Baby boomers continue to be the single fastest-growing group seeking divorce, and given their age, they tend to have more complications, including greater wealth. High asset division for gray divorce creates complications that should be handled with advanced planning.
For example, the two largest assets parties in this category will hold will be real estate and investment funds. When dividing these assets in divorce, it is a mistake to simply think one can swap dollar for dollar without regard to the asset, because the tax consequences could vary wildly. A house purchased jointly during the marriage and sold 15 years later but titled to only one spouse likely will result in a capital gain, taxed at the rate of 15%. The same would hold true if taking the sale of a stock portfolio with a capital gain. The difference, though, is that the tax laws allow an individual to exclude the first $250,000 of the gain on a house, with no such exclusion for stock sales. Thus, the spouse who claimed the house nets more on a dollar for dollar exchange of equity in the house for stock.
In a different scenario, better planned, the spouses could agree to sell the marital residence jointly and file jointly so they could claim $500,000 of the gain on the house. In this scenario, the spouses elude the bulk of the capital gains (if not all), and split the equity of the house, and if they both use their share to buy a new house, they also avoid paying income tax on the proceeds. This type of planning in advance yields both parties more money and maximizes the gain from the marital estate.
Retirement accounts look like ready cash, particularly to gray divorcing spouses, but they should resist the temptation. All retirement accounts have early withdrawal penalties, and it seems ridiculous to pay that fee when these spouses are close to retirement. Better to wait and allow the fund to gain more. Also, if the IRA is not a Roth (where tax is paid at the time of contribution and tax-free at withdrawal), spouses could have taxable income issues. If a spouse feels a need for funds, a loan (given very low-interest rates now) might make more sense than draining some retirement accounts.
Perhaps the biggest consideration in a gray divorce involving professionals and a long marriage will be the value of the professional license. If a spouse earned a degree (say dental school) during the marriage and opened a practice, and the other spouse gave up a career to help care for the children or otherwise support the dentist spouse, the court could value the contribution of the spouse to the license and award that value in one of several ways, including a cash payout or a percentage of the practice. It likely will be necessary to hire vocational experts to get a precise value of the practice and to assure that all funds have been properly accounted.
High asset divorces usually require special care because of the number of tax laws that get impacted by the value of the estate. No one in a high asset gray divorce should agree to any settlement without having an experienced attorney and forensic analyst evaluating all the tax implications of resolving distribution of these high assets.
If you have questions about high asset gray divorce, contact us – we can help.