Three Things You Must Do Before Divorce

By Jennifer Paine

Attorney, Cordell & Cordell

This is part 1 of a two-part series on the professionals you must consult before finalizing your divorce. In Part 2, I revealed the third professional you probably overlooked even though it deals with one of the most heated areas of contention in a divorce.

Wait! Don’t sign that divorce decree just yet!

There are three things most people forget to do before finalizing their divorce. It is these three things – well, actually it’s three people – that if you didn’t consult before your divorce could have a damaging impact and make your good divorce go bad.

Who are they?

 

1. The Tax Professional

Spend a little extra cash now and have your tax professional review your divorce decree before you sign it. Tax law, like divorce law, is a specialized area of practice. It is also an evolving area of law, and you will want the most accurate, current information available.

You will not offend your attorney, and, if you have a good attorney, your attorney will consult a tax professional with you. Divorce lawyers want to make sure our clients take advantage of tax benefits and avoid tax consequences whenever possible.

If you do not, the consequences could be costly.

Consider this. Transfers of property between spouses or former spouses incident to their divorce are generally tax free. See IRC 1041. This means the transferor spouse does not have to report a discharge of indebtedness, nor the transferee spouse income, for the transfer when filing the tax return for the year of the transfer.

This does not mean, however, that there are no tax consequences. Under IRC 1041, the transferee spouse takes the transferor spouse’s basis and holding period in the property. When the transferee spouse disposes of the property, the transferee spouse pays taxes on the entire disposition. This is, in a sense, a delayed tax.

For example, if during the divorce each spouse agreed to be responsible for 50% of their stock’s $50,000 appreciation, if this language is not included in the divorce decree, after divorce the burden is 100% the transferee spouse’s.

The most important thing for you to do is plan ahead. Have you tax professional review the final draft of your decree before you sign it, and ask for a thorough assessment from a tax perspective. It is better to pay for these services now than to find out 10 years from now that you have to report $50,000 of gain.

The court will not listen to you complain that you did not anticipate the tax consequences. As the Michigan Court of Appeals said of an ex-husband making that argument, “His claim regarding unexpected income taxes is, of course, without merit. He either knew, or should have known, of the income tax consequences of his actions. . . .” Couzens v Couzens, 140 Mich App 423; 364 NW2d 340 (1985). [1]

 

2. The Appraiser

Appraise your home and personal property – the couple bucks and a few hours’ intrusion in your home could mean a couple thousand extra dollars in your pocket. Do not assume that a bad economy means your home has no equity. We’ve received appraisals indicating homes with equity of $60,000 and more.

Moreover, every item of personal property has a value. Yes, in isolation the value may be small ($5 for all of the plants, $20 for the yard tools), but combined, they add up!

A fully furnished, three bedroom, two bathroom home with a family computer, a washer and dryer set and a tool shed would have, even at garage sale prices, between $5,000 and $10,000 worth of personal property.

Half of that money is presumably yours, possibly thousand of dollars you would have otherwise left with your ex. You may retain a local auctioneer or estate salesman to appraise that property in one afternoon for a few hundred dollars.

This is part 1 of a two-part series on the professionals you must consult before finalizing your divorce. In Part 2, I revealed the third professional you probably overlooked even though it deals with one of the most heated areas of contention in a divorce.

 


[1] You should contact a tax attorney and/or your tax advisor for a thorough assessment of the tax laws applicable to you. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, be advised that any federal tax advice contained in this article was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Always consult a specialist for thorough tax advice.

 

Jennifer M. Paine is an Associate Attorney in the Detroit, Michigan office of Cordell & Cordell. She is licensed to practice in Michigan, and has been admitted pro hac vice in Illinois, Ohio, and the United States Court of Federal Claims.

Ms. Paine received her BA in English and Mathematics from Albion College and graduated Summa Cum Laude. She received her Juris Doctorate from MSU College of Law and graduated Summa Cum Laude.

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