Even when the process is going well, divorce can be a financially stressful experience. Seemingly small mistakes can significantly impact one’s finances, leading to a less than equitable division of marital assets. Taxes on the future sale or withdrawal of certain assets are a commonly overlooked area during property division.
Take for example a Minnesota couple with two holdings of the exact same stock, both worth $100,000. It might seem reasonable for each spouse to simply keep one holding each. However, if the first holding was purchased for $45,000, it would be subject to a 20% capital gains tax when sold. If the second were purchased for $90,000 there would only be about $2,000 in taxes. The spouse with the first holding would only receive $89,000 while the other would get $98,000.
A similar problem can be found when dividing retirement savings. If that same couple has two retirement accounts with balances of $100,000 in each, they may think the same as they did with the stock — each spouse should just keep one. If one of those accounts is a Roth IRA and the other is a traditional IRA, the spouse with the Roth account will actually get more because the money has already been taxed. Money in traditional IRAs is taxed when withdrawn, meaning that it is ultimately worth less.
One should not always take the worth of an asset at face value. Marital assets often have hidden tax consequences that may not be discovered until in the future when it is too late to make changes. This can result in tens of thousands of dollars in unintended losses and may skew one’s property distribution, which in Minnesota should be equitable. Speaking with an experienced counsel who understands the unique issues associated with high asset divorces may be helpful in this situation.