Consider these tax consequences when splitting assets in a divorce

With divorce filings high at the start of a new year, brush up on tax and other implications of marriage dissolution

Dec 30, 2014 @ 1:13 pm

By Liz Skinner

The kiss at midnight on New Year's Eve may be the last for many couples, if past years are any indication.

Divorce filings spike at the beginning of the year, and advisers need to be ready to help clients seeking to split.

Clients need to think about the tax implications of divorce, especially as they relate to certain investments.

“Divorce filings increase at the start of the year, unfortunately, with many setting New Year's resolutions to make a change,” said Diane Pearson, a planner and certified divorce financial analyst with Legend Financial Advisors.

For some couples, the holidays may have been unbearable, or they may have just waited until after the holidays for their kids' sake, she said. As soon as school starts up again, many unhappy couples focus on beginning the divorce process.

A FindLaw.com/Westlaw analysis of divorce filings in the U.S. from 2008 to 2011 showed divorces shoot up in January, continue rising through February and peak in March. The whole divorce process takes anywhere from six months to over a year, depending on state laws.

(More: Mediating disputes between spouses part of advisers' job)

The family home tends to be the greatest asset, and what to do with it requires serious thought, Ms. Pearson said.

There's no one-size-fits-all solution in terms of who should get the house, which requires cash flow for paying taxes, utilities, upkeep and the mortgage, or whether it should be sold before the divorce is final, she explained.

One consideration is appreciation. If a spouse is awarded the family home and sells that property after the couple is officially divorced, only $250,000 in appreciation is exempted from taxes, compared to $500,000 if a married couple sold that home, she said.

Leslie Thompson, principal at Spectrum Management Group and a CDFA, recommends clients focus on the liquidity of assets that will be split by the couple. This can be especially tricky when there is real estate, retirement assets and privately held businesses to consider.

Most of the time she has an answer regarding the primary home, especially the large ones.

“I typically recommend that neither party keep the home,” she said. “Typically the children are grown with the clients I work with and neither of them needs so much house.”

With investments such as mutual funds and stocks, it's most important that everyone understand the cost basis that goes along with those, Ms. Pearson said.

For instance, the low-wage earner of the couple may be the best recipient of stock that was held for 20 years and has appreciated significantly because the spouse who falls in the lower tax bracket will owe a smaller amount in long-term capital gains when they file separately.

In cases with limited partnerships, the tax brackets of the two spouses also are important, as well as understanding any lock-up period that would make it difficult to turn the asset into cash flow, she said.

There also are Social Security implications to think about, including whether and when a person can qualify for spousal benefits.

“Also, make sure to keep both parties in the loop if you have been dealing with them as a couple,” Ms. Pearson said. “Meet with them together if at all possible.”

(More: Advisers need to be nurturers when helping a woman through life changes)

Lauren Prince, owner of Prince Financial Advisory and also a CDMA, agreed that figuring out the embedded capital gains of investments that will have to be sold is paramount.

“You don't want one half of the couple stuck with high capital gains when the other half isn't,” Ms. Prince said.

She also recommends divorcing couples first pay off marital debts like credit cards.

“They probably want to pay off bad debt and close joint accounts,” she said. “You don't want one irate spouse charging things just for spite or anger.”

Ms. Prince recommends advisers learn about the benefits of different divorce processes.

If there is some cooperation, a divorce facilitated by a mediator or through a collaborative process with the spouses and their lawyers can be more dignified and cheaper, Ms. Prince said.

When there is mental or physical abuse in the marriage, litigation is probably the way to go, she said.

Divorce among older couples is especially on the rise, and differences in retirement plan savings amounts should be a factor of concern. People over age 50 are twice as likely to get divorced as they were in 1990, according to an October 2014 paper from the Council on Contemporary Families.

0
Comments

How do you help clients who are divorcing?

View comments

Recommended for you

Upcoming Event

Nov 13

Conference

Best Practices Workshop

For the sixth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video

Events

Financial advisers highlight solutions to increase diversity and inclusion

These Excellence in Diversity & Inclusion award winners suggest short-term changes to help foster D&I in the financial advice profession.

Latest news & opinion

7 things advisers should do today to boost diversity and inclusion

Creating diversity and inclusion within financial advice firms is challenging, but these InvestmentNews Excellence in Diversity & Inclusion award winners have suggestions that firms can put into practice today

What to tell your clients after they've won the lottery

The current combined Mega Millions and Powerball jackpots are more than $850 million. What should you tell your clients if they have a winning ticket?

2019 Medicare premiums announced

Slight increase in Part B premium to $135.50 per month is in line with expectations.

7 ways states got tough with unregistered individuals and firms in 2017

Rise in digital currency frauds helped trigger a crackdown by state regulators.

Market slide awakens nervous investors, puts advisers back to work

Some reach out to clients who need hand-holding, while others see decline as opportunity to drum up new business.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print