When 50/50 Isn’t Fair: Splitting Marital Assets with Tax Intelligence

Susan Copeland, CFP®, CDFA®

 Avantax Senior Financial Planner 

Would your client be happy if they heard their ex-spouse took a vacation using the credit card miles they earned during their marriage? 

We’d venture to guess the answer is a resounding “no.” 

Unfortunately, assets like these are often overlooked when marital property is simply split “50/50” between parties during a divorce. Although it may not be a fun topic to discuss, failing to help your clients plan for this potential scenario can result in a less than desirable financial outcome. And with 43% of first marriages dissolving (not to mention second and third marriages failing at a far higher rate) it’s only a matter of time before a client turns to you, their trusted financial professional, to wisely guide them through this very complicated and emotional life event.

So, what can you do to help ensure your client gets their fair share of the marital assets when divorce is on the table? 

Pretax & After-Tax Considerations 

The focus of nearly every divorce is evenly splitting assets. But Avantax Planning Partners℠ Senior Financial Planner and Certified Divorce Financial Analyst (CDFA®) Susan Copeland has witnessed firsthand how a 50/50 split isn’t always fair. 

“Throughout my tenure in financial services, I’ve come across several recently divorced clients whose attorney or prior financial advisor split assets straight down the middle without regard to the tax implications.” 

To help ensure your client is getting a fair shake, it’s important to look beyond dollar amounts and ask this question: Have taxes already been paid or will my client be stuck paying the associated taxes on these accounts/assets in the future? 

For example, most qualified retirement assets are funded with pretax dollars while cash accounts (money market, checking and savings accounts, etc.), are funded with after-tax dollars. If an attorney or financial advisor simply plots a 50/50 split with one spouse being awarded mostly pretax accounts, they could unknowingly be taking on a considerable tax burden that effectively reduces their “half” of the assets. 

That doesn’t sound very fair, does it? 

“Help your clients understand the basic differences between account registration types and the impact taxes can have on their overall financial picture,” Susan suggests. “Although it might sound simple to a financial professional who deals with pre- and after-tax accounts every day, the concept may be unfamiliar to the average person – not to mention a spouse who didn’t regularly handle the household’s finances.” 

Bringing Hidden Assets to Light 

Once the larger, more obvious assets are accounted for, it’s important not to forget about those that might not be top-of-mind for a client during such a tumultuous time. 

“Some of the most important documents I receive when guiding a client through a divorce is the financial affidavit and balance sheets provided by the opposing side,” says Susan. “I review them carefully and work closely with clients to identify the less obvious assets that aren’t listed.” 

Whether it’s credit card reward points or funds in a peer-to-peer payment app or cryptocurrency account, a comprehensive review of your client’s financial picture may help uncover forgotten pieces of the puzzle. 

Bottom line: Taking a tax-intelligent approach with clients who are navigating the treacherous waters of a divorce could help save them financial heartache down the road.