Page 663 - TaxAdviser_2022
P. 663
PERSONAL FINANCIAL PLANNING
Dividing up assets
when a marriage ends:
Tax implications
Editor: An often-cited belief is that 50% of nonrecognition rule applies to transfers
Theodore J. Sarenski, CPA/PFS marriages now end in divorce. Regard- between married partners who are not
less of whether this statistic is accurate contemplating divorce and, in addition,
Author: (for first marriages, the divorce rate extends to transfers that are incident to
David Stolz, CPA/PFS more likely peaked at around 40% in divorce. “Incident to divorce” is defined
the United States around 1980 and in Sec. 1041(c) as a transfer that occurs
declined to about 30% by the early 21st within one year after the date on which
century), most CPAs have observed the the marriage ceases or that is related
impact that divorce can have in the lives to the cessation of the marriage. Temp.
Tax advisers can help of friends and clients (or in their own Regs. Sec. 1.1041-1T further defines
divorcing couples lives). A tax practitioner can greatly the term “related to cessation of the
reach an agreement help people in divorce by reducing the marriage” to be a transfer pursuant to
a divorce or separation instrument, if
overall stress of the divorce process and
that divides marital providing the clarity they need to make the transfer occurs within six years after
property equitably good financial decisions for their future. the date on which the marriage ceases.
(Caution: Sec. 1041’s nonrecognition
When dividing assets in divorce,
with respect to taxes the tax considerations can be straight- rule does not apply to transfers made to
and each party’s forward in simple situations but can nonresident alien spouses or to transfers
financial goals. become complex very quickly when the in trust where liability exceeds basis —
Secs. 1041(d) and (e)).
assets are larger and more diverse. This
column focuses on the tax implications Considering Sec. 1041’s nonrec-
of dividing marital property. ognition rule as well as the unlimited
Beginning with the basics, Sec. marital deduction for federal estate and
1041 provides that no gain or loss is gift tax purposes allowed under Sec.
recognized on the transfer of property 2523 for gifts of cash and property to
between spouses. This Code section, a spouse, most property transfers in di-
which was introduced in the Deficit vorce will likely be nontaxable transfers.
Reduction Act of 1984, P.L. 98-369, With the presumption that any
changed the treatment of transfers transfer within six years from the
between spouses, which previously date of divorce (assuming it is under
were treated like sales (referred to as a divorce or separation instrument) is
the Davis rule, after Davis, 370 U.S. 65 treated as nontaxable under Sec. 1041,
(1962)). it is prudent to be mindful of any trans-
Transfers that qualify under Sec. action during this six-year time frame.
1041 do not have to recognize gain In IRS Letter Ruling 8833018, this
or loss for income tax purposes, and became evident when the husband was
the transferee spouse receives car- awarded a right of first refusal to ac-
ryover basis like a gift. Sec. 1041’s quire the family home that was awarded
54 December 2022 The Tax Adviser
