Is Divorce Planning a Prudent Strategy for Both Parties?
While it might sound sinister, divorce planning is actually a legitimate technique in many cases. Divorce planning does not mean hiding assets or reducing income to avoid financial obligations. In my book, Frumkes & Vertz on Divorce Taxation, we discuss some of the predominant strategies: shifting income to a lower tax bracket (in order to make more net income available); accomplishing divorce-related property transfers without triggering tax; and getting a handle on business valuation and incentive compensation plans that may come into play. Divorce planning may be a prudent strategy for both routine and high net-worth cases.
Shifting Income to a Lower Tax Bracket
In many cases, one spouse earns more – and is in a higher tax bracket than – the other spouse. The difference is stark in cases involving a stay-at-home parent who has little or no income. Many times, the family can reduce the combined tax liability by shifting taxable income from the high-earner’s tax return to the low-earner’s tax return. This income-shifting is the primary benefit of alimony and spousal support.
To some people, alimony is a dirty word. But realistically, it can be used as an effective tool to reduce taxes and make more net income available. In many cases, the tax savings can benefit both spouses and their children. Alimony can be paid on a temporary basis, to ease the family’s cash flow during the divorce negotiation period, or it can smooth the financial transition that occurs when the divorce is final. Income-shifting and tax reduction are some of the tools we use for divorce planning.