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Tax Considerations in Divorce Agreements, Are Your Intended Results Reflected?

December 1, 2016 Written by Lynne C. Halem

Divorce is a time of major decision-making…

Divorcing couples quickly realize that they need to determine how to divide their assets, how to structure custodial arrangements for their children, and how much support will be exchanged.  Most divorcing couples come to the table knowing that division of assets, time with children, and money are all areas central to reaching a settlement.  Others are aware that they also need to address questions pertaining to health insurance coverage and even life insurance.  Few, however, consider the tax implications of their agreements.

At the Centre for Mediation and Dispute Resolution, we suggest that all agreements need to include consideration of tax implications, lest you realize tomorrow that the agreements you reached do not provide you with the moneys you anticipated at the time of settlement.

The following represents a sampling of areas with tax implications, which should be included, where applicable, in your divorce settlement:

Child-Related Taxes:

Real Estate Sales

Investment Gains and Losses

Retirement Funds

Life Insurance Policies (w/Equity)

Term Life Insurance

Transfer of Property

Support

It is important to note that the terms of your agreement can result in a taxable event unintended by the parties.  Therefore support payments need to be structured with full awareness of the tax pitfalls and implications under various situations.

The above list constitutes only a smattering of the many tax implications inherent in each couple’s divorce settlement.  In order to protect both spouses from unpleasant surprises, it is crucial for both parties to understand what they are receiving and what they are really giving up in fashioning their agreement.  Often parties can create better, more beneficial agreements, by “giving” to their spouse in areas that will not have a negative impact on their own settlement. The problem-solving element of mediation presents an ideal forum for analyzing tax implications and weighing their “value” to each party…. In the end, the parties’ agreement should focus on tax savings and advantages to be achieved by both parties sharing the common goal of optimizing the “goodness” of their agreement for the family.



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