Tax Issues in High Net Worth Divorces

A considerable amount of time is spent dealing with the division of marital property in most divorces. However, high net worth divorces offer other particularly challenging factors. High net worth individuals often use a complex network of legal entities, asset classes, and tax shelters in their financial matters. Therefore, during the property division process, it is easy for the unwary to create unintended tax problems.

Transferring Assets

Under the IRS regulations, standard property transfers between spouses, as part of a divorce, are not usually taxable events. However, often, assets or property is not titled in the name of either spouse. If an asset is titled under a business, the transfer of that asset to a spouse may create a taxable event in some situations. Any income tax ramifications of a property transfer need to be factored in when dividing marital property.

Understanding Income Tax Burden

Various assets such as securities may not have a uniform basis point. Stocks that were purchased at cheaper price may carry a larger tax bill upon transfer than other stocks trading at the same price yet purchased at a higher price. The division of marital assets requires more than just a simple addition and subtraction of fair market values—the tax consequences of any transfer must also be considered. You do not want to get stuck with a tax bill that erases the value of the assets you were awarded in the divorce.

The Value of Losses

Not everything with taxes and divorce is about value and income. Sometimes one of the most important factors is a loss. The rules are very strict about who can use the losses. Additionally, losses cannot always be transferred between spouses in a divorce and will largely depend on how the asset causing the loss was held.

In certain circumstances the IRS allows an individual to carry forward losses to another tax year to offset the amount of income tax due. While it is difficult to predict when losses will be useful in reducing future tax obligations, the use of carry forward losses can make a difference of tens or even hundreds of thousands of dollars on a tax bill. When you are looking over the complete financial picture in a high net worth divorce, it is important to not forget about the potential future value of recent losses.

If you are involved in a high net worth divorce, or have any questions about property division, support, or custody, you need advice from a knowledgeable DuPage County divorce attorney. Call Sullivan Taylor, Gumina & Palmer, P.C. today at 630-665-7676 to schedule a consultation today.

Sources:

http://www.irs.gov/publications/p504/

http://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=577&ChapterID=8

http://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=2086&ChapterID=59