Annuities, Trusts, and Life Insurance Policies for Continued Spousal Support

Permanent Spousal Support

When the court orders one party to pay for the financial support of the other after divorce, it is considered a “permanent” spousal support award. Under California Family Code § 4320, a court must consider several factors when determining issues involving spousal support. Among these factors is the length of the parties’ marriage, the marital standard of living, each party’s respective financial needs, and the supporting spouse’s ability to pay.

An award of permanent spousal support is typically reserved for marriages of “long duration.” A marriage that lasted for at least ten years is generally considered to be a marriage of long duration.

Annuities, Trusts, and Life Insurance Policies Under Family Code § 4360

Another factor relevant to the determination of spousal support under Family Code § 4320 is the age and health of the parties. Spousal support obligations automatically terminate upon the death of the supporting spouse. In cases where a spouse is entirely dependent on the other spouse’s financial support, and they have no reasonable chance of becoming self-supporting, the payor spouse’s untimely death would leave the supported chance without the means to cover their living expenses.

Under California Family Code § 4360, the court may fashion a spousal support award that includes amounts necessary to purchase and maintain a life insurance policy, annuity, or trust that will provide for the supported spouse after the death of the supporting spouse.

For example, the total support a spouse would owe each month could include an amount that would cover premiums on a life insurance policy covering the life of the supporting spouse. Alternatively, a spousal support award could cover amounts sufficient to cover payments for an annuity that pays out after the death of the supporting spouse. An annuity is an agreement where one party---typically a financial institution like a bank—agrees to make recurring monthly payments over time. Section 4360 also authorizes the court to order the supporting spouse to create and maintain a trust that would benefit the supported spouse upon the supporting spouse’s death. The supporting spouse would pay into a trust where the trustee is responsible for investing the principal income to generate income for the future benefit of the other spouse.

Tax Treatment of Section 4360

As mentioned above, one of the defining features of spousal support is that it automatically terminates upon the death of either spouse. Spousal support awards cannot bind the supporting spouse’s estate after their death for posthumous payments. California restricted its definition of spousal support this way in conformity with the federal definition of “spousal support” under the tax code.

Before 2019, a taxpayer could deduct amounts paid as spousal support, which the tax code defined as periodic payments for the support of a spouse, made from the future income of the other spouse, and which terminates upon death. After the enactment of the Tax Cuts and Jobs Act in 2019, the spouse receiving support received favorable tax treatment for spousal support payments, while the supporting spouse cannot deduct spousal support from his or her taxable income.

California still recognizes a deduction for spousal support, so long as such payments qualified as the same. Therefore, any orders or agreements purporting to provide for spousal support after another spouse’s death would not qualify as “spousal support” and would not be eligible for any applicable tax deduction.

So wouldn’t Section 4360 endanger a person’s ability to take advantage of any favorable tax treatment associated with spousal support payments? California courts have held that an insurance policy, annuity, or trust under Section 4360 does not violate the definition of “spousal support” for tax purposes. These vehicles do not extend the supporting spouse’s obligation to pay support after their death. Instead, the obligation to pay rests on third-parties—i.e., an insurance carrier, financial institution, or trustee—and arises from contracts.

Contact Bremer Whyte Brown & O’Meara to Consult One of Our Skilled Attorneys

If you have questions about the financial and legal implications of your divorce or another family law dispute, you should ask an experienced attorney from Bremer Whyte Brown & O’Meara. We have more than seven decades of combined legal experience with matters of California family law, including spousal support disputes. You can count on us to provide comprehensive legal services to promote your best interests before the court.

To learn more about our services at Bremer Whyte Brown & O’Meara, call us at (949) 229-8546 or contact our office online today.