When a couple has a significant number of high value assets, divorce can become exceptionally complicated. Thinking about your financial future in this case is crucial, as the decisions made about how to divide property can have lasting consequences. If you are considering a high net worth divorce, you may want to consult with an experienced Arizona divorce attorney with Sullivan Shick to learn more about the implications the divorce may have on your finances, taxes, and estate plan. Call (480) 719-2558 to schedule an appointment and review your case.
Get Familiar With Marital Finances
In many high net worth marriages, one spouse often handles the marital finances. This means that the spouse is familiar with how much money the couple has, how much debt they share, and what kind of assets they have. The other spouse frequently has little to no knowledge about any of this information and that can prove problematic upon divorce. Not knowing about the marital finances and shared assets can allow the other spouse to hide assets, shift money to new accounts, and otherwise attempt to avoid an appropriate division of assets.
If an individual considering divorce does not handle their marital finances, they should take some time to start learning about them before telling their spouse they want a divorce. They should review bank and credit card statements, life insurance policies, trusts, business documents, property records, and any other financial documents they can access. They should also familiarize themselves with marital debts as these are also frequently split in divorce.
Arizona’s Approach to Asset Division
A.R.S §25-211 is Arizona’s law regarding property acquired during a marriage. This law states that Arizona is a state that views marital property as community property, which means that all the assets acquired during the marriage are considered to be equally and jointly owned by both spouses and are divided equally during a divorce. Not everything can be split equally, though. In cases of an imbalance in the asset division, the spouse who gets the larger share of the assets may be required to make equalization payments to help alleviate the imbalance.
Couples in a high net worth divorce may also want to discuss the tax implications of the divorce and various asset division options with an attorney. The division of assets, alimony, and transfer or sale of certain assets may impact each spouse’s tax situation differently. Understanding the potential impacts may cause individuals to reconsider how a particular asset is handled. Additionally, if the couple has a prenuptial or postnuptial agreement in place and the agreement is enforceable under A.R.S. §25-202, any assets included in the agreement are protected from division and belong to the spouse named in the agreement.
Potential Tax Implications
Every individual’s tax situation is different. Speaking with a divorce attorney, accountant, financial advisor, and other experts can assist the individual in fully understanding the potential tax implications a high net worth divorce will have for them. However, there are three specific tax situations that will impact most people in a divorce with significant high value assets.
Spousal Support
The Internal Revenue Service (IRS) made changes to how spousal support, or alimony is handled for tax purposes. For any divorce or separation that has an agreement dated December 31, 2018 or later, the payor cannot deduct spousal support from their taxes and the recipient is not taxed on the support they receive.
For divorces or separations that had agreements before December 31, 2018 but modify those agreements after that date, the payor will no longer be able to deduct spousal support and the recipient will not be taxed on the support received. If an individual is uncertain about their tax situation regarding spousal support, they should consider seeking advice from an attorney or accountant to ensure they are in compliance with IRS regulations.
Capital Gains Tax
Certain marital property, such as real estate, can trigger capital gains tax if it is sold. In a high net worth divorce, some couples may have multiple pieces of real estate that they divide between them. Others may only have the marital home and feel that selling it is the best option. Before doing so, they should ensure they understand the tax basis of their shared asset and strategically plan any sales to ensure minimal tax liability.
Retirement Account Penalties and Taxes
Retirement accounts often have strict restrictions on when and how money may be withdrawn without taxes or penalties. Unfortunately, asset division during divorce is typically not an allowed withdrawal. Yet it may be necessary if the court orders a divorcing couple to split one or more retirement accounts.
To avoid taxes and penalties, the court must issue a Qualified Domestic Relations Order (QDRO). This order creates the right for an alternate payee to receive all or a portion of the benefits in the account. Without a QDRO or if the money is otherwise transferred incorrectly, it may have unintended financial consequences for both spouses.
Community Property Boundaries
A common misconception that some people have is that since they are married, every single item they own is jointly owned with their spouse unless there is a prenuptial or postnuptial agreement that states otherwise. However, this is not entirely accurate. While it is generally true that any assets acquired during the marriage are community property and therefore jointly owned, not everything is.
Pre-Marital Assets
Most people already own at least a few assets when they get married. Those assets remain the sole and separate property of that individual after the marriage. However, if the individual co-mingles their pre-marital property with marital property, it may no longer be solely their own. Examples of commingling separate property with joint property are depositing money from a pre-marital bank account into a joint marital bank account, using marital funds to make improvements to a pre-marital home, or using marital income to maintain a pre-marital home.
Property Acquired By Gift, Devise, or Descent
Sometimes property that is acquired during the marriage is also separate property. Property that one spouse acquires by gift, devise, or descent is separate property as long as it is given solely to one spouse. Gift means that the asset was given as a gift, such as a Christmas gift given by a spouse. Devise means an inheritance received through a will when someone passes away. Descent means an inheritance received when someone passes away without a will and the inheritance has come to the individual through intestacy.
Property received through any of these methods is considered separate property unless both spouses are named. Additionally, like pre-marital property, if the individual co-mingles the gift or inheritance with marital property, it may then become community property rather than separate.
Property Acquired After Filing for Divorce
From the wedding day forward, assets acquired are considered marital property. However, when the couple decides to divorce, they often need to purchase or otherwise acquire new assets as part of living a new life apart. This may include purchasing a new home, car, or opening a new checking, savings, investment, or retirement account. They do not want it to be community property, though. Fortunately, the law provides a clear answer to this.
The same law that defines community property also stipulates that once one spouse has legally served the other with the petition for dissolution of marriage, any assets acquired are considered separate property. However, even if an asset is purchased after the legal paperwork has been served, there is still the potential for it to complicate the divorce. If the individual uses community funds to pay for separate real property (such as a down payment toward a mortgage or improvements on a separate residence), they may be required to reimburse their spouse for the community money spent. If you are considering purchasing an asset but are not sure if the money you will use is community funds or separate, you may want to consult with a divorce attorney at Sullivan Shick to review your circumstances before moving forward.
Can Community Property Be Sold During Divorce?
Generally, until assets have been evaluated, divided, and fully transferred to the correct spouse, nothing can be sold. This is done to ensure that neither spouse can try to hide assets by selling them to someone they know with the intention to buy them back later or hide the money received from the sale.
However, there are rare instances when the court will allow exceptions. One possible exception is selling an asset to pay off significant share debts that make the division of assets more difficult. If an individual believes this may be necessary, they may wish to consult with their attorney first to learn more about the tax implications, as well as what they may need to do to convince the court to allow the exception.
Are Retirement Benefits Community Property?
Retirement accounts can be a complicated asset to sort out in divorce. Any retirement benefits derived from wages earned during the marriage are subject to division during the divorce. This includes qualified pensions, 401(k)s, and individual retirement accounts (IRA). However, depending on the age at which the couple married, some retirement accounts may have existed prior to the marriage, with more contributions being made during the marriage. In this case, there will be a mixture of premarital and marital contributions.
If this is the case, experts may be required to go over the retirement accounts and determine how much of the benefits are community property and how much is separate. This is an additional expense and may also cause the high net worth divorce to take longer.
Hire Experts for Complicated Assets
In a high net worth divorce, there are often multiple complicated assets. Retirement accounts, businesses, real estate, stock options, and other significant assets are not easily divided. They may require appraisals, valuations, or other steps to determine their value.
Individuals should consider hiring the appropriate experts to ensure that these types of assets are properly valued so that they receive their share of these assets. Experts that they may need to hire include appraisers, forensic accounts, tax advisors, or financial planners.
Update Estate Plan After Divorce Becomes Final
A.R.S. §14-2804 strips former spouses and their relatives of their beneficiary designations in wills, trusts, bank or brokerage accounts, IRAs, and other legal documents. This means that if an individual is divorced and their estate plan still lists their ex-spouse as a beneficiary, those designations are treated as though the ex-spouse died first. There can be exceptions to this, however.
Additionally, when the designations are treated as though the ex-spouse died first, the probate court determines who should receive those assets instead based on alternate designations and residuary beneficiaries. By updating an estate plan after divorce, the individual ensures that they remain in control of who receives their assets after their death. By updating their estate plan, if they do wish to leave anything to their former spouse or to a relative of their former spouse, such as a stepchild or a beloved niece or nephew, they can ensure their estate plan reflects that intention so that the individual receives the inheritance as intended.
How an Arizona Divorce Attorney Can Assist You With Your High Net Worth Divorce
Any divorce can be complicated. Those with significant, high value assets can be even more complicated. Looking ahead to your financial future is important as you divide assets and debts, consider the timing of your divorce, and other details. A knowledgeable Arizona divorce attorney may be able to assist you by offering advice on taxes, keeping separate and marital property separate, hiring the appropriate experts, finding hidden assets, and other aspects of a high net worth divorce. Call Sullivan Shick at (480) 719-2558 to schedule your consultation and review your unique case.