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What Are the Tax Implications in a High-Net-Worth Divorce?

Protecting what is separate property and fairly dividing marital property are big jobs in many divorces. That’s especially true in high-net-worth divorces.

Couples with more than $1 million in liquid assets usually own a diverse portfolio such as real estate holdings, stocks, bonds, and other investments. Every divorce is unique, but many high-asset splits involve property transfers, asset liquidation, and spousal support, all of which affect the tax liability of the individuals involved. When one or both halves of a couple owns a business, even more complications arise.

Retaining a divorce attorney with considerable experience in high-net-worth divorces is critical to evaluate every detail of the divorce. At the Law Office of Dennis R. Vetrano, Jr., LLC, we work to ensure that if our client faces the biggest tax burden, that is accounted for in the overall divorce settlement. We represent high-net-worth clients throughout communities in Dutchess, Orange, Putnam, Rockland, Ulster, and Westchester counties.

Liquidating Assets in a Divorce

Liquidating property and assets should be done only after professional guidance. Unless the liquidation is properly structured, you could trigger capital gains tax liability. There is generally no gain or loss recognized by the Internal Revenue Service (IRS) if the liquidation occurs within one year of the divorce and is related to the end of the marriage. Like property received as a gift, the person receiving the asset will have a carryover basis in the property received.

Dividing Retirement Benefits in a Divorce

Retirement accounts such as IRAs and 401(k)s are considered marital property and are divisible by equitable distribution. If the IRA was opened before the marriage, the contributions made during the marriage with joint funds are at stake. One of our experienced attorneys can submit qualified domestic relations order (QDRO). This important legal document allows you to divide retirement holdings without tax penalties for early withdrawal.

Changing Laws about Spousal Support in a Divorce

In many high-net-worth couples, one spouse has an income greater than the other spouse. When the couple divorces, the person earning less is often eligible for alimony. One aspect of spousal support is to maintain the same standard of living that was established during the marriage.

How spousal support payments are taxed changed, effective for all divorce agreements established as of Jan. 1, 2019. With the Tax Cuts and Jobs Act (TCJA), alimony payments are no longer tax deductible for the payor. The person receiving the payment no longer is required to report the spousal support as income, so spousal maintenance payments are no longer subject to U.S. federal withholding tax. While great for the person receiving alimony, the change has increased the tax liability of the payor.

Understanding Grantor Trusts in a Divorce

The TCJA made changes beyond how spousal maintenance is taxed. From 2019 onward, a grantor trust established for the benefit of an ex-spouse before the divorce shall continue to be classified as a grantor trust for U.S. federal tax purposes. That means that the person who created the trust – the grantor – will continue to be liable for the income tax on that trust's income going forward even though the ex-spouse receives the income. Prior to the Act, the ex-spouse was taxed for any income received from a grantor trust. This change in who is taxed must be addressed in any divorce negotiation.

Retain a Lawyer Experienced in High-Net-Worth Divorces

Divorce is rarely and becomes substantially more complicated for wealthier couples. Attorneys play a significant role in high net worth divorce cases. Hiring an attorney with specific experience in high-asset cases is crucial.

At the Law Office of Dennis R. Vetrano, Jr., LLC, our attorneys have more than 75 years of collective experience. We’ve fought for our clients through strategic negotiation and skilled litigation. We understand what is at stake and we will aggressively protect your best interests.

Start to protect your wealth before you file for divorce. Schedule a consultation with one of our attorneys by calling (845) 605-4330 or submitting our online form on our website.