Tax Considerations of the Division of Assets in a Divorce

An important consideration when negotiating a divorce settlement is whether there are any tax consequences for a spouse being awarded certain marital assets. 

Often the most equitable way to divide a marital estate is for each party to be awarded assets “in kind”, meaning similar amounts of similar types of assets.  That way each party is in a similar financial position post-divorce.  However, often there is a situation where one party has a stronger emotional attachment to an asset, such as the marital home or a pension account.  In those instances, it is important to consider the tax implications of all assets when formulating settlement positions and dividing the estate.

Retirement assets such as a 401(k)s and traditional IRAs are taxed at the time the recipient withdraws the funds after retirement.  For this reason, a spouse receiving $10,000 in an IRA is not worth as much as receiving $10,000 in cash because the spouse receiving the IRA will have to pay taxes on the distribution when it is taken.   Additionally, there is a specific court order, called a Qualified Domestic Relations Order, that transfers certain qualified retirement assets between spouses in a divorce in a way that avoids tax consequences at the time of the transfer.  However, the spouse receiving the funds will still be taxed when he or she withdraws the funds in the future. 

There may be capital gains on other assets, such as investment assets or certain real estate.  The tax consequences of the sale or transfer of these assets will need to be addressed in your settlement in a way that shares the burden between both spouses rather than one party. 

The Law Office of Erin M. Wilson LLC are not tax advisors or attorneys.  We will work with your tax professionals to ensure that any tax implications of the division of assets are appropriately considered and addressed in your settlement, and guide you to a fair resolution of your case.

NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.