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Virtually everyone in Michigan has heard the declaration that the only two certainties in life are death and taxes. Even so, when it comes to property division,many couples fail to consider the tax implications. It may be beneficial to both parties to look at the value of each asset after taxes.
For example, it might seem equitable for one party to receive the marital home, which has $500,000 of equity in it, while the other spouse receives a retirement account with a current balance of $500,000. However, withdrawals from the retirement account are taxable, which could significantly reduce its value. The house, on the other hand, could qualify for a capital gains exclusion, which would make these two assets unequal. Each asset will need to be reviewed to ensure that taxes will not cause an asset to be incorrectly valued.
Another impediment to ensuring a fair and equitable settlement could arise by allowing a Michigan court to decide what assets each party receives. Judges may not consider taxes when making their rulings. In the aforementioned example, the court would most likely rule that the division is equal. In that scenario, one party would end up being dissatisfied. When parties negotiate their settlement outside the courtroom, they have more freedom to take the valuation of an asset — including how it will be affected by taxes — into consideration.
Property division in a divorce can be a challenge. However, with the proper preparations and considerations, each party can walk away feeling as though he or she was treated fairly. Moreover, each party could have a better chance at successfully starting over on his or her own.
Source: CNBC, “Not always a rose: Avoiding thorny asset-liquidation issues in divorce“, Deborah Nason, June 14, 2014