The 2017 Tax Cuts and Jobs Act produced many high-visibility changes to divorce taxation. The repeal of the alimony deduction is the change everyone in family law practice knows about. A second TCJA change of comparable consequence has received substantially less attention and continues to surprise practitioners who encounter it: the repeal of Internal Revenue Code Section 682, which has produced an enduring grantor trust problem for couples with trusts created during the marriage. The repeal affects any divorce executed after December 31, 2018, regardless of when the underlying trust was created, and the resulting tax burden can extend for years or decades after the divorce is final.
The problem is most acute for couples who engaged in sophisticated estate planning during the marriage — exactly the population that has the resources to create such trusts in the first place. Spousal Lifetime Access Trusts, lifetime marital trusts, dynasty trusts with spousal-distribution provisions, and similar structures created during the marriage now generate a tax burden on the grantor spouse that persists indefinitely after divorce. The grantor spouse continues to pay income tax on trust distributions that are received by the now-ex-spouse, with no automatic mechanism to recoup the cost.
What follows is a working brief on the Section 682 repeal and its implications for Divorce Financial Coaches, family lawyers, and estate attorneys advising clients with trust structures. It covers what grantor trusts are and why they were created, what Section 682 used to do, what the repeal changed, which trusts are affected, the planning options for addressing the problem, and the operational adjustments to settlement negotiations that the repeal requires.
Grantor trusts — what they are and why families use them.
An individual can create irrevocable trusts for the benefit of family members, moving the assets transferred to those trusts out of the trust creator’s estate for estate tax purposes. The trust creator is known as the grantor. Once the assets are transferred to the irrevocable trust, the grantor no longer owns them and they no longer count toward the grantor’s taxable estate at death.
Even though the assets are irrevocably gifted to the trust, the Internal Revenue Code permits the grantor to remain responsible for paying the trust’s income and capital gains taxes through several mechanisms. Trusts that fall within these mechanisms are treated as owned by the grantor for income tax purposes and are known as grantor trusts. The income from a grantor trust is taxed to the grantor, even though the grantor no longer owns the assets producing the income and even though the trust income is actually distributed to other beneficiaries (typically family members other than the grantor).
The structure is a very popular estate planning tool because of a counterintuitive benefit. The grantor’s payment of the trust’s tax liability has no gift tax consequence — the IRS does not treat the payment of the trust’s tax as a gift from the grantor to the trust beneficiaries. The grantor’s payment of the tax effectively makes a tax-free gift to the trust in the amount of the tax payment, which otherwise would have been payable by the trust itself or by the trust beneficiaries on distribution. Practitioners often purposely include provisions in trusts that trigger grantor trust status specifically to allow these trusts to grow tax-free for the beneficiaries while the grantor absorbs the tax cost.
Grantor trust status is triggered by various mechanisms in the Code. Under Section 677(a)(1), a grantor is treated as the owner of any portion of a trust if income may be distributed to the grantor or the grantor’s spouse. Under Section 672(e)(1), a grantor is treated as holding any power or interest held by an individual who was the grantor’s spouse at the time the power or interest was created. The combined effect of these provisions: if a trust was created while the parties were married and trust income may be distributed to the grantor’s spouse, the trust is likely a grantor trust under the spousal-attribution rules and remains a grantor trust based on the grantor’s deemed ownership.
The most common grantor trust structures created during marriage that produce this effect include Spousal Lifetime Access Trusts (SLATs), where one spouse creates a trust for the benefit of the other spouse and the descendants, with the grantor reserving no direct interest but with the spousal beneficiary serving as the practical access point to the trust’s resources during the marriage. Lifetime marital trusts created for estate planning purposes during marriage similarly trigger grantor status. Many irrevocable life insurance trusts (ILITs) created during marriage with spousal distribution provisions are also grantor trusts.
What Section 682 used to do — and why it mattered in divorce.
Until December 31, 2018, Internal Revenue Code Section 682 provided a critical relief mechanism for grantor trusts after divorce. The provision specified that, after divorce, the income distributed to a spouse from a grantor trust would be taxable to the recipient (the ex-spouse receiving the distribution) rather than to the grantor. The effect was to terminate the grantor’s income tax responsibility for distributions to the ex-spouse following divorce, with the tax obligation transferring to the recipient where it economically belonged.
The Section 682 relief mechanism reflected a sensible policy. The original grantor-pays-tax structure was designed to operate within an intact marriage where the grantor’s tax payment effectively benefited the household economy. Once the spouses divorced, the policy rationale for the grantor’s continued payment of tax on distributions to the ex-spouse no longer applied. Section 682 transferred the tax obligation to align with the economic benefit, treating post-divorce distributions to the ex-spouse the same way distributions to any other unrelated beneficiary would be treated for tax purposes.
The provision operated automatically. No election was required, no notification needed to be filed with the IRS, no specific drafting language in the divorce decree needed to be included. The repeal of Section 682 by the TCJA eliminated this automatic relief and left the underlying grantor trust rules in full effect, with the consequences discussed below.
What the repeal changed.
The Tax Cuts and Jobs Act, signed into law on December 22, 2017, repealed Section 682 for divorce or separation agreements executed after December 31, 2018. The repeal is permanent and does not sunset. Unlike many other TCJA provisions that revert to pre-TCJA treatment after December 31, 2025, the Section 682 repeal is in effect indefinitely unless Congress affirmatively restores the provision.
The effect of the repeal: a grantor whose marriage produced a grantor trust with spousal-distribution provisions, who then divorces under an agreement executed after December 31, 2018, continues to be treated as the owner of the trust for income tax purposes. Distributions to the ex-spouse from the trust are not taxed to the ex-spouse; they are taxed to the grantor. The grantor spouse continues to pay income tax on income that flows to the ex-spouse, while the ex-spouse receives the distributions tax-free.
The economic burden falls entirely on the grantor spouse. For a substantial trust producing significant annual income, the tax cost can be very large — potentially tens or hundreds of thousands of dollars per year, depending on the trust’s income and the grantor’s marginal tax rate. The cost continues for as long as the grantor lives and the trust continues to distribute income to the ex-spouse, which can be decades.
The effective date of the repeal is keyed to the date the divorce or separation agreement is signed, not the date the trust was executed. A trust created in 2010 generates grantor trust consequences in a divorce executed in 2024, even though the trust predated the TCJA by years. This is the surprise that catches practitioners — the trust planning was sound at the time it was done; the repeal of Section 682 retroactively changed the post-divorce treatment of trusts that were already in place.
Which trusts are affected.
Any trust created during the marriage in which the other spouse can receive distributions is potentially affected. The category is broad and includes many of the standard estate planning structures used by upper-income and high-net-worth families.
Spousal Lifetime Access Trusts (SLATs). The classic structure — one spouse creates a trust for the benefit of the other spouse and the descendants, providing access to trust resources during the marriage. The non-creating spouse is a permitted beneficiary, which triggers grantor status under Section 677(a)(1) and is now permanent post-divorce.
Lifetime marital trusts. Trusts created during the marriage for the benefit of the other spouse for estate planning purposes (often using the unified credit or marital deduction). The spousal beneficiary’s status as a permitted distributee triggers grantor status.
Irrevocable life insurance trusts (ILITs) with spousal beneficiary provisions. Where the trust permits distributions to the spouse during life, the grantor status is triggered. ILITs with no spousal-distribution provisions during life (where the spouse is only a death beneficiary of the insurance) may not be affected, but the trust documents need to be reviewed specifically.
Dynasty trusts and other long-term family trusts that include the spouse as a permitted distributee. The long horizon of these trusts means the post-divorce tax obligation can extend across decades.
Some Qualified Terminable Interest Property (QTIP) trusts created during the marriage. The specific grantor status depends on the QTIP’s terms and the timing of its creation.
Trusts created before the marriage are generally not affected because the spousal-attribution rules under Section 672(e)(1) require the spousal relationship to exist at the time the power or interest was created. A trust the grantor created before marriage, even if it includes the eventual spouse as a beneficiary, may not be a grantor trust under the spousal-attribution mechanism — though it may be a grantor trust under other Code provisions.
Trusts created after divorce are not affected by the spousal-attribution rules vis-à-vis the ex-spouse. A grantor who creates a new trust for the benefit of the ex-spouse after the divorce is final does not have the spousal-attribution problem because there is no longer a spousal relationship.
The planning options for addressing the problem.
Collaboration between estate counsel and matrimonial counsel is essential for addressing the Section 682 repeal in any divorce involving meaningful trust structures. Several planning options exist; each has trade-offs.
Terminating the trust upon divorce. The cleanest option in some cases is to terminate the trust as part of the divorce settlement, distributing the trust assets and ending the ongoing tax obligation. The termination may have its own tax consequences — recognition of built-in gains, gift tax considerations, loss of estate tax benefits — that need to be evaluated. The option is not always available depending on the trust’s terms; many irrevocable trusts cannot be terminated unilaterally by the grantor.
Decanting the trust to a new trust. Many states have decanting statutes that allow trust assets to be transferred from one trust to another with modified terms. The decanting can remove the spouse as a beneficiary, eliminating the grantor status going forward. The decanting process is technical and state-specific; not all states have decanting statutes, and the available terms vary substantially. The decanting may also have tax consequences that need to be evaluated.
Modifying the trust to remove the spouse as a beneficiary. Where the trust’s terms permit modification — through a special power of appointment held by another person, through a trust protector’s authority, or through court approval — modifying the trust to eliminate the spouse as a beneficiary can eliminate the grantor status going forward. The available modification mechanisms vary by trust and by jurisdiction.
Equalizing the tax burden through the divorce settlement. When the trust cannot be terminated, decanted, or modified, the divorce settlement can include reimbursement or equalization provisions that shift the economic burden of the ongoing tax obligation from the grantor to the recipient ex-spouse. The mechanism: the recipient pays the grantor a portion of the tax due on the distributions they receive, effectively converting the structure back to something closer to the pre-repeal Section 682 treatment by contract. The mechanism requires explicit language in the settlement, clear computation methodology, and enforcement provisions for non-payment.
Adjusting other terms of the settlement to reflect the ongoing tax cost. Where reimbursement is not practical, the settlement can adjust other components (the property division, the alimony amount, the asset allocation) to compensate the grantor for the ongoing tax burden. The adjustment requires explicit modeling of the expected tax cost over the relevant time horizon, with appropriate discounting to present value, and explicit treatment of the uncertainty (the actual tax cost depends on future trust distributions, future tax rates, and future interpretation of the rules).
The collaboration imperative.
The Section 682 repeal is one of the most concrete examples of why HNW divorce requires coordinated estate and matrimonial counsel from the beginning of the case. The matrimonial attorney without estate planning expertise may not recognize the grantor trust problem at all. The estate planning attorney without matrimonial expertise may not appreciate how the issue interacts with the divorce settlement. Either professional working alone produces incomplete advice.
The collaborative analysis should begin by inventorying every trust structure either spouse has created or has standing in. The inventory includes irrevocable trusts created by either spouse for the benefit of the family, irrevocable trusts created by parents or grandparents in which either spouse has an interest, irrevocable life insurance trusts, and any other irrevocable structures with distribution provisions to the spouse. For each, the grantor trust status, the post-divorce treatment, the available modification mechanisms, and the cost of the available planning options need to be evaluated.
The work is technically demanding and time-consuming, but it is also where substantial value lies. A divorce settlement that does not address the Section 682 issue leaves the grantor spouse exposed to potentially substantial ongoing tax obligations. A settlement that addresses it through one of the available mechanisms protects the grantor and produces a more sustainable post-divorce structure for both parties.
The cost of the collaborative work is justified by the magnitude of the issue. For a SLAT or similar structure producing $200,000 of annual income, the grantor’s annual tax cost at high marginal rates can run $80,000 or more. Over a twenty-year post-divorce horizon, the present value of the ongoing tax cost runs to seven figures. Investing tens of thousands of dollars in the collaborative work to address the issue is straightforwardly cost-effective relative to absorbing the unaddressed tax burden.
Why the issue still surprises practitioners.
Several factors contribute to the continued surprise the Section 682 issue produces for practitioners encountering it.
The repeal was buried within the broader TCJA changes. The alimony repeal received extensive coverage in the legal press; the Section 682 repeal received much less attention because it affected a narrower population. Practitioners outside the HNW estate planning specialty may not have absorbed the change at the time it was passed.
The effect of the repeal is delayed. A couple whose divorce was finalized in 2019 may not have seen the meaningful tax impact until 2020 returns were filed in 2021, by which point the divorce was long final and the planning windows had closed. The delayed visibility of the consequence has produced a sustained stream of practitioner surprises as cases unfold.
The grantor trust mechanism is technically intricate. Even practitioners aware of the repeal may not immediately recognize when a given trust is implicated. The combination of Section 677(a)(1) (spousal distributions trigger grantor status) and Section 672(e)(1) (spousal status at creation persists) produces the result, but the interaction requires careful reading of the Code provisions and the trust documents.
Estate planning attorneys and matrimonial attorneys often work in separate professional networks. The estate planning attorney who drafted the SLAT during the marriage may not be aware that the couple is divorcing. The matrimonial attorney handling the divorce may not know the trust exists or may not appreciate its tax characteristics. Without explicit communication between the two professionals, the issue can go unaddressed.
The takeaway: any HNW divorce case should explicitly inventory trust structures early in the process and should bring estate counsel into the team to evaluate the grantor trust implications. The issue cannot be addressed retroactively after the divorce is final, except through subsequent court modifications that are difficult and expensive to obtain.
Operational adjustments to settlement negotiations.
Four operational adjustments incorporate the Section 682 repeal into the settlement negotiation workflow.
First, inventory all trust structures during the initial financial discovery. The discovery template should explicitly request information about every trust either spouse has created or in which either spouse has an interest. Trust documents should be produced for review by both matrimonial and estate counsel. The inventory should be completed before substantive settlement negotiations begin.
Second, evaluate the grantor trust status of each identified trust. The evaluation requires reviewing the trust’s terms for the specific provisions that trigger or do not trigger grantor status, considering the timing of creation relative to the marriage, and analyzing the spousal-attribution implications. The evaluation should produce a clear conclusion for each trust about whether grantor status persists post-divorce.
Third, identify the available planning options for each affected trust. The options analysis requires the trust’s terms, the applicable state law for modification or decanting mechanisms, and the tax consequences of each available action. The analysis produces a recommended planning approach for each affected trust.
Fourth, build the chosen planning approach into the settlement agreement. The settlement should include explicit provisions addressing the trust planning — termination provisions if the trust will be terminated, decanting authorization if the trust will be decanted, modification provisions if the trust will be modified, or reimbursement provisions if the grantor’s ongoing tax burden will be equalized through periodic payments from the recipient. The provisions should be detailed enough that they can be implemented without further negotiation post-decree.
The broader principle — TCJA changes that did not sunset.
The Section 682 repeal is one of several TCJA changes that did not sunset along with the headline individual income tax changes. The alimony repeal also did not sunset. The Qualified Business Income deduction (Section 199A) is scheduled to sunset on December 31, 2025 along with the other individual provisions, but the repeals of pre-existing benefits (like Section 682 and the alimony deduction) are permanent unless affirmatively restored by Congress.
The asymmetry — the new benefits sunset while the new burdens persist — is a structural feature of the TCJA that practitioners need to be aware of. Planning that assumed the entire TCJA structure would sunset and revert to pre-TCJA treatment in 2026 is incorrect; the alimony rules and the Section 682 repeal will remain in effect regardless of what happens to the other provisions.
How VennBoard supports the trust-aware divorce workflow.
Trust-aware divorce planning requires the kind of integrated, multi-professional engagement that the team-based piece described. The trust documents have to be in the workspace, accessible to both estate and matrimonial counsel, with the analytical work product (grantor status determinations, planning option evaluations, settlement provisions) tracked as the analysis develops.
VennBoard’s matter workspace supports the integration. Trust documents upload to the matter with structured tagging. The grantor status analysis lives alongside the documents as a working artifact. The settlement provisions addressing the trust planning are tracked as part of the broader settlement structure. Both estate counsel and matrimonial counsel can engage with the work product without needing to coordinate through email.
Two operational features matter most for trust-related cases. The audio and video transcribe tool captures the technical conversations between counsel and the client about trust planning options, which is critical because the conversations are technically demanding and the client’s understanding evolves across multiple discussions. The transcripts provide the documentation record that the client genuinely engaged with the analysis. The immutable messaging log captures the team coordination on the trust issues, which becomes the defensive record if any settlement provision is later challenged.
The Section 682 repeal is the kind of issue where the difference between informed and uninformed planning produces decade-spanning consequences. VennBoard exists to support the informed version. Professional walkthrough at VennBoard.com, product detail at VennBoard.com.