One reason for setting up an Alimony Trust is to make sure support for the receiving spouse continues even when the paying spouse has run into financial difficulties. Suppose a paying spouse owns a Certificate of Deposit and uses the interest from that CD to pay some or all of the alimony owed to the receiving spouse. If the paying spouse runs into financial difficulties he or she might be tempted to cash the CD out to be their own bills, leaving the receiving spouse to apply to the court for help with alimony.
However, if the same CD had been put into an Alimony Trust the paying spouse could not cash the CD out and the receiving spouse's alimony payments would remain steady.
Under an Alimony Trust, the paying spouse does not receive an alimony deduction for income reported by the receiving spouse from the trust. Nor does the paying spouse pays taxes on the trust income received in lieu of alimony. The paying spouse 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.
