Tax Issues in a High Net-Worth Divorce

In a high-net-worth divorce, several tax issues must be carefully considered. Some of the most significant tax issues include:

Division of assets: 

When dividing assets in a divorce, it is critical to understand the tax implications of each asset. For example, some assets may generate high ordinary income taxes on a sale and/or have substantial ‘built-in gains’ due to accrued depreciation and/or low-cost basis. On the other hand, other assets may be subject to preferential capital gains tax treatment on a sale. These tax consequences must be considered in making a ‘just and right’ division of assets.

Spousal support:

Spousal support payments are no longer tax-deductible for the paying spouse and are not recognized as taxable income by the receiving spouse. Therefore, the paying spouse is responsible for the support payments and paying the tax on this money. This adverse double whammy on the paying spouse and windfall on the receiving spouse must be considered in making a ‘just and right’ division of assets.

Retirement accounts: 

Retirement accounts such as 401(k)s and IRAs can have complex tax implications in a divorce. For example, dividing a retirement account may trigger early withdrawal penalties and tax liabilities unless done in a particular way. Different types of retirement accounts may have different tax implications. Moreover, calculating the pre-marriage separate property portion of retirement accounts involves a very complex process.

Estate planning:

A high net-worth divorce may require significant changes to estate planning documents, such as wills, trusts, durable powers of attorney, medical power of attorney, and medical directive. It is also important to consider the tax implications of any changes to these estate planning documents.

Business interests:

If one or both spouses have business interests, there may be complex tax issues related to the tax basis and valuation of the business and the division of ownership interests. Moreover, under the corporate governance documents or the agreement of the owners, a divorce may trigger mandatory buy/sell provisions and/or ownership interest valuations under pre-established procedures or formulas.

Overall, the tax implications of a high-net-worth divorce can be complex and significant. It is important to work with a qualified divorce attorney and tax professional to ensure that all tax issues are properly considered and addressed in the divorce settlement agreement.

Kay Polk has the winning combination of attorneys in the practice areas of family law, tax law, estate planning, and corporate law, as well as in-house accountants and CPAs that will carefully examine all these issues affecting the high net worth clients."

For more information or to schedule a consultation, contact Kay Polk, Attorney at Law.