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Gray Divorces and Tax Changes Complicate Retirement

U.S. News & World Report

When people over the age of 50 get divorced, retirement accounts become a key asset, even more so sometimes than the house or alimony. Lawyers and feuding couples are bracing for big changes at the end of 2018 for how these assets get split up.

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While there is always a sentimental attachment to the family home, you have to do the math.

"If the house is saddled with debt, you have to ask, can the spouse fund the expenses?" said Marilyn Chinitz, a divorce attorney at Blank Rome based in New York.

What Chinitz often advises is that the spouse who gets the house turn around and sell it, putting the proceeds into an investment account for retirement.

CONSIDER THE TAXES

Chinitz also makes sure that if there is a split of the sort where one side gets the house and the other side gets what seems like an equivalent amount in an investment or retirement account, that the taxes be figured into the equation.

"If I ask if you would rather have $1 million in cash or $1.5 in a brokerage account. You'd say, I’d rather have $1.5 million. But if there are embedded capital gains, the real value could be $800,000," said Chinitz.

Another one to look out for: IRA or 401(k) assets versus Roth assets. If you have $20,000 in each account, they are not equal because of the tax treatment of distributions - the Roth is worth more because the taxes have already been paid.

Key after this tax year will be the valuation of private businesses, because the tax changes gave out corporate breaks. But higher cash flow might not be known until the following year. Even if you are not selling a business, you still need to assess its value in a divorce.

Especially in the case of pensions, Chinitz cautioned to have a proper legal order for any asset distributions, because the tax penalties could be enormous (see https://reut.rs/2AoJJMB).

"High-net worth clients are going to have attorneys and forensic accountants. That’s not the case for the rest of America," Chinitz said.

"Gray Divorces and Tax Changes Complicate Retirement," by Beth Pinsker was published in U.S. News & World Report on October 15, 2018.