The financial implications of a separation are not lost on anyone who has ever experienced the end of a marriage. However, Connecticut residents may be surprised to know that a divorce can play a role in how taxes will influence the dissemination of assets. This is of particular interest to couples with a high net worth, as they stand to lose more in an unfavorable taxation situation.
Connecticut is a so-called equitable distribution state, which means there are fewer guidelines than in community property states where distribution is based on who owned what before and during the marriage. In an equitable distribution state, the general rule is assets will be divided according to "fairness" in the eyes of the divorce court. One way to ensure an equitable split in this scenario is to agree to a division of assets out of court, which can then be signed off on by the presiding authorities.
Many assets fall under the category of the "tax-free transfer" which means that while dividing assets, including cash, the assets are not federally taxable. A notable exception to this rule is retirement funds or IRAs, as they are already considered to be tax-advantaged. It is important to fully understand how the tax laws operate at the state level in order to ensure neither party is unfairly taxed on assets going to the former spouse.
As a general rule, Connecticut residents will agree that knowledge is power -- not in a punitive sense, but as a tool to ensure an equitable distribution of assets in a divorce proceeding. Understanding rights and responsibilities of both parties before entering negotiations can go a long way toward smoothing the road. This will allow both parties to move forward, confident their financial situation has been equitably dealt with and a comprehensive settlement achieved.
Source: marketwatch.com, What's even worse than divorce? The taxes, Bill Bischoff, Dec. 3, 2013