Divorce and Taxes: Avoiding the Pitfalls

Wall, Ginita
August 2002
Journal of Financial Planning;Aug2002, Vol. 15 Issue 8, p78
Academic Journal
This article discusses how financial advisers can guide divorcing couples in the U.S. toward accurate and complete financial and tax advice. To effectively advice clients during this difficult process, planners must consider three major factors, namely, Client's situation, goal and personality, family law and tax law and the effect of divorce on the clients. Clients must know how to protect themselves from the U.S. Internal Revenue Service at this crucial time. The basis and general rule for transferring property is that a spouse' adjusted basis in property transferred to the other spouse or former spouse becomes the recipient's basis, under section 1041(b), even if the recipient is required to pay the transferor for the property. Another important consideration for clients who divorce is division of the retirement plan, 401(k) or stock options. Retirement assets, whether defined benefit, defined contribution or IRAs, can be divided like any other part of the marital estate. Generally, a Qualified Domestic Relations Order (QDRO) will allow an alternate payee to remain in the retirement plan or opt for a present division, which he or she may choose to roll over in an individual retirement account (IRA). In the transfers of stock in a business, although both spouses could continue to own the stock of a business, ownership is typically awarded entirely to just one person. Divorce is unquestionably one of the most difficult events that a person can go through. While planners can seldom help their clients down the emotional road that they travel at the end of marriage, planners can certainly help them make solid, reasonable decisions that enable them to rebuild a solid personal financial foundation.


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