It is a common and basically sound policy in mediation for couples to trade off one asset for another.
“I’ll take the Prius and you take the brand new Lexus SUV.” What might look like a crazy swap might actually be a smart move for both parties. One person wants the luxury of the Lexus. The other party is more concerned with great gas millage.
And the most important part of this trade is that each party is fully aware of what they’re getting. This is not always true when parties exchange financial assets. After taxes, hidden costs, and penalties, one $600,000 financial asset might be an apple, another $600,000, an orange.
Apples and Oranges: How Couples Commonly Confuse Them
All Support Is Not Created Equal: Maintenance (alimony) is taxable to the person who receives it and tax deductable to the person who pays. The opposite is true with child support. There is no tax deduction for the payor, and the person receiving it is not taxed. If the person paying support is in a much higher tax bracket, both the parties might find it advantageous to load up on more maintenance than child support. But talk to a tax professional: You must structure your maintenance payments within a certain timeframe, or the IRS will disallow your alimony deduction as disguised child support.
Basic Discussions Must Involve Basis: Let’s say you own a marital house worth $600,000 and a stock portfolio valued at the same price. Which is the better deal? Depends on who is getting slammed with taxes: If you’ve paid only $400,000 for the stocks, there are capital gains taxes on the $200,000 profit. Whereas a house that cost $400,000 and has been a couple’s principal residence, can under the right circumstances be exempted from at least $250,000 of capital gains ($500,000 potentially for a couple).
Will My Asset Work for Me, Or Will I be Working for My Asset? Yes you’re attached to your home. And it feels like a good financial deal to take the house, valued at $600,000, as a swap with your ex for nearly the same amount in cash. Your reasons: the house provides you with a place to live; and you’re betting it will increase in value faster than interest rates rise on bank Money Markets or CDs. But no savings account ever required a new roof, or a paint job, or hiring a gardener to keep its value. Are you better off just splitting the proceeds from the house with your ex and turning into a worry-free renter?
Don’t Turn a Good Pension into a Bad Apple: Pensions are often the most lucrative assets a couple owns, aside from their house. But their valuation is tricky. Each pension, especially annuities, comes with their own set of rules that give them a present day value, and the right way (if at all) they can be divided without triggering tax consequences. And if you think that your spouse is going to pull out a chunk of money from his or her IRA and just write you a check, then you’re in for a rude surprise in terms of taxes and financial penalties. Follow the tax rules closely with pensions and realize that if you’re forty and need money tomorrow, you might be better off trading the pension that kicks in only when you’re six months shy of sixty for some immediate cash.
Just as there are no two financial assets that are exactly alike, every couple we see in mediation has unique financial needs. We help people in mediation discuss how they want to split up their financial assets, considering what each asset is actually worth (with the help of a good financial and/or tax expert). And considering what you anticipate your financial needs are right now and in the future.
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