Definition
The term alimony trust refers to an arrangement involving the transfer of assets to a trust structured in a way such that income is provided to a former spouse. Alimony trusts provide the income-receiving spouse with a number of protections, the most important of which is non-payment.
Explanation
Also referred to as an alimony and maintenance trust, an alimony trust can ensure the receiving spouse has a reliable source of income. With this type of arrangement, the payer spouse transfers income-producing assets into a trust, which is then used to provide the receiving spouse with their agreed-to alimony payments until the stipulated payment timeline ends. After this occurs, the assets remaining in the trust can provide income to children or the assets may be returned to the payer's spouse.
Alimony trusts provide both the payer and beneficiary with a number of advantages over traditional alimony arrangements, including:
Protecting the income stream from the death of a spouse or bankruptcy.
Payments are administered through a trustee, which is of particular importance if the divorce results in a combative relationship between the former spouses.
The assets placed in the trust can eventually produce income for the former couple's children.
The trust can be structured in a way that the beneficiary, not the trust's grantor, is taxed on the income derived from the trust.
Upon creation of the trust, both parties to the agreement must understand what happens when the assets in the trust do not generate sufficient income to satisfy the alimony owed the spouse or when the assets produce too much income.
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