Page 665 - TaxAdviser_2022

PERSONAL FINANCIAL PLANNING

Looking at the potential tax liability of all the assets that are being
divided from the marital community can help to make the asset
division more equitable as well as eliminate some
potential surprises for the parties later.

and does not need a QDRO to divide. meet the material-participation test on to provide each party with the best
This is also true for Roth IRAs, rollover their own for any activity they own. A opportunity for financial success in
IRAs, and nonqualified retirement and couple and their advisers would want the future. Advisers working with
deferred compensation plans, as well as to avoid turning a formerly nonpas- one party in the divorce will want
a few others. These accounts can be di- sive activity into a passive activity by to factor in their personal goals and
vided by including the instruction in the virtue of transferring it to a spouse compare them with the cash flow
settlement agreement. These instructions who does not meet the material- that they would be receiving from the
constitute a domestic relations order participation rules. assets awarded to them in the divorce.
(not a “qualified” domestic relations It is not uncommon for a passive Since living on divided assets will be
order) in the same way that property real estate activity to have suspended different from living on the shared
divisions, alimony, and other instructions losses that were not allowed in prior assets as the couple did in the past,
are recorded in an agreement. years. Typically, a disposition of a pas- they will likely need to make some
One planning note is that a retire- sive activity in a fully taxable transac- adjustments to their personal lifestyle.
ment account being divided via a tion allows the deduction of these Preparing a cash flow projection that
QDRO has an opportunity to distribute suspended losses (Sec. 469(g)(1)). How- includes the tax planning from the
funds out of the plan without having to ever, in divorce, a distribution under asset division can provide them with
pay the 10% early-distribution penalty. Sec. 1041 is treated as a gift and not the confidence to make financial
The distribution will be taxable as or- a disposition of the activity. As such, decisions about their future, and it will
dinary income but without the penalty. the suspended losses are added to the help them get started on their new
This can be a good way to generate basis and are not allowed as a future personal and financial lives. ■
some liquidity in a dissolution with lim- deduction. (Community property states
ited other assets. This distribution must would add 50% to the basis, as only
be part of the QDRO instructions and 50% was a gift.)
is not available for IRAs, as they are not Contributors
divided with a QDRO. Toward an equitable division
David Stolz, CPA/PFS, CDFA, CFP,
Since different assets have different is with Stolz & Associates in Tacoma,
Other assets and activities tax treatments, it is unlikely that a
Wash., and the author of Women,
Higher-net-worth divorcing couples complex divorce can ever result in
Divorce and Money: Taking Control
may have other assets, including assets being divided perfectly “equally.”
of Your Finances and Your Future.
businesses, rental real estate, and ad- This is especially true as the parties
Theodore J. Sarenski, CPA/PFS, CFP,
ditional personal assets that can be will typically have certain assets that
is a wealth manager at Capital One/
divided. Each of these assets should they prefer to keep, regardless of the
United Income in Syracuse, N.Y. Mr.
be reviewed for tax issues and op- tax treatment. A good practice is to
Sarenski is chairman of the AICPA
portunities. When dividing passive group assets into similar “buckets” and
Advanced Personal Financial Planning
activities, advisers should also consider then try to equally divide the buckets
Conference. He is also a past chairman
how the income or loss from the asset — retirement accounts in one bucket,
of the AICPA Personal Financial
will be treated for tax purposes in passive activities in another, cash and
Planning Executive Committee and
the future. While the couple are still investments in yet another, and so on.
a former member of the Tax Literacy
married, Sec. 469(h)(5) provides that Then, dividing these buckets as equally
Commission. For more information
the participation of one spouse in a as possible can help to get closer to an
about this column, contact
passive activity will allow both spouses equitable distribution.
thetaxadviser@aicpa.org.
to be treated as participating. After Also, it should be kept in mind
the divorce, each spouse will need to that the goal in dividing the assets is
56 December 2022 The Tax Adviser