Answer: One of the stickiest aspects of a divorce, and often the greatest point of contention, is the separation of financial assets.
The beauty of choosing the Collaborative Divorce process is that the decisions made between the soon-to-be ex-spouses are bound by what the couple wants, with guidance from their respective attorneys and the neutral professionals on the Collaborative Divorce team. Generally, the financial separation of assets is done at the time of the signing of the divorce agreement. However, it can occur at any time if agreed upon by the parties.
If a couple has already reached a financial agreement of how the marital assets should be divided, there is no need to wait until the divorce is signed. If each asset is split down the middle, it is an easy task; however the splitting method is not always the best strategy.
Question: Are asset transfers between spouses taxable?
Answer: No taxes are paid on asset transfers between spouses. However, two assets with the same current value may not really be equal. Thus, even if you split assets, you must know the value of the contribution made/invested in each asset. Knowing this “cost basis” will help in the division of assets for “tax impacting” when divided.
Question: How do we know what really is equal?
Answer: For example: The couple owns two brokerage accounts each worth $100,000. Account A started with a value of $75,000. Account B started with a value of $125,000. Are these accounts really “equal” when it comes to splitting assets “down the middle” in the divorce settlement? While it may seem easier to say to your spouse, “You take Account A and I’ll take Account B,” in the long run this could be detrimental to your financial health.
If both accounts are sold today, Account A would have a capital gains tax on the $25,000 profit. At a minimum, that reduces the profit and account balance by $3,750 or 15% of the gain. Account B, when sold, will have a loss of $25,000 and will receive 100% of the proceeds or $100,000. Now do they still seem equal? Account B will have a $25,000 tax loss and potential “carry over” of that loss for future years. This in and of itself is a valuable asset that will help to reduce taxes going forward. Now you can see that all assets are not “equal.”
Question: What about our home? I am planning to keep it, but it’s held in our joint names.
Answer: With the help of an attorney, you can change the ownership/title on the home to your name individually. There is no taxable transfer between spouses. When you do sell, as an individual, you are entitled to a $250,000 exclusion on any gain (what you purchased the home for, plus improvements, less your net selling price). As a couple, you would have been entitled to $500,000 exclusion before capital gains are paid.
Question: What if we plan on keeping the home jointly until our youngest child turns 18?
Answer: Again, you will need an attorney to change the title of the home to joint tenants in common. This way, if one of you were to pre-decease the other, your heirs would get your half of the home.
A qualified financial professional can assist with the tax implications of the division of assets.