3 Tax Issues That May Play a Role in a High Net Worth Divorce

 Posted on September 19, 2023 in Main

A high net worth divorce can be complex and challenging, and it may involve multiple types of intricate financial issues. In these situations, it is crucial to understand the tax implications of the decisions made during the divorce process. By working with an experienced family law attorney to address these issues, you can make informed decisions that will minimize your tax liabilities and protect your financial interests. Some issues that you may need to consider include:

1. Division of Assets

One of the primary considerations in any divorce is how marital assets will be divided between spouses. In a high net worth divorce, this division becomes even more critical due to the significant value and complexity involved in assets such as investments, real estate properties, businesses, retirement accounts, and stock options.

The way these assets are divided can have substantial tax consequences for both parties. For example:

• Taxable capital gains: When dividing appreciated assets like stocks or real estate properties between spouses, any capital gains taxes associated with those assets may need to be paid if assets are sold or transferred.
• Tax basis: The transfer of certain assets from one spouse to another may result in changes to their cost basis for future sales or transactions.
• Retirement benefits: Special care must also be taken when dividing employer-sponsored retirement accounts (such as 401(k)s), individual retirement accounts (IRAs), or pension benefits, since withdrawals made before reaching retirement age could incur early withdrawal penalties and income taxes. Using a Qualified Domestic Relations Order (QDRO) to divide these assets will allow funds to be withdrawn and transferred without being required to pay taxes or penalties.

2. Child Custody and Support

In high net worth divorces involving children, child custody arrangements and child support payments can have significant tax implications. Child support payments are not deductible by the paying parent, nor are they considered taxable income for the receiving parent. However, parents should be aware that additional tax benefits (such as deductions when claiming children as dependents and tax credits for childcare expenses) may be affected depending on the agreed-upon custody arrangements.

3. Estate Planning Considerations

During a high net worth divorce, it is important to reassess your estate plan and address changes in your personal financial circumstances. The terms of certain estate planning instruments, such as wills, trusts, beneficiary designations, powers of attorney, etc., may need to be updated following your divorce. Ensuring that these documents reflect your wishes and address the changes in your life can help you make sure your assets will not go to unintended beneficiaries, and you can help avoid disputes between family members down the line. 

When updating your estate plan, you can take steps to minimize future estate taxes. Your divorce may provide you with the opportunity to transfer assets to family members or create trusts that will reduce the taxable value of your estate. You can also make sure assets will be set aside for your children or other family members, while also addressing your own ongoing needs.

Contact Our Wheaton High Net Worth Divorce Attorneys

If you are going through a high net worth divorce it is crucial to partner with an experienced family law attorney who can help you understand the legal issues you will need to address and the potential tax ramifications of divorce-related decisions. At Mirabella, Kincaid, Frederick & Mirabella, LLC.,  we have a team of skilled DuPage County high asset divorce lawyers who can handle complex divorce cases, including those involving significant assets. Contact us at 630-665-7300 to schedule a consultation today.