Legal Blog

The Role of Future Tax Liabilities in Determining the Value of Marital Property

divorceIn proceedings for Absolute Divorce or Annulment, the court may make a monetary award or transfer certain retirement assets or the former marital home.  In doing so, the Court must engage in a three-step process in deciding whether and in what amount to make a monetary or marital award in distributing marital property.  In the first step, the court must identify which of the assets of either or both parties is marital.  Marital property is in general all property which was acquired during the marriage. Excluded from such property are assets acquired prior to the marriage, assets acquired before or after the marriage as a result of gifts from a third party, or those which are inherited. In the second step, the court must determine the value of the marital assets it has identified.  Finally, in the third step, the court may, but is not required to make a monetary award or a transfer to one party of certain assets which are limited by statute, such as retirement accounts and the former marital home.

This article deals with Step 2, valuation of marital property.  In general, for marital distribution purposes, the value of an asset is its fair market value at the time of or shortly before the trial.  By way of example only, let’s use publicly traded stock and assume that during the period that one spouse held one or more stocks, the stocks appreciated in value.  On sale of appreciated assets, we would ordinarily believe that the gain in the value of the stock (the appreciation over the cost basis of the stock), would, if sold, be subject to capital gains taxation.  We would logically believe that the value of the stock for purposes of the court granting a monetary award to the non-titled spouse in order to attempt to fairly distribute assets obtained during the marriage, is the fair market value at the time of the divorce or annulment.  So what’s the problem?  Stocks which are assets not held within a retirement account, cannot be transferred by the court from one spouse to the other (except by agreement of the parties).  So, to what extent, if any, should the court take into consideration any future taxes, when determining the value of marital property?  The problem arises because we don’t know when, if ever, the stock will be sold, and if sold, we don’t know what the tax rate will be, or if any potential tax will be offset by losses incurred relating to the same or similar types of assets.

Because of this problem, Maryland courts have held that potential tax liabilities should not be taken into account in valuing property for purposes of making a marital award, but may only be considered as another factor in the marital award.  The litmus test for when it is appropriate to consider tax liabilities as an “other factor” is whether such potential tax consequence is immediate and specific, and not speculative.  In some cases, when reviewing for valuation purposes, it has been argued that the court must consider future taxes where the nature of the asset (retirement assets?) may require the imposition of a tax or penalty for premature distribution.

In Solomon v. Solomon, 383 Md. 176, at 179 (2004), the Court of Appeals held that a party’s personal tax liabilities on future sales of property or distributions of retirement assets were not immediate, were speculative, and in any event such a sale which might generate tax liabilities in the future was not compelled, the Appellant having other sources with which to satisfy a monetary award.

ABOUT RON OGENS

Mr. Ogens is a past president of the Maryland Chapter of the American Academy of Matrimonial Lawyers, an association of the nation’s top matrimonial lawyers from the 50 states who specialize in all issues relating to marriage and divorce. The Academy conducts local continuing legal education programs, participates in the legislative process and engages in a variety of other activities to serve the public and improve the practice of matrimonial law.

 

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