In negotiating matrimonial settlements, I often find it useful to explore the possibility of an “in-kind” distribution of an investment account that is subject to equitable distribution.
An “in-kind” distribution is a non-taxable division of an asset. In the context of investment accounts, in lieu of selling off all stock positions held within such accounts at the time of a divorce, an in-kind distribution avoids a forced sale by providing the option of dividing the equity positions in accordance with a pre-determined percentage.
For purposes of example, if Wife has a brokerage account in her individual name with 500 shares of XYZ corporation which were purchased in 2005 for $200,000 and are now worth $500,000, I would strongly advise the parties to explore the possibility of each receiving 50% of the stock value through an in-kind distribution. I would make this recommendation due to the fact that a distribution under this background would maintain a significant tax advantage.
If the Wife were to liquidate all of her 500 shares of XYZ corporation to pay Husband his 50% equitable distribution interest, she would encounter a tax liability of $300,000 ($500,000 current value – $200,000 basis in which the stock was purchased) due to the capital gain associated with the investment. By imploring an “in-kind” transfer of the same account, any taxes associated with a forced redemption to buy-out Husband’s interest would be avoided by simply dividing the stock. Through an in-kind division, Husband would now be the owner of 250 shares of XYZ at the price of Wife’s original purchase and absorb the taxes associated with the stock redemption if he decided to liquidate the shares for cash.
Another advantage remains that after an in-kind transfer, both parties retain the ability to make strategic financial planning decisions regarding whether or not they wish to redeem or hold the particular asset for tax purposes. For instance, if you receive 50% of 10 different stock positions through an in-kind distribution, after speaking with a qualified professional, you may decide that it is best to sell off stock that is underperforming in a particular tax year to offset some of the capital gains associated with a higher performing stock. If you elected to liquidate all of the stock during the divorce litigation, you would have lost the flexibility to plan out the best windows to sell off positions to lower your total tax liability.
The division of brokerage accounts during a divorce proceeding is often a complicated process and exploring the utilization of an in-kind transfer may be to your advantage. It is important that you work closely with a qualified matrimonial attorney to fully capture the maximum value your are entitled through equitable distribution.