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Alimony trust refers to a trust in which the payor spouse transfers to the trustee, property from which the payee spouse, as beneficiary, will be supported after a divorce or separation. For example if X is ordered by court to make alimony and/or child support payments to spouse Y, X can put the assets in a trust from which the payments are made to spouse Y. The payor spouse does not receive an alimony deduction for income reported by the payee spouse from the trust. The payee spouse pays taxes on the trust income received in lieu of alimony. The grantor does not pay taxes on any trust income unless the divorce instrument or trust instrument fixes an amount or portion of payments as child support.
These trusts are often created in accordance with a separation agreement. Alimony trusts ensures support for a divorced spouse especially when the payor spouse engages in risky business ventures or has bankruptcy risk. Further it minimizes non payment risk and protects against a decreasing fluctuation in the payor spouse’s income.