Divorce and Financial Planning: A Perfect Marriage

By Sarenski, Theodore J. | The CPA Journal, January 1996 | Go to article overview

Divorce and Financial Planning: A Perfect Marriage


Sarenski, Theodore J., The CPA Journal


Financial planners usually work with people in establishing goals and developing a plan to assist them in achieving those goals. But what happens when those goals and dreams are shattered by a divorce? Emotional issues often cloud rational thinking, and both spouses can end up damaged mentally and financially. The need for professional financial planning and advice and the expertise of a knowledgeable CPA is never greater.

CPAs can offer their services to attorneys and mediators involved as well as to the divorce principals. A natural offshoot of the service is to offer financial planning services before, during, and after the divorce. Predivorce financial planning is essential to assure the best possible tax consequences after equitable distribution of the marital assets. Planning before the distribution of the assets also allows the financial planner opportunity to select the division of assets that best accomplishes each spouse's goals. Prior to the divorce, the financial planner can help define new goals and develop realistic budgets. During the divorce, the planner can assist in determining alimony, child support payments, and the division of assets. After the divorce, the planner can assess risk management issues, investment analysis, wills and trust changes, or estate planning issues.

What Is "Marital Proper'

Marital property, as defined in New York State Domestic Relations Law Section 236(B), is "all property acquired by either spouse during the marriage and before the execution of a separation agreement or the commencement of a matrimonial action, regardless of the form in which title is held, except as otherwise provided in agreement pursuant to subdivision three of this part. Marital property shall not include separate property ..."

Transfer of Assets Incidental to a Divorce

IRC Sec. 1041 allows for the nonrecognition of gain on all transfers of assets between spouses during marriage and within one year after the date a marriage ceases. Further, IRC Sec. 1041(c) allows a sixyear window of nonrecognition of gain for transfers made between former spouses if the transfers are related to the cessation of the marriage and are pursuant to a divorce or separation agreement. IRC Sec. 1041 (c) is important if all transfers to be made between former spouses cannot be made within one year after the date the marriage ceases. The parties must specifically identify the assets to be transferred in the divorce agreement to qualify for the nonrecognition of gain on the transfer of those assets pursuant to IRC Sec. 1041(c). A transferor has no gain or loss in a transfer under IRC Sec. 1041. The transferee's basis in the property is the same basis the transferor had in the property immediately prior to the transfer.

The nonrecognition of gain on transfers between spouses is a significant tool in the financial planning process. It allows the shifting of appreciated assets to the spouse who will be in the lower tax bracket after the divorce. It allows title transfers of individually held assets to the other spouse without tax consequence. How is it best to divide assets in a divorce? While each situation is unique, there are some guidelines to abide by.

The Principal Residence

The principal residence is often an emotional issue to deal with. In a long-term marriage, it can be the source of many memories. As a planner, you need to recognize the emotional issues but not let them interfere with the service you have been hired to perform.

A principal residence acquired by a two- wage earner family may need to be sold because neither spouse can afford to maintain the residence on his or her own. The residence may be sold because each spouse wants to start fresh in a new location or in a new house. Whatever the reason for selling the principal residence, there are some traps to be aware of and avoid.

IRC Sec. 1034(a) allows for the nonrecognition of gain on the sale of property used as a principal residence if, within a two-year period before or after the sale, the taxpayer purchases a new principal residence that costs at least as much as the adjusted selling price of the old principal residence. …

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