Buzzword of the Week: Alimony Substitution Trust

I’m fortunate to have met the right woman the first time around, and have just celebrated my 28th wedding anniversary. Some people are not so lucky. Divorce can be messy, both from an emotional and a financial viewpoint.

Our buzzword website Investopedia has an answer for everything, even the divorce situation. When faced with a divorce, you can try establishing an Alimony Substitution Trust. This is a trust agreement in which a divorced person agrees to pay spousal support from the income generated from a trust. An alimony substitution trust is different from receiving alimony because this trust is taxed differently. The ex-spouse responsible to provide income from the trust is not required to pay income taxes on the income generated by the trust nor do they receive a tax deduction for payments made from this trust.

A trust is a bank account that is managed by a trustee (person or institution) who holds a legal title enabling them to manage trust funds for the benefit of the beneficiary. The money held in this trust is referred to as trust money. This trust agreement ends when the obligation to pay the ex-spouse ends. Payments made from these trust accounts are done automatically and periodically as long as there are enough funds or assets in the trust to cover such spousal support payments.

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