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Can I avoid unfair taxation after divorce?

The greater the assets within your marriage, the more complicated the terms of your divorce are likely to be. Specifically, many spouses approaching divorce worry that separating their assets may leave them vulnerable to taxation draining away resources that previously enjoyed protection within the marriage. There are no simple answers to this concern, since different types of assets are subject to wildly different taxation, but it is certainly an important factor to consider when negotiating a fair divorce settlement.

The good news is that the law generally allows spouses to transfer property between themselves because of divorce without triggering taxation. However, this is generally contingent on being able to demonstrate clearly that the divorce was the reason that the transfer took place, and does not necessarily protect against capital gains taxation.

One common area that requires special attention is any transfer that might entail a capital gains tax. In such a situation, one spouse may buy out the other spouse's share in an asset that has risen in value since it was purchased. While the purchasing spouse may face liability for the increase in value of the asset, the other spouse may not face taxation for the funds received.

These matters are never simple, and a detailed understanding of the nuances involved is crucial to negotiating a truly fair settlement. Without proper guidance, you could end up with a settlement that looks good on paper but sticks you with a surprising tax bill come the next tax season. It is wise to enlist the guidance of an attorney who is qualified to handle even the most complex asset division and keep your rights and privileges protected throughout the process.

Source: Findlaw, "Divorce, Taxes, and Your Estate Plan," Brenda G. Wong, accessed July 14, 2017

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