While any divorce can be complicated, high net worth divorces are often much more complicated than others. There are so many unique aspects to these divorces that make them more difficult to navigate. One of the most unique, and perhaps most concerning, aspects is the potential tax implications of a divorce that is worth so much money. If you are preparing for a high net worth divorce in North Carolina or South Carolina, a skilled divorce attorney with King Law Offices may be able to offer legal guidance and assist in negotiations. We proudly serve Winston-Salem, SC, Rock Hill, SC, Cornelius, NC, Charlotte, NC, Waynesville, NC, and Boone, NC. Call (888) 748-KING to schedule a consultation and learn more about how we may be able to assist you.
What Is Considered a High Net Worth Divorce in the Carolinas?
High net worth divorces are not always easily defined. The Internal Revenue Service (IRS) does not offer a definition that can be applied on a federal level, and each state offers its own definition. This can make it even more confusing for the individual trying to determine whether theirs is a high net worth divorce or not.
North Carolina
North Carolina family law does not have an exact definition of high net worth divorces. However, the state generally considers a divorce to be high net worth if the couple has a combined annual income of at least $300,000, or they have a total of $1 million or more in marital assets.
South Carolina
Like North Carolina, South Carolina does not provide a precise definition of high net worth divorces. Their general definition varies from North Carolina’s, however. South Carolina generally defines a high net worth divorce as one involving a significant amount of assets, typically worth several million dollars or more.
General Identifiers for High Net Worth Divorces
Exact numbers are not necessarily the relevant, or deciding, factors in determining whether a divorce is high net worth or not. Instead, consider the assets the couple has. High net worth divorces include assets such as real estate (including vacation homes and investment properties), investment portfolios, retirement accounts, business interests, pensions, stocks and bonds, and other valuable assets. They frequently own multiples of many of these assets, such as multiple properties and multiple investment portfolios.
Another general way to identify a high net worth divorce is the lifestyle the couple lives. In high net worth divorces, the couple has become accustomed to a certain lifestyle during the marriage. This lifestyle often includes multiple residences, luxury vehicles, expensive vacations, and exclusive private memberships.
Issues in High Net Worth Divorces
While those with a lower net worth may think it would be nice to have a higher net worth, having a high net worth does present issues, particularly when it comes to divorce. While these issues are not insurmountable, they can cause disputes and delays in the divorce process.
Child Support
North Carolina’s Division of Social Services Child Support Services provides guidelines and formulas for calculating child support. These guidelines are based on the Income Shares Model, which is based on the idea that children should receive the same parental income proportion that they would have if their parents were still together. However, these guidelines specifically state that if the parents have a combined income of more than $40,000 per month or $480,000 per year, the guidelines cannot be used to determine the basic child support obligation. Instead, the court may use the guidelines as a starting point to determine a minimal level of child support, but the court will also consider other factors to determine an appropriate child support obligation.
South Carolina’s Department of Social Services also provides guidelines and formulas for calculating child support. South Carolina’s guidelines are based on the same model as North Carolina’s, and also stipulates that for parents with a combined monthly income of $40,000 per month or $480,000 per year, the guidelines will not apply. The guidelines instruct the courts to determine child support in these cases on a case-by-case basis.
Child Custody
There are many factors that both North and South Carolina consider when determining child custody. N.C. G.S. §50-13.2 states that the court must award custody to the parent who will best promote the interests and welfare of the child. S.C. Code §63-15-230 indicates that the court shall determine final custody in the best interest of the child based on the evidence presented.
In high net worth divorces, one or both parents may have business interests that keep them away from home for extended periods, whether through travel for work or simply working long hours. Additionally, the additional money allows the parents to provide additional opportunities for travel, experiences, and extravagant living in general. The courts must attempt to determine which parent may provide a more stable and consistent home for the child while also ensuring that the child does not experience jarring differences between the two homes.
Spousal Support
As of 2019, spousal support in both states is no longer tax-deductible to the payor or considered taxable income to the receiver. This means there are no longer any tax advantages associated with paying or receiving spousal support. However, depending on the structure of the divorce agreement, some types of financial support or settlements which the parties may think of as spousal support may still have tax implications.
Additionally, spousal support can be complicated in high net worth divorces due to the fact that there are often significant income disparities between the spouses. Often, one spouse has sacrificed career opportunities or received a large inheritance that contributed to the high net worth of the couple. These factors must be carefully considered when determining an appropriate amount of spousal support, as well as other factors such as property division and child custody, which will also impact each spouse’s net worth post-divorce.
Property Division
When couples divorce with little to no assets, property division can be relatively simple. Many times, the only asset they have is the marital home, which they often sell and divide the proceeds so they can start their new post-divorce life. For high net worth divorces, the number of assets, combined with their value and the assortment of different types of assets can make property division complicated and time-consuming. The couple may disagree over how to divide the assets or the value of certain assets. Some assets may be difficult to value and require the specialized expertise of appraisers, forensic accountants, or others. The varying values of the assets and the types of assets may also make it difficult to fairly distribute the assets between the spouses.
Tax Implications
High net worth divorces can have significant tax implications. Capital gains taxes, incorrectly valued assets, royalties or other future payments received from an asset, tax penalties, and the appreciation of an asset between when it is received in the divorce and when it is later sold are just a few potential tax implications the spouses may face. Additionally, there may be disputes between the spouses over the tax implications. For example, the spouses may disagree on the amount of capital gains tax that will need to be paid on an asset or they may disagree about whether there will be tax consequences at all for a particular asset. These disputes can add to the difficulty of property division, further delaying the finalization of the divorce.
High Net Worth Divorces and Potential Tax Implications in South Carolina
The tax implications of high net worth divorces are intricate and can vary from one divorce to the next. However, there are some common potential tax consequences that spouses should consider as they prepare for their divorce. In South Carolina, three areas that spouses should consider include the division of assets, child support and custody, and estate planning.
Division of Assets
Some assets are subject to capital gains taxes when sold, which means if a spouse receives any appreciated assets like stocks or real estate, and later sells it or transfers it to someone else, they may need to pay capital gains taxes. Additionally, when assets are transferred between spouses in a divorce, this may change the assets tax basis. If it does, this will change their cost basis for future transactions or sales.
Another area of asset division in which to use caution is retirement benefits. Employer-sponsored retirement accounts, individual retirement accounts, and pension benefits all typically have early withdrawal penalties and taxes. In order to divide retirement assets, the court must issue a Qualified Domestic Relations Order (QDRO) that allows for the penalty-free and tax-free withdrawal and transfer of these funds.
Child Support and Custody
Like spousal support, child support is not tax-deductible for the parent who pays it or taxable income for the parent who receives it. However, child custody can have tax implications. Custody can affect tax benefits such as tax credits for child expenses and deductions when claiming children as dependents.
Estate Planning
Estate planning may not be top of mind during high net worth divorces, but in South Carolina (and any other state), it is something that spouses should review. First, the review and updating of their estate plan can help them avoid having unintended beneficiaries and prevent potential disputes between family members. Individuals can also address the tax implications and minimize future estate taxes by transferring assets or establishing trusts to reduce the taxable value of their estate. King Law Offices can assist you with reviewing and updating your estate plan after your divorce in South Carolina or North Carolina.
High Net Worth Divorces and Potential Tax Implications in North Carolina
There are tax implications for high net worth divorces in North Carolina as well. Some tax implications are state-specific, but others are federal, which means they may apply in South Carolina as well.
Spousal and Child Support
Both spousal and child support are not considered taxable income to the receiver nor tax-deductible to the payor. However, child support and custody have tax implications. The IRS provides that the custodial parent is typically the parent who can claim the child as a dependent on their taxes. However, North Carolina prefers to give parents joint 50/50 custody, giving both parents approximately equal time with their children. In this case, if the parents have an equal number of nights with the child each year, the IRS stipulates that the custodial parent is the one with the higher adjusted gross income.
However, the IRS also offers some options for noncustodial parents to be able to claim the children as dependents. The custodial parent can release the dependency exemption with a written declaration or the IRS’s Form 8332, granting the noncustodial parent permission to claim the children. This can also be done for the child tax credit, credit for other dependents, and additional child tax credit. However, it does not apply to dependent care credit, earned income credit, or being able to file as head of household.
Asset Division
In North Carolina, most assets and property can transfer between the spouses with no tax consequences for up to one year after their divorce is final. If their divorce agreement or order contains the appropriate condition, they may be able to extend this period for up to six years after their divorce is final. However, this does not apply to all assets. A United States savings bond will be taxed when transferred, for example. Additionally, if one of the spouses lives abroad and is not a United States citizen, the transfer of property may be taxed with specific taxes imposed on foreign nationals or may be taxed as a gift.
Additionally, the marital home is subject to capital gains taxes when it is sold. Transferring it from one spouse to the other will not trigger these taxes, but if or when that spouse sells the home, they will need to pay capital gains taxes at that time. When the marital home is the primary residence, there are a certain amount of gains that can be excluded from taxable income. However, the divorce can complicate this, as the date of the divorce determines the filing status for the year and the IRS requires that both spouses live in the home for the previous two years to claim the higher amount. When an individual is considering asking for the marital home as part of their property distribution, and plans to sell it, they may want to consult with an attorney to learn more about how capital gains taxes may impact them before moving forward with that decision.
Retirement Accounts
Like South Carolina, North Carolina requires a QDRO to transfer money from retirement accounts without early withdrawal penalties and tax implications. However, while federal law allows for this transfer pursuant to either a divorce decree or a decree of separate maintenance, North Carolina does not have decrees of separate maintenance. Therefore, it is often recommended that individuals wait until the divorce is final to initiate these transfers, even with a QDRO.
Learn More About Tax Implications in Your Divorce From a Qualified Divorce Lawyer
Money can’t buy happiness, and for spouses engaged in a high net worth divorce, those words are both true and painful. High net worth divorces can actually be more complex and frustrating due to the higher number and value of the assets the spouses have. When couples have many high value assets, it is important that they carefully consider the potential tax implications of every decision they make, from the property division to child custody and support. If you would like to explore your options and learn more about the possible tax consequences of various scenarios in your high net worth divorce, call King Law Offices at (888) 748-KING. Whether you are in Winston-Salem, Rock Hill, Mecklenburg County, Haywood County, or Watauga County, we are happy to schedule a consultation and review your legal options with you.