Marital dissolution can have severe financial consequences if there is insufficient attention given to asset preservation in divorce. One of the best options is a pre- or postnuptial agreement, which may be part of a business succession and estate plan. Still, many couples do not recognize the need for asset preservation in divorce until they are facing a marital separation. It is never too late, but the options are more limited when a divorce is imminent. In my book, Frumkes & Vertz on Divorce Taxation, we examine the principal techniques for achieving asset preservation in divorce.
Through careful planning and cooperation, spouses who are separated or divorcing can minimize their tax liabilities, which helps with asset preservation in divorce. For instance, alimony is an effective way of shifting taxable income from the payor’s tax bracket into a lower tax bracket for the alimony recipient. By reducing taxes, there is more net income available to share. This technique is effective when the payor earns more, and is in a higher tax bracket, than the recipient. It also requires the payor to overcome the distaste of paying alimony.
Along similar lines, divorcing spouses must consider how to deploy tax deductions and credits most effectively. A custodial parent might want to retain the children’s dependency exemptions to reduce taxes, but the other parent might get a greater benefit if he or she is in a higher tax bracket. On the other hand, if the exemption would be phased out, then it should be retained by the parent who can actually use it.