Property Division and Tax Concerns in Wisconsin Divorces
When spouses decide to divorce, child custody, placement schedules, and what will happen to the marital home become serious considerations. Maintenance (formerly called Alimony) and division of joint banking accounts and other assets also become a priority. One issue many couples fail to thoroughly discuss, however, is how the federal tax code will impact decisions made both during and after a divorce.
In some divorces, a divorce attorney may suggest a Certified Public Accountant (CPA) be hired to assist. The CPA may either serve as a forensic accountant and assist with the location of assets and liabilities, or the CPA may serve as an advisor and explain the tax implications of separating assets and debts. In the vast majority of cases, your attorney will be able to advise you regarding these issues.
The division of marital property in Wisconsin
In a divorce, all property—which includes both assets and debts—must be divided. Typically, any property that is acquired after the parties marry is clearly marital property. Wisconsin is a community property state, meaning that marital property is under concurrent ownership. Even each spouse’s earnings are considered marital property in a divorce. Property that was acquired by a spouse before the marriage is still considered marital property, but the court has discretion over whether that property may remain with that spouse. For example, a home that a spouse owned before the marriage will be deemed marital property, whether the owner put the other spouse’s name on the house or not. The court can decide whether to give that spouse a credit for their premarital share. Property that is inherited or gifted to a spouse from a third party may also be categorized as separate property where it has remained separate and not comingled with marital property.
Any transfer of property may be subject to income taxes or gift taxes, depending on the individual nature of that transfer. However, the division of property that occurs as a part of the divorce is typically not subject to such tax.
Each spouse must be transparent about all assets and debts whether acquired during the marriage or not. Hiding assets may land a spouse in a lot of trouble with the courts. For example, spouses cannot transfer a piece of property to a third party in anticipation of the divorce in an attempt to hide it from the other spouse. The attorneys typically advise divorcing spouses to create an inventory of all property that clearly lays out the value of each item. Intangible items, such as degrees, should also be included in this list.
Is one spouse hiding property?
Any transfer of property that occurs before or during a divorce will come under scrutiny by the courts. Since some spouses may sell or transfer property without any dishonest intentions, courts typically ask the following questions about the transaction:
- Was consideration exchanged for the property?
- How big was the property in comparison to the spouse’s total wealth?
- At what point in time did the transfer occur?
- Were the spouses on good terms at the time of the transfer?
- What is the source of the property that was transferred?
- Did the spouse retain any power or rights in the property that was transferred?
After examining the answers to these questions, courts will make a determination as to whether the transfer was unethical.
Specific tax concerns
The transfer of property between divorcing spouses typically does not provide for taxable gain or gift tax liability. An estate tax marital deduction is not permitted for transfers to a former spouse.
Under relevant laws, a transfer of property will be considered as part of a divorce if it occurs no later than one year after the marriage ended and is noted in a divorce or separation order.
Maintenance (formerly known as Alimony) payments are typically deductible by the payer and taxable to the recipient. Maintenance does not include child support or property settlements. Spouses may spend a fair amount of time arguing as to whether a property settlement or an award of maintenance should be ordered in the divorce. In some cases, the paying spouse must take out life insurance and name the ex-spouse as the beneficiary to ensure that any remaining obligations are met after the payer’s death.
The advice of a skilled Wisconsin divorce attorney is needed for property division matters
If you are considering a divorce, or if you have been served with divorce papers, contact Bandle & Zaeske today to schedule a free consultation. Our Wisconsin divorce attorneys have the knowledge and experience you need to protect your best interests and your financial future. We proudly serve Washington, Ozaukee, Waukesha, Milwaukee and other surrounding counties. To schedule a consultation, call (414) 359-1424 or contact us online.