37.4 Payments Must Stop at Death

Liability for a payment must end on the death of the payee-spouse. If all the payments must continue after the death of the payee-spouse, none of the payments, whether made before or after the payee’s death, qualify as taxable (to payee-spouse) or deductible (by payer-spouse) alimony. If some payments must continue after the payee’s death, that amount is not alimony regardless of when paid. Note that these rules do not just prevent a deduction for payments made to the payee-spouse’s estate or heirs after the payee’s death, but it may also have the surprising result of disallowing an alimony deduction for otherwise qualifying payments actually made to the payee-spouse. The issue is a hypothetical one: would the payment have to be made after the payee-spouse’s death?

If the answer is yes, the payment is not deductible, regardless of when made.

The divorce decree or separation agreement does not have to specifically state that payments end at death, if under state law the liability to pay ends on the death of the payee-spouse.

To the extent that one or more payments are to begin, increase in amount, or accelerate after the death of the payee-spouse, such payments may be treated as a substitute for continuing payments after the death of the payee-spouse. Such substitute payments will be denied alimony treatment.

Attorneys’ fees.

Under the laws of many states, a court award of attorneys’ fees remains enforceable after the death of the payee-spouse, thereby disqualifying a payer’s alimony deduction for the payment and making it nontaxable to the payee-spouse. For example, a husband who was ordered by an Oklahoma court to pay his wife $154,000 for her attorneys’ fees prior to the entry of a final divorce decree was unable to deduct his payment. The Tax Court and the Tenth Circuit Court of Appeals agreed with the IRS that under Oklahoma law, the husband’s liability to pay the attorneys’ fees would not have ended, as a hypothetical matter, had the wife died before the final decree was entered. The policy reason for the state law is to assure that attorneys get paid for their services, which will enable indigent clients to retain counsel in divorce actions.

In this situation, the payer can obtain a deduction if the attorneys’ fees remain the liability of the payee-spouse and the court decree increases the amount of cash alimony to cover the fees, rather than having them paid separately. The cash alimony would be taxable to the payee-spouse. The payee-spouse’s payment of the fees to the attorneys may be deductible, but only as a miscellaneous expense subject to the 2% of AGI floor.