who might otherwise make poor investment decisions;
  6. A spouse may want to protect assets for children and future descendants from creditors; or
  7. A spouse may want to take advantage of potential estate, gift, and GST tax savings.

With a support trust, the Moneyed Spouse first transfers income producing assets, such as cash, securities, or business interests, into an irrevocable trust. Unless the support trust is being structured—for estate planning purposes—to provide a future benefit to beneficiaries other than the two spouses,[80] (1) no gain or loss will be recognized for income tax purposes under section 1041 for the transfer during marriage or incident to a divorce,[81] and (2) the transfer could be structured to be free of gift taxes pursuant to the unlimited marital deduction provided by sections 2056 and 2523[82] or pursuant to a written marital settlement agreement under section 2516.[83]

By utilizing a support trust, the spouses no longer would need to interact with each other because the support trust could be managed by an independent, neutral trustee outside of the control of both spouses. The income generated by the support trust’s assets as well as trust principal—for example, a specified dollar amount or percentage of trust assets—could be distributed to the Non-Moneyed Spouse for a specified length of time, such as a term of years or the life of the Non-Moneyed Spouse. At the end of the trust term, the support trust’s assets could either revert back to the Moneyed Spouse or be distributed outright, or in trust, to the spouses’ children or future descendants.

B. Grantor Trust Rules

The tax rules under sections 671-679 (the Grantor Trust Rules)[84] typically apply to support trusts because the Moneyed Spouse usually retains certain interests in, or powers over, the trust.[85] Moreover, for estate planning purposes, a tax efficient strategy may be to have the Moneyed Spouse intentionally retain certain rights that will cause the support trust to be treated as a grantor trust for income tax purposes under the Grantor Trust Rules, but not cause the trust to be included in either spouse’s estate for estate tax purposes—commonly referred to as an “intentionally defective grantor trust” (IDGT).[86] In other words, the IDGT can continue to grow, free of taxes, outside of the Moneyed Spouse’s estate for the benefit of children and future descendants. Moreover, because the Moneyed Spouse is paying the taxes directly, those payments are not treated as a gift for gift tax purposes and will further reduce the value of the Moneyed Spouse’s estate for estate tax purposes.[87]


Under the usual Grantor Trust Rules, the Moneyed Spouse would be subject to tax on the trust’s taxable income, regardless of whether the support trust distributed any income to the Non-Moneyed Spouse.[88] In other words, the Moneyed Spouse would be treated as the owner of the trust’s assets for income tax purposes.[89] It is very unlikely that a Moneyed Spouse would want to be subject to taxes on trust income to the extent that income is distributed to his or her former spouse after a divorce. Fortunately, section 682 provides a special exception to the usual Grantor Trust Rules, requiring the Non-Moneyed Spouse—not the Moneyed Spouse—to include the income he or she is entitled to receive from the support trust in his or her gross income.[90] Under section 682, the Moneyed Spouse does not get an income tax deduction, as with alimony, and is not taxed on any of the trust’s income that is payable to the former spouse.[91] Instead, the Non-Moneyed Spouse is taxed on that income, as if he or she received it directly, rather than the trust.[92]

Example 1. Natalie, the Non-Moneyed spouse, and Martin, the Moneyed Spouse, are getting a divorce in 2018. As part of their settlement negotiations, they discuss whether it would be better for Martin to pay Natalie $100,000 per year as alimony or to contribute $2,000,000 out of his separate property investment portfolio to a support trust that would pay Natalie $100,000 per year, which also could be structured as a unitrust that pays Natalie 5% of the trust’s assets per year. The $2,000,000 portfolio is invested in highly rated corporate bonds, which generate a five percent return annually, or $100,000 per year. If the spouses agree to alimony, (1) Martin first would be required to include the $100,000 of taxable bond interest in income, (2) Martin then would receive an offsetting deduction for the payment of alimony, and (3) Natalie would be required to include the $100,000 of alimony as income. On the other hand, if Natalie and Martin were to utilize a support trust, (1) Martin would not be subject to tax on the $100,000 of income and, therefore, would not need an offsetting deduction, and (2) Natalie would be subject to tax directly on the $100,000 of bond interest that she receives from the trust.

Example 2. Assume in the foregoing example that the support trust’s $2,000,000 portfolio instead generated only $50,000 in qualified dividends. In that case, Natalie still would be entitled to a $100,000 distribution. She would be subject to tax on $50,000 in qualified dividends, and the additional $50,000 that Natalie receives from the support trust would be treated as a tax-free distribution of principal[93] under section 102.[94] While alimony payments are treated as ordinary income under section 71, support trust payments under section 682 retain the same character for tax purposes as the income earned by the support trust—in this case, qualified dividend income, which could be subject to federal income tax at the highest rate of 23.8%, as opposed to ordinary income, which is subject to tax at the highest rate of 40.8% in 2018.[95]

Section 682(a) provides that if the spouses are divorced from each other or are separated under a decree of separate maintenance or under a written separation agreement, the Non- Moneyed Spouse is required to include in gross income:

[t]he amount of the income of any trust which such wife is entitled to receive and which, except for this section, would be includible in the gross income of her husband, and such amount shall not, despite any other provision of this subtitle, be includible in the gross income of such husband.[96]


If one were to read solely section 682—which originally was enacted as part of the Revenue Act of 1942[97]—it would appear to be a very paternalistic rule that only refers to the situation where a husband, the Moneyed Spouse, sets up a trust for his wife, the Non-Moneyed Spouse. However, section 7701(a)(17) provides that section 682 also applies to a trust created by a wife for her husband and to trust relationships between former wives and husbands—or vice versa.[98] Sections 682 and 7701(a)(17) refer to only relationships between husbands and wives, or former husbands and former wives, and do not address the specific tax treatment for same-sex spouses.[99] However, the Service issued a response to the United States Supreme Court ruling in United States v. Windsor,[100] concluding that, “[f]or federal tax purposes, the terms ‘spouse,’ ‘husband and wife,’ ‘husband,’ and ‘wife’ include an individual married to a person of the same sex if the individuals are lawfully married under state law.”[101]


C. Front-Loaded Payments, Anti-Lester Rules, and Child Support

Unlike with alimony,[102] a support trust can be used to front-load payments to the Non- Moneyed Spouse with decreasing amounts over time. Under the alimony rules,[103] excessively high or front-loaded payments in the first three post-separation years are subject to recapture or being taxed to the payor in the third post-separation year.[104] However, a support trust is permitted to make extra payments to the Non-Moneyed Spouse in the first three post-separation years because trusts are subject to taxation under the Grantor Trust Rules, not section 71.[105]

The Anti-Lester Rules[106] prohibit spousal support payments from being treated as alimony if reductions in such payments are tied to certain childhood events.[107] This rule was implemented so that these types of payments would be treated like child support payments, which are not deductible by the payor and not taxable to the payee.[108] However, unlike with alimony, a support trust can provide a reduction in payments to the Non-Moneyed Spouse based on certain childhood events.

Example 1. Mark and Nina have agreed that Mark’s spousal support payments to Nina should end after their child graduates from high school or reaches the age of nineteen, whichever comes first. Because this would not qualify as alimony under section 71(c)(2), Mark (who is in the highest tax bracket) would not receive a deduction and Nina (who is in a much lower tax bracket) would not include the payments in income. If Mark is in the highest tax bracket, he could be subject to a federal tax rate as high as 40.8% on ordinary income (in 2018) and 23.8% on long-term capital gains and qualified dividends;[109] however, Nina could be in a much lower tax bracket, potentially even subject to a zero percent rate on long-term capital gains and qualified dividends.[110] As an alternative to spousal support that is treated as child support under section 71(c)(2), Mark could contribute assets to a support trust that would provide Nina with support until the earlier of their child graduating high school or turning nineteen years old. Mark would not be subject to tax on the income from the Spousal Trust and Nina would be subject to tax on the income, which would be a much more efficient result for tax purposes due to Nina’s lower tax bracket. Such a result is possible with Spousal Trusts because such trusts are subject to taxation under subchapter J of the Code[111] and are not subject to the Anti-Lester Rules of section 71(c)(2).

While section 682 does provide special tax treatment for amounts that are payable to support a former spouse, the section 682 exception to the Grantor Trust Rules would not apply to any part of trust income that the terms of the divorce decree, written separation agreement, or trust agreement fix as payable for the support of the Moneyed Spouse’s minor children.[112] To the extent any amounts from a support trust are paid to support the Moneyed Spouse’s minor children, the Moneyed Spouse would be subject to tax on the portion of the support trust’s income that is used for such support.[113] This is similar to the limitation on alimony, in that child support payments do not qualify as alimony under section 71, and child support payments are not deductible by the paying spouse and not taxable to the child.[114]

D. Section 682 Capital Gains Issue

A major problem with section 682 is that the Code and the Treasury Regulations thereunder fail to define the term “income” for purposes of section 682. “Income” could mean “fiduciary accounting income” (FAI) under section 643(b), which is determined under the trust instrument and local law and typically would not include capital gains.[115] On the other hand, “income” could mean “income determined for tax purposes” under section 1.671-2(b) of the Treasury Regulations, which would include capital gains.[116]

In other words, if a support trust has any capital gains, it is not clear whether the Moneyed Spouse or the Non-Moneyed Spouse would be subject to tax on the capital gains, regardless of any amounts distributed to the Non-Moneyed Spouse. In 2015, this issue was brought to the attention of the Service’s Office of Chief Counsel, Department of Treasury, United States Congress Joint Committee on Taxation, and Senate Finance Committee, which led to the Department of Treasury adding the issue to its 2016-2017 Priority Guidance Plan.[117] Until the government provides the necessary guidance to taxpayers, a practical solution could be to include provisions in the trust agreement to address a potentially negative conclusion by the Service. For instance, the spouses could agree that the Non-Moneyed Spouse will be liable for the tax on capital gains to the extent his or her distributions are above distributable net income as determined under section 643. Moreover, the agreement could require the Non-Moneyed Spouse to reimburse the Moneyed Spouse to the extent the Moneyed Spouse is subject to tax on such capital gain income. In order to prevent such reimbursement from being treated as income under section 71, the trust agreement also could contain a provision stating that the reimbursement payments should not be included in the Moneyed Spouse’s gross income and should not be deductible by the Non-Moneyed Spouse.

E. Non-Grantor Trust Rules

To the extent a Moneyed Spouse were to create a non-grantor trust for the benefit of a Non- Moneyed Spouse that does not fall under Grantor Trust Rules, section 682 would not apply and the tax consequences to the Moneyed Spouse, Non-Moneyed Spouse, and support trust—both during and after marriage—would be governed by the standard trust taxation rules under subchapter J of the Code, primarily sections 651-652 for “simple trusts” and sections 661-662 for “complex trusts.” While the foregoing sections do not use the terms “simple trusts” or “complex trusts,” such terms may be found in the Treasury Regulations thereunder.[118]

F. Alimony Trust Rules

To the extent a divorce or separation instrument requires the establishment of a trust to make payments for life to the Non-Moneyed Spouse, there is an argument to be made that section 71(a) may apply instead of section 682, which would require all payments from the trust to be included in the Non-Moneyed Spouse’s gross income and treated as ordinary income, regardless of whether such payments are from the net income of the support trust.[119] If that were the case, then the Moneyed Spouse—who would be treated as the owner of the trust under the Grantor Trust Rules—may be able to deduct the payment under section 215 because the Moneyed Spouse would be treated as having made the payment.[120] To prevent the possibility of such a result, a practical solution would be to include a provision in the spouses’ divorce or separation agreement stating that the distributions from the support trust to the Non-Moneyed Spouse are not included in his or her income under section 71(a).[121]

G. Estate Planning with Support Trusts

Support trusts also could be a good strategy to address certain estate planning objectives to provide for children and future descendants. For instance, the Non-Moneyed Spouse may be concerned that the Moneyed Spouse will not leave sufficient funds for the couple’s children. Life insurance is one possible solution to this issue; however, it may not be possible to obtain life insurance on the Moneyed Spouse—for example, there may be a health condition or the cost of life insurance could be prohibitively expensive. A support trust could alleviate this concern by having the Moneyed Spouse irrevocably transfer assets to the trust that would not revert back to the Moneyed Spouse. At the end of the term of providing support to the Non-Moneyed Spouse, which could be the Non-Moneyed Spouse’s lifetime, the assets would be distributed outright, or in trust, to the spouses’ children or future descendants.

Moreover, a support trust that eventually will benefit future generations could provide substantial gift, estate, and GST tax savings. This likely would be a concern only for high net worth clients with more than $11,180,000—the exclusion amount in 2018—which is the maximum amount each spouse can give away, either during life or at death, without being subject to any gift, estate, or GST taxes.[122] To the extent a Moneyed Spouse has more than the exemption amount—or may have more than the exemption amount at death due to appreciation of assets—the support trust could be structured to utilize the Non-Moneyed Spouse’s exemption amount for estate tax purposes. This would allow the Moneyed Spouse and Non-Moneyed Spouse to effectively combine their exclusion amounts—which would be $22,360,000 in 2018[123]—to leave twice as much to future generations free of gift, estate, and GST taxes.

Example 1. Michelle and Nathan are getting a divorce and have three minor children. Michelle has a substantial net worth of $30,000,000—all her separate property. As a creative settlement solution, Michelle and Nathan could set up a support trust that would provide support payments to Nathan and help both parents achieve their estate planning goals for their children and future generations. Michelle’s financial advisors have run a “Monte Carlo simulation”[124] that shows she could gift $11,180,000 out of her investment portfolio, maintain her standard of living, and still have a 99% probability of retaining a substantial amount of assets for the remainder of her life. Accordingly, Michelle could set up a support trust without the need for the assets to revert back to her—at the same time, she likely does not want her future ex-husband to get those assets either. Instead, Michelle may want the remaining assets after the end of the trust term—which could be upon Nathan’s death—to go outright, or in trust, to the children. A support trust with $11,180,000 could support Nathan for the remainder of his life— for example, a four percent annual income distribution would equal approximately $447,200. As a more tax efficient estate plan, the support trust could be structured as a completed gift for gift tax purposes,[125] using up a portion of a spouse’s lifetime exclusion amount—that is, $11,180,000 in 2018.[126] As a result, any assets remaining in the trust at the end of the specified term could be transferred outright, or in trust, to the spouses’ children free of future gift and estate taxes.

Utilizing a support trust as part of a tax-efficient estate plan could minimize the value of the current gift for gift tax purposes under section 2702 and could eliminate a 40% estate tax on the future appreciation of the assets in the trust—which is commonly referred to as an “estate freeze.”[127] Such a plan could result in a substantially larger transfer of assets to the spouses’ descendants and still provide support to the Non-Moneyed Spouse for his or her lifetime.



Given the complexity of the tax rules, especially in connection with a divorce, it is very important for all of a client’s advisors—including attorneys, accountants, business valuation professionals, investment managers, and other advisors—to work collaboratively so that the client’s tax and estate plan is implemented correctly and in the most efficient manner. Mistakes and poor planning could lead to severe, unintended tax consequences—including additional taxes, penalties, and interest—among a multitude of other issues. If planning is done correctly, a client potentially could save thousands—or even millions—of dollars over a lifetime in income, estate, gift, and GST taxes.


Adapted with permission from Justin T. Miller, Making Divorce Less Taxing: A Unique Opportunity for Income, Estate and Gift Tax Planning, 52 Real. Prop. Tr. & Est. L.J., no. 1 (2017) and The New York State Society of Certified Public Accountants on-line tax publication, TaxStringer (April, 2021). The comments contained in this Article are the individual views of the author who prepared them. The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, or tax advice. The reader should contact his or her legal or tax advisor prior to taking any action based on this information.

Justin T. Miller, J.D., LL.M., TEP, AEP®, CFP®, is a national wealth strategist at BNY Mellon, an adjunct professor at Golden Gate University School of Law, and a Fellow of The American College of Trust and Estate Counsel.


[1] See I.R.C. § 401(a).

[2] See 29 U.S.C. § 1056.

[3] See I.R.C. § 414(p)(1)(A).

[4] See 29 U.S.C. § 1056(d)(3)(B)(i).

[5] See I.R.C. § 401(a)(13)(B).

[6] See id.

[7] I.R.C. § 402.

[8] See I.R.C. § 402(e)(1)(A).

[9] See I.R.C. § 72(m)(10).

[10] See I.R.C. § 72(t)(2)(C).

[11] See I.R.C. § 3405.

[12] See I.R.C. § 3405(c).

[13] See I.R.C. § 72(t)(2)(c).

[14] See I.R.C. § 72.

[15] See I.R.C. § 414.

[16] See Priv. Ltr. Rul. 9234014 (May 21, 1992); see also Silverman v. Spiro, 784 N.E.2d 1, 9 (Mass. 2003) (granting husband’s request for attorney’s fees associated with back child support); Renner v. Blatte, 650 N.Y.S.2d 943, 946 (1996) (approving use of QDRO as security for future support obligations); Hayden v. Hayden, 662 So. 2d 713, 717 (Fla. Dist. Ct. App. 1995) (permitting QDRO to secure alimony and child support arrearages).

[17] See I.R.C. § 408(d)(6).

[18] I.R.C. § 408(d)(6) supersedes I.R.C. § 1041.

[19] See Priv. Ltr. Rul. 9422060 (June 3, 1994) and 8820086 (Feb. 25, 1988).

[20] I.R.C. § 71(b)(2)(A).

[21] See supra note 235 and accompanying text.

[22] See Priv. Ltr. Rul. 9344027 (Nov. 3, 1993) (concluding that a husband’s transfer of his wife’s community share of IRA pursuant to a “private” written separation agreement was not incident to either a divorce or legal separation); Tech. Adv. Mem. 199935055 (providing that a withdrawal from husband’s community IRA endorsed to wife was not “under” a written instrument). In both cases, the husband was subject to tax on the IRA distribution.

[23] See I.R.C. § 408(d)(6).

[24] See I.R.C. § 408(d)(1).

[25] See I.R.C. § 72(t)(1).

[26] See I.R.C. § 4974.

[27] I.R.C. § 72(t)(4).

[28] I.R.C. § 219(f)(1).

[29] See I.R.S. Pub. 590-A, at 28 (2016).

[30] See Jones v. Comm’r, 80 T.C. 259 (2000); Bunney v. Comm’r, 114 T.C. 259 (2000); Czepiel v. Comm’r, 78 TCM

(CCH) 378 (1999); Harris v. Comm’r, 62 T.C.M. (CCH) 406 (1991).

[31] I.R.C. § 72(t)(4).

[32] See id.

[33] 249 See Priv. Ltr. Rul. 201030038 (Jul. 30, 2010); 200717026 (Apr. 27, 2007); 200225040 (Mar. 25, 2002); 200202076 (Jan.

11, 2002); 200202075 (Jan. 11, 2002); 200202074 (Jan. 11, 2002); 2002-14-034 (Apr. 5, 2002); 200116056 (Apr. 23, 2001);

200052039 (Jan. 2, 2001); 200050046 (Dec. 18, 2000); 200027060 (Jul. 10, 2000); and 9739044 (Sept. 26, 1997).

[34] See 29 U.S.C. § 2510.3-2.

[35]  See Kennedy v. DuPont, 555 U.S. 285 (2009); Egelhoff v. Egelhoff, 532 U.S. 141 (2001). Note that the ERISA exception for spousal protection may override beneficiary designations. See Egelhoff, 532 U.S. at 151–52.

[36] See Kennedy, 555 U.S. at 299–300.

[37] See I.R.S. Pub. 590-A, at 8 (2016).

[38] See, e.g., CAL. PROB. CODE § 5040(a) (“[A] nonprobate transfer to the transferor’s former spouse, in an instrument executed by the transferor before or during the marriage . . . fails if, at the time of the transferor’s death, the former spouse is not the transferor’s surviving spouse. . . .”); see also East v. PaineWebber, Inc., 748 A.2d 1082 (Md. Ct. Spec. App. 2000).

[39] See I.R.C. §§ 1041, 2056, 2516, 2523.

[40] For purposes of this article, both spouses are assumed to be U.S. citizens. An analysis of the tax consequences for noncitizen spouses is beyond the scope of this article. For example, the non-recognition provisions of section 1041 for income tax purposes do not apply to transfers to a spouse who is a nonresident alien or to a trust for that spouse’s benefit. See I.R.C.

  • 1041(d). However, section 1041 does apply to transfers from a nonresident spouse to a spouse who is a U.S. person. Furthermore, there is no unlimited marital deduction for gift tax purposes for non-U.S. citizen spouses, in which case qualified domestic trusts (QDOTs) may be beneficial.

[41] Note that, among other things, section 1041 of the Code is not applicable with respect to negative basis property under section 1041(e) of the Code—in other words, to the extent that the sum of the liabilities assumed plus the amount of liabilities to which the property is subject exceeds the adjusted basis of the transferred property—or with respect to the transfer of an installment obligation under section 453B(g) of the Code.

[42] See I.R.C. § 1041(c); see also Treas. Reg. § 1.1041-1T(b) (providing that a transfer is related to the cessation of the marriage when the transfer is required under the divorce or separation instrument and the transfer takes place within six years from the date of the divorce).

[43] See id.

[44] See Treas. Regs. § 1.1041-1T, Q&A (7); see Priv. Ltr. Rul. 9306015 (Nov. 11, 1992).

[45] Temp. Treas. Regs. § 1.1041-1T, Q&A (7).

[46] Temp. Treas. Reg. § 1.1041-1T(b), Q&A (7); see Young v. Comm’r, 113 T.C. 152 (1999), aff’d 240 F.3d 369 (4th Cir. 2001) (delay permitted); Priv. Ltr. Rul. 200221021 (delay permitted due to compelling business reasons); Priv. Ltr. Rul. 9644053 (Nov. 1, 1996) (delay permitted); Priv. Ltr. Rul. 9306015 (Feb. 12, 1993) (an eight year delay in a property division was not made to effect a property division); Priv. Ltr. Rul. 9235026 (Aug. 28, 1992) (delay due to dispute over purchase price and transfer was made shortly after resolution of the dispute).

[47] See Temp. Treas. Reg. § 1.1041-1T(c), Q&A (9).

[48] See I.R.C. § 71(b)(1)(B).

[49] See I.R.C. § 1041.

[50] See Treas. Reg. § 301.7701-18.

[51] See I.R.C. § 1041.

[52] See I.R.C. §§ 2056, 2523. Note, for non-U.S. citizens, there may be gift tax issues. See I.R.C. § 2523(i). The annual gift tax exclusion for gifts to non-U.S. citizen spouses is $149,000 (for 2017), adjusted periodically for inflation. See I.R.C. §§ 2503, 2523(i)(2). For transfers in trust to a spouse who is not a U.S. citizen, a qualified domestic trust (QDOT) may provide a more tax- efficient result. See Treas. Reg. § 20.2056A-2.

[53] See I.R.C. § 2523.

[54] See I.R.C. § 2516(1)-(2).

[55] See id.

[56] See Treas. Reg. § 25.2516-1(a).

[57] See I.R.C. § 2516(2).

[58] The I.R.C. and Treasury Regulations fail to define the “age of majority” for purposes of section 2516. It may be eighteen or twenty-one. See Rev. Rul. 79-363, 1979-2 C.B. 345 (providing that a transfer of remainder interest in trust to an adult child was not made for full an adequate consideration under section 2516, except to extent that the donee spouse specifically released support rights); see also Rev. Rul. 68-379, 1968-2 C.B. 414 (providing that a payor may be deemed to receive adequate consideration if spouse releases future support rights).

[59] See Treas. Reg. § 25.2516-1(a).

[60] See id.; Treas. Reg. § 25.6019-3(b).

[61] See I.R.C. § 2516.

[62] See id.

[63] See Harris v. Comm’r, 340 U.S. 106 (1950); see also Rev. Rul. 79-118, 1979-1 C.B. 315; Rev. Rul. 60-160, 1960-1 C.B.

[64] See Rev. Rul. 77-314, 1977-2 C.B. 349; Rev. Rul. 71-67, 1971-1 C.B. 271; Rev. Rul. 68-379, 1968-2 C.B. 414; see also Rosenthal v. Comm’r, 205 F.2d 505 (2d Cir. 1953); Keller Estate v. Comm’r, 44 T.C. 851 (1965).

[65] Treas. Reg. § 25.2512-8; see also Rev. Rul. 68-379, 1968-2 C.B. 414 (concluding that transfers in satisfaction of a legal obligation of support are different than transfers in settlement of a transferee spouse’s inheritance rights).

[66] See I.R.C. § 2503(b).

[67] See Rev. Proc. 2018-18, 2018-10 I.R.B. 392, 397.

[68] See I.R.C. § 2503(e).

[69] In general, an agreement to transfer property is subject to gift tax if the promise is enforceable under state law. See Rev. Rul. 79-384, 1979-2 C.B. 344.

[70] See supra notes 269 and 270 and accompanying text.

[71] See I.R.C. § 2702(a)(2)(A). Treasury Regulation section 25.2702-1(c)(7) provides an exception to section 2702 of the Code “if the transfer of an interest to a spouse is deemed to be for full and adequate consideration by reason of section 2516 . . . and the remaining interests in the trust are retained by the other spouse.” It also is possible that a transfer could be treated as a recognition event, as opposed to a gift. For instance, if the primary purpose of the transfer to the trust is to discharge a spouse’s obligation to support children or is made to provide a reasonable allowance for the support of the spouses’ minor issue under section 2516, the transfer may be treated as a recognition event instead of a gift. Neither section 1041 nor the Treasury Regulations thereunder distinguish between trusts with a spouse as the sole beneficiary and trusts that have additional beneficiaries, nor do they specify the type or amount of interest that the spouse is required to have in order for section 1041 to apply.

[72] See I.R.C. § 2056.

[73] See I.R.C. § 2516; Treas. Reg. § 25.2702-3. Section 2702 does not apply if the spouse retains a “qualified interest.” I.R.C. §§ 2702(a) and (b); Treas. Reg. § 25.2702-3(b)(1)(i).

[74] See Priv. Ltr. Rul. 201116006 (Apr. 22, 2011).

[75] For more a more detailed discussion, see Justin T. Miller, Support Trusts in Lieu of Alimony: A Creative Settlement Solution, 30 AM. J. OF FAM. L., no. 2 (2016); Justin T. Miller, Taxation of Grantor Trusts After Divorce: A Need to Define to ‘Income,’ Tax Notes, Tax Analysts (Sept. 14, 2015); Alan S. Acker, 852-3d Tax Mgmt. Portfolio (BNA), Income Taxation of Trusts and Estates (2007); Carlyn S. McCaffrey & Melissa G. Salten, Structuring the Tax Consequences of Marriage and Divorce, The Little, Brown Tax Practice Series (1995).

[76] See I.R.C. § 718. Alimony refers to spousal support payments that meet the requirements for “alimony or separate maintenance payment.” Id.

[77] “Subpart F of part I of subchapter J of chapter 1 is amended by striking section 682 (and by striking the item relating to such section in the table of sections for such subpart).” T.C.J.A. § 11051(b)(1)(C).

[78] See T.C.J.A. § 11051(c).

[79] According to research provided by the National Basketball Players Assn. (2011) and National Football League Players Assn. (2011), 60% of NBA players and 78% of NFL players are broke within two to five years into retirement. See Pablo Torre, How (and Why) Athletes Go Broke, Sports Illustrated Mar. 23, 2009, 03/23/105789480/how-and-why-athletes-go-broke.

[80] See infra Part XI.G.

[81] See I.R.C. § 1041 (the transfer of assets to the support trust would not be a taxable event).

[82] See I.R.C. §§ 2056, 2523. See, e.g., I.R.S. Priv. Ltr. Rul. 201707007 (Feb. 17, 2017) and 201707008 (Feb. 17, 2017). For example, an inter vivos qualified terminable interest property trust that provides fiduciary accounting income at least annually to the Non-Moneyed Spouse with the remainder to the spouses’ children after death (either outright or in trust). See I.R.C. § 2056.

[83] See I.R.C. § 2056 (providing that the divorce occurs within a two year period beginning one year before the execution of the agreement and ending one year after the execution of the agreement).

[84] See I.R.C. §§ 671-79.

[85] See I.R.C. § 672(e) (treating the Moneyed Spouse as holding any interest or power held by the Non-Moneyed Spouse during marriage). There are no provisions in the Code—subject to limited exceptions provided by sections 71 and 682—that terminate such treatment if the marriage is dissolved. See I.R.C. § 672(e). The support trust would be a grantor trust if the Moneyed Spouse has the right to decide how the spouses’ children will share in the trust property upon the death or remarriage of the Non-Moneyed Spouse. See I.R.C. § 674(a). The Moneyed Spouse would be treated as the owner of any portion of a trust, under the Grantor Trust Rules, in which he or she has a reversionary interest upon the occurrence of a specific event—for example, the death or remarriage of the Non-Moneyed Spouse—if the value of such reversionary interest is more than five percent of the initial value of such portion of the trust. See I.R.C. § 673(a). The Moneyed Spouse would be treated as the owner of any portion of the trust if the income from that portion may be distributed to, or accumulated for future distribution to, the Moneyed Spouse without the consent of an “adverse party,” as defined in section 672(a). I.R.C. § 677(a).

[86] I.R.C. § 675; see also Rev. Rul. 2011-28, 2011-49 I.R.B. 830; 2008-22, 2008-16 I.R.B. 796; 2004-64, 2004-29 I.R.B. 6; 85-13, 1985-1 C.B. 184; Priv. Ltr. Rul. 200606006 (Feb. 10, 2006) and 200603040 (Jan. 20, 2006).

[87] See id.

[88] See I.R.C. § 671.

[89] See id.

[90] See I.R.C. § 682. Section 682(a) supersedes the usual Grantor Trust Rules. See Treas. Reg. § 1.671-1(b) (“Sections 671 through 677 do not apply if the income of a trust is taxable to a grantor’s spouse under section 71 or 682 (relating respectively to alimony and separate maintenance payments, and the income of an estate or trust in the case of divorce, etc.)”); see also Treas. Reg. § 1.677(a)-1 (“However, section 677 does not apply when the income of a trust is taxable to a grantor’s spouse under section 71 (relating to alimony and separate maintenance payments) or section 682 (relating to income of an estate or trust in case of divorce, etc.”)).

[91] See I.R.C. § 682.

[92] See id.

[93] Also commonly referred to as corpus.

[94] See I.R.C. § 102.

[95] See T.C.J.A. § 11001 and I.R.C. §§ 1(j), 1411. Effective on January 1, 2013, the Patient Protection and Affordable Care Act of 2010, as amended, imposed a new additional 3.8% surtax on net investment income, which includes many different types of passive investment income, including interest, dividends, annuities, royalties, rents, passive-activity income, and capital gains. See I.R.C. § 1411.

[96] I.R.C. § 682(a).

[97] See ch. 619, 56 Stat. 798, 817-18. The predecessor to section 682 was section 171 of the Internal Revenue Code of 1939, as amended, which was adopted pursuant to section 120 of the Revenue Act of 1942. See id. Section 171 of the Internal Revenue Code of 1939, as amended, became section 682 as part of the Internal Revenue Code of 1954. See ch. 736, 68A Stat. 1, 234 (codified as amended at I.R.C. § 682).

[98] See I.R.C. § 7701(a)(17).

[99] See id.

[100] 133 S. Ct. 2675 (2013) (holding Section 3 of the Defense of Marriage Act unconstitutional because it violated principles of equal protection by treating relationships that had equal status under state law differently under federal law).

[101] Rev. Rul. 2013-17, 2013-38 I.R.B. 201.

[102] See supra Part VIII.B.

[103] See supra Part VIII.B.

[104] See I.R.C. § 71(f).

[105] See I.R.C. §§ 671-79.

[106] See supra Part VIII.B.

[107] See I.R.C. § 71(c)(2).


[108] See Temp. Treas. Reg. § 1.71-1T(c), Q&A (15)–(16).

[109] See I.R.C. §§ 1, 1411.

[110] See T.C.J.A. § 11001, I.R.C. §§ 1(j), 1411, and Rev. Proc. 2018-18, 2018-10 I.R.B. 392.

[111] See I.R.C. §§ 641-92.

[112] See I.R.C. § 682(a). If trust income is less than the amount required to be paid for child support, trust income is to be allocated first to the child support portion of the amount paid to the Non-Moneyed Spouse. See id.

[113] See I.R.C. § 682(a); Treas. Reg. § 1.682(a)-1; see also I.R.C. §§ 674(b)(1), 677(b).

[114] See id.

[115] I.R.C. § 643(b).

[116] Treas. Reg. § 1.671-2(b).

[117] See Miller, supra note 292, at 96; Department of the Treasury 2016-2017 Priority Guidance Plan at 13 (Aug. 15, 2016).

[118] See, e.g., Treas. Reg. § 1.651(a)-1.

[119] Before the Deficit Reduction Act of 1984, a prior version of section 71 applied to trusts that were created in contemplation of a divorce or separation instead of section 682. Under the former section, all payments to the Non-Moneyed Spouse were taxable whether or not they would be taxable to the beneficiary under the rules applicable to standard trusts and their beneficiaries. As a result, distributions of principal as well as distributions of tax exempt income from a trust would be included in the Non-Moneyed Spouse’s gross income and excluded from the Moneyed Spouse’s income. See Treas. Reg. §§ 1.71-1(c)(2), 1.682(a)-1(a)(2); Rev. Rul. 65-283, 1965-2 C.B. 25. Contra Ellis v. United States, 416 F.2d 894 (6th Cir. 1969); Stewart v. Commissioner, 9 T.C. 195 (1947). The current version of section 71 contains no similar provision.

[120] See Treas. Reg. § 1.671-2(c).

[121] See I.R.C. § 71(b)(1)(B); see also Miller, supra note 292, at 96.

[122] See Rev. Proc. 2018-18, 2018-10 I.R.B. 392, 397.

[123] See id.

[124] A “Monte Carlo simulation” is a computational algorithm that is used to approximate the probability of certain outcomes by running multiple trial iterations using random variables. See EPA, Office of the Scientific Advisor, Guiding Principles to Monte Carlo Analysis, (last visited Jan. 16, 2017).

[125] See, e.g., Treas. Reg. § 25.2511-2(b), which provides that a gift is complete as to any property, or part thereof or interest therein, of which the donor has so parted with “dominion and control” as to leave the donor with no power to change its disposition, whether for the donor’s own benefit or for the benefit of another. The section also provides an example where no portion of the transfer is a completed gift when the donor transfers property to another in trust and the donor retains a testamentary power to appoint the remainder among the donor’s descendants.

[126] See Rev. Proc. 2018-18, 2018-10 I.R.B. 392, 397.

[127] See I.R.C. §§ 2033, 2036(a), 2036(b), 2038, 2039, 2042; see also Rev. Rul. 2011-28, 2008-22, 2004-64, 85-13; Priv. Ltr. Rul. 2006-06-006 (Feb. 10, 2006), 2006-03-040 (Jan. 20, 2006).

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