News & Articles

Tax Issues to Consider When Small Business Owners Get Divorced

Posted on Thu, Mar 14, 2019

For many small business owners, their ownership interest is one of their biggest personal assets. What will happen to your ownership interest if you get divorced? In many cases, your marital estate will include all (or part) of your business interest.

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Tags: IRS, Divorce, Small Business

Answers to Your Questions about Marital Status and Tax Returns

Posted on Fri, Jun 23, 2017

When a couple ties the knot or gets divorced, taxes are probably not the first thing on their minds. But many decisions that couples make do affect their tax returns — and the amount they ultimately owe the federal government.

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Tags: Divorce, Taxes, Marriage

Which Parent Gets Child-Related Tax Breaks After Divorce?

Posted on Mon, Mar 13, 2017

Divorce causes tax issues. For example, which parent is allowed to claim a host of valuable child-related tax breaks? Sometimes, but not always, it depends on which parent is allowed to claim the child as a dependent. This article explains what you need to know.

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Tags: Tax Breaks, Divorce, Tax Break

Dividing Assets and Tax Bills in Divorce

Posted on Fri, Oct 14, 2016

When a divorce happens, there are often major financial consequences and some important tax issues too. Here are the tax rules that generally apply when a couple's assets are split up in a divorce property settlement.

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Tags: State and Local Tax, Divorce, Taxes

Seven Reasons to Update Your Will

Posted on Fri, Sep 02, 2016

Even if you have a valid will, you may need to draft a new one for a variety of reasons. A will is an essential part of planning for the future. But don't think creating a will is a one-time proposition. Even if you have a valid document, you may need to draft a new will for a variety of reasons. For example:

1. Deaths - If individuals named (as heirs or executors) have died or they become incapacitated, a will should be reviewed to ensure changes are not needed.
 Where Is It?  

Before it's too late, people should let someone know where their original will is stored. If one can't be found after a person dies, a court may decide it was destroyed. It's a good idea to keep a copy in a safe deposit box, but don't put the original there without checking state law. Some states require that safe deposit boxes be sealed after the renter dies.

Other options include:

  • Store an original will in the office of the county Clerk of the Superior Court. (It is retrieved if the person moves.)
  • Have your attorney and/or your accountant retain the original will. Ask them what will happen to the document if they die, move, or quit practicing.
  • Store the will at home. Of course, it could be lost, destroyed or discovered by an interested party who could deliberately destroy, conceal, or alter it.

2. Assets - Revisions may be needed if the value of assets has increased or decreased significantly, or they are no longer owned. For example, if you specifically leave your home to one of your children, and later sell it, you may want to change the distribution of your other assets.

3. Marriage -
 Wedding bells usually signal the need to review a will. Which assets should pass to your spouse? Are step-children involved? If this is not spelled out in a will, the state will decide. In a community property state, a spouse automatically inherits half of all community property. In most other states, a spouse may receive one‑third to one‑half of the estate, absent any other directions.

Also, keep in mind that an unmarried couple living together may want to leave assets to each other but in order to make an inheritance happen, it must generally be spelled out in a will.

4. Divorce - In many states, a divorce automatically revokes a will or those provisions concerning an ex‑spouse. As a result, if you get divorced, it's best to have a new will drafted. For instance, you might have your former spouse removed as a primary beneficiary. In addition, you may want to change the beneficiary of your life insurance, pension or any existing IRAs. Consider the use of a trust if children from a previous marriage are involved.

You may also want to change your will if one of your children gets divorced.

5. Births - Once parents have children, you may want to consider updating your will to include the names of children. Also, you want to name guardians to care for the children in the event the parents die prematurely. (However, the naming of guardians is not binding by the probate court.) Grandparents might wish to draft a new will concerning the distribution of assets after children are born. Again, the use of a trust may be recommended.

6. Retirement - This event may also trigger the need to make changes to an existing will. For example, many retirees sell their homes and move to other states. But state laws can vary widely. Furthermore, individuals may consider a power of attorney that enables someone else to act on their behalf in the event of certain illnesses.

7. Tax law revisions - The Internal Revenue Code is regularly changed. In fact, the estate tax rules have undergone significant changes in recent years and more changes could occur. A will should be reviewed to take advantage of maximum tax benefits that exist today so it may have to be updated if tax laws change.

Note: In some cases, a will might be amended with a "codicil." However, in many cases, it is best to draft a new will. Your estate planning adviser can guide you on how to proceed.

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Tags: Estate Planning, Assets, Divorce

Divorce Valuations: Active versus Passive Appreciation

Posted on Wed, Jun 29, 2016

It's common in divorce cases for an interest in a closely held business or professional practice to be the marital estate's most valuable asset. In many states, when the owner-spouse brings this asset to the marriage, a valuator may be called upon to distinguish between active appreciation in the business's value (which is generally subject to division) and passive appreciation (which generally isn't).

Appreciating the Difference

Typically, when a spouse owns an interest in a closely held business before marriage, that interest is considered his or her separate property. In many states, appreciation in the value of the interest during the life of the marriage due to the owner-spouse's efforts is considered marital (or community) property. Thus, it's subject to division. Passive appreciation in the interest's value during the marriage retains its character as separate property. (It's critical that state law also be accounted for.)

Passive appreciation may result from a variety of market forces and other external factors, including:

    • General economic growth;

    • Industry growth;

    • Financial changes, such as in interest rates, markets or credit policies;

    • Legislative or regulatory changes;

    • Demographic trends; and

    • Consolidations and other changes in the competitive landscape.

Active appreciation, on the other hand, is attributable to the owner-spouse's active management of the business.

Example: When Sue married John, she owned a parcel of undeveloped land worth $300,000. When they divorced ten years later, the land remained undeveloped, but its value had increased to $1.3 million as a result of changes in the local real estate market. The $1 million in growth during the marriage is passive appreciation.

But what if Sue built an office building on the property and marketed the space to local businesses? What if the property was worth $4 million when Sue and John divorced? Clearly, a significant portion of the property's increase in value would be attributable to Sue's efforts, constituting active appreciation that may be subject to division.

In the case of real estate, allocating the growth in value between active and passive appreciation may be relatively straightforward. In this case, if undeveloped land in the same location would be worth $1.3 million, then arguably the additional $2.7 million in appreciation would be attributable to Sue's active efforts.

This is a simple example to illustrate the difference between active and passive appreciation. Obviously, real-life situations can be far more complex

The Line Is Not Clear

The line between active and passive appreciation becomes blurred, however, when a business is involved. After determining the value of the business at the beginning and end of the marriage, a valuator might use econometrics or other statistical methods to analyze and quantify the impact of various passive factors on business growth.

Among other aspects, the valuator will consider:

1. Whether property subject to passive appreciation changes its character,

2. The degree of the success of management efforts by an owner-spouse, and

3. The record of business growth and the level of growth attributable to management efforts.

The remaining appreciation in value is classified as active, but the valuator's job isn't done yet. Depending on the nature of the business, the valuator may also need to determine how much of that active appreciation is attributable to the owner-spouse's efforts and how much, if any, is attributable to the efforts of others.

The Inflation Myth

Owner-spouses sometimes argue that a business's growth during marriage is attributable primarily or exclusively to inflation and, therefore, is passive. Suppose, for example, that a business is valued at $5 million at the beginning of a marriage and at $10 million when the marriage ends 25 years later. Assuming a 3 percent inflation rate, $5 million would be worth more than $10 million at the end of the marriage by virtue of inflation alone. Therefore, an owner-spouse might argue, the entire amount of appreciation is passive.

The fallacy of this argument is apparent when you consider that, if it were valid, all businesses would grow at least at the rate of inflation. In the real world, of course, many businesses experience stagnant growth or fail. Indeed, studies of public company stock prices show that in most cases there is little, if any, direct correlation between inflation and business growth.

A Critical Distinction

Distinguishing between a business's active and passive appreciation can have an enormous impact on how property is distributed in a divorce. It's important for attorneys to understand the need for sophisticated valuation techniques in making this distinction. Valuators also are instrumental in challenging simplistic arguments such as the inflation theory.

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Tags: Divorce, Valuation, Business Valuation, Interest

Reduce Contention and Cost in a Divorce with a Joint Appraiser

Posted on Thu, Sep 18, 2014

When a business owner is getting a divorce, determining the value of the business interest to include in the marital estate can be one of the most contentious and time-consuming issues. Rather than hire separate experts to duke it out in court, many spouses opt to hire one joint appraisal expert.

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Tags: EHTC Article, Divorce, Newsletter, Articles, Business Valuation

Can Pension Benefits Be Deducted as Alimony?

Posted on Sun, Jul 13, 2014

When married couples split up, the terms of the divorce or separation agreement can have a major tax impact. For example, any amounts paid for alimony are deductible by the payor and taxable to the recipient.

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Tags: EHTC Article, Tax Court, Alimony, Divorce, Newsletter, Articles, Taxes, Pension Benefits, Child Support