One of the critical aspects of most divorces is the unwinding of shared finances. For many couples, this means splitting up their marital property through a process called property division. Property division can be particularly complex for high-net-worth couples who own substantial and often complicated assets, as there are often tax implications involved.
Equitable Distribution and High-Asset Divorces
Missouri uses the equitable distribution rule for property division in divorce. Under equitable distribution, a court presiding over a Missouri divorce will divide marital property fairly between spouses. Note that “fairly” does not necessarily mean “equally.”
Equitable distribution in high-asset divorces can involve complex financial and tax issues, given the intricate nature of high-value assets, such as business interests, stock portfolios, and real estate holdings. Furthermore, dividing high-value assets can trigger unexpected tax consequences for couples.
Common Assets with Tax Consequences
High-net-worth couples often own various types of assets that qualify as marital property, subject to division in divorce in Missouri. Dividing assets like the following may raise tax implications:
- Retirement accounts (401(k)s, IRAs, pensions): In order to give one spouse their fair share of a tax-advantaged retirement account, the other may need to withdraw money from that account, which can trigger significant tax penalties. As a result, couples typically use qualified domestic relations orders (QDROs) to avoid early withdrawal penalties. These orders direct the plan administrator to pay a portion of the benefits to the other spouse as an alternate payee when the account goes into payment status.
- Real estate: Selling marital real estate can trigger capital gains taxes. However, by timing a sale correctly, a divorcing couple can take advantage of the principal residence exemption, which allows a married couple filing jointly to exclude up to $500,000 in capital gains from the sale of a primary residence.
- Investment accounts and stock options: Dividing investment interests and stock options received as equity compensation can have various tax implications, including the potential for unrealized capital gains or the triggering of a taxable event when one spouse transfers an investment or stock option to the other spouse.
- Business ownership interests: Splitting a spouse’s business interest can affect both spouses’ future income tax and capital gains tax liabilities.
Alimony and Tax Reform
Recent updates to tax laws have changed the tax treatment of alimony payments. Spouses with alimony obligations can no longer deduct their payments for a divorce judgment or separation agreement executed after 2018. Spouses who receive alimony payments do not have to include those payments in their income.
For divorce judgments or separation agreements executed before 2019, spouses may deduct their alimony payments, and recipients must report those payments as taxable income. However, modifications to those judgments or agreements can change the tax treatment of alimony payments.
Using Tax Professionals and Legal Experts
Given the potential tax implications involved, it’s critical that high-net-worth couples seek advice and representation from experienced divorce attorneys and tax professionals. Divorce lawyers and tax advisors can help spouses incorporate tax planning into their negotiations over a property settlement or case strategy, which can help avoid unexpected financial liabilities. For example, couples can structure divorce settlements to minimize capital gains taxes on the liquidation of marital assets.
Contact a Divorce Attorney Today
Are you a high-net-worth individual going through a divorce in Missouri? If so, you should consider getting legal guidance to help you protect your assets and manage the tax implications of your divorce agreement. Contact the Law Office of Amy L. Gervich today for a free, confidential consultation with a knowledgeable divorce attorney, and let us help you plan for the future.
