Continuing my basic primer on family law – last time, I posted a
fairly complete discussion on advantages (if any) of filing for divorce
first. This post, I will go into a little detail about
divorce and Taxes.
First, let's start with a common scenario: Wife loves the family home,
it has sentimental value and she does not want to uproot the kids. Husband
has spent years building stock in his incorporated small business and
does not want wife to have access to the stock. Thus, a trade ensues:
he agrees that the wife gets to keep the family home in exchange for keeping
the stock. All free and clear? Let's see what the tax rules say.
The "tax-free transfer rule" (otherwise known as Section 1041
of the Internal Revenue code) makes it possible to transfer an asset that
has cash value without any federal income or gift tax consequences. Moreover,
under this rule, the person receiving the asset assumes the benefits/liabilities
for gain/loss basis and short-term/long-term holding. So, while the transfer
or trade of these items is tax-free, you still assume any taxes that maybe
generated after the transfer.
Tax-free transfers can be made before the divorce becomes final or if post-divorce,
it must be part of the "incident to divorce"; e.g., transfers
that occur within one year after the date the marriage ends or within
six years after that date as long as the transfer is part of the divorce
or separation agreement.
There's more to this topic than I can stuff into a blog post. It is
important to understand that every situation is unique. As a reminder,
if anything you read in any of these blogs triggers interest, I strongly
advise that you get a direct consultation from an Irvine divorce attorney
and/or, in this case, your tax adviser.