The division of property in an Indiana divorce can be a complex matter. Indiana divorce laws govern the manner in which property is allocated to each spouse and federal law shapes the tax implications of that division or distribution of property. In addition to the legal and financial complications, separation and divorce from a spouse is an emotionally trying, stressful process, which can further muddle the matter of how property and assets of the marriage are divided. An Indianapolis divorce lawyer at Keffer Hirschauer LLP can alleviate some of these burdens by helping you navigate Indiana divorce laws regarding property and address important tax considerations in divorce or legal separation.
Tax Considerations and Indiana Divorce Laws Regarding Property
Like the majority of states, Indiana divorce laws regarding property and asset distribution call for an equitable distribution of marital property. Individuals who are filing for a divorce must be aware, however, that equitable distribution does not necessarily mean equal distribution, as there are additional factors that the court may consider.
Under Indiana Code § 31-15-7-7, when the court determines the appropriate division of property and assets in a divorce case, it should consider the current and future tax impacts of the distributions for each party. Thus, the court looks not only at the current balance sheet of the parties joint and other assets but also at the tax consequences of the proposed division or distribution of assets.
The complexities of marital asset distribution underscore the need for an experienced Indiana divorce lawyer to provide guidance, counsel, and representation as you work through the separation and divorce process.
How Is Property Divided in a Divorce in Indiana?
Generally, Indiana divorce laws regarding property require an equitable distribution in a divorce. As a result, the court determines the fair division of marital property on the basis of various factors, including:
- How long the marriage lasted
- The property brought to the marriage by each spouse
- Each spouse’s future earning potential
- The allocation of child-rearing responsibilities (when there are children of the marriage)
- Any employment retraining that either spouse may require
- Intangibles that may create more wealth for one party in the future, like advanced academic degrees
- The allocation of debts
- The tax basis of property received in divorce and the tax consequences of the various distributions
Unless property is protected by a prenuptial agreement, any assets that were acquired before or during a marriage in Indiana are included in the marital pot for distribution, even when an asset or account is only in the name of one spouse. Both parties have a duty to disclose and provide proof of all property owned, and both parties are responsible for debts incurred during the marriage. If one spouse transferred funds or assets prior to the divorce or separation, those assets may still be included in the marital property subject to division in some cases.
While the Indiana divorce laws regarding property make this a “common law” state, nine states in the US apply a community property standard to the distribution of property in divorce. In those states, all assets of the parties are generally divided equally.
Although Indiana does not have community property laws, in some cases, such as when the parties previously resided in a community property state while one spouse accrued certain retirement benefits, federal law may require the value of those benefits to be treated as community property. This might occur in the case of military pensions under 10 U.S.C. § 1408(c)(1) or for civil service pensions under 5 U.S.C. § 8345(j). If this scenario applies to your case, it is important to discuss this matter with your divorce attorney in Indiana.
Indiana Divorce Laws Regarding Property and Asset Division
More specifically regarding the Hoosier State, Indiana Code chapter 31-15-7 governs the disposition of property and maintenance in an Indiana divorce. Indiana Code § 31-15-7-4 defines the property that is subject to division by the court, which includes the property of both spouses whether it was acquired before the marriage, independently during the marriage, or together during the marriage. The statute further describes the means by which the property may be distributed, including:
- Division of property between the two parties
- Allocation of property to one spouse while the other receives compensation for their share
- Sale of property with the proceeds divided between parties
Meanwhile, Indiana Code § 31-15-7-5 addresses the presumption for equal distribution of assets, stating that courts should generally assume that an equal division is reasonable. However, either spouse can rebut this assumption on the basis various factors, including the parties’ economic circumstances, earning potential, conduct during the marriage, contributions (of income or otherwise) to the acquisitions, and/or proof that property was owned by one spouse prior to marriage or was obtained as a gift or inheritance.
IRS Code and Tax Considerations in Divorce
IRS Code § 1041 establishes that transfers of property that are “incident to divorce” are not taxable in most cases. Generally, transfer that are made within one year of the divorce are assumed to fall into this category. After one year and up to six years, the divorce decree must support that the transfer was a result of the marriage ending. After six years have passed, transfers of property between former spouses are not considered incident to divorce for tax purposes, and the burden to prove that the transfer is incident to the divorce and show proof of a valid delay is placed upon the spouse responsible for the tax.
The IRS Code does provide some protection for divorcing spouses from tax losses due to property transfers. However, the intricacies and intersections of tax law and divorce law mean the matter is often more complex. An Indianapolis divorce lawyer who understands the implications of federal tax laws on assets and property can best help individuals gain a fair settlement and protect their share of assets and property in a divorce.
Types of Property Divided in Divorce and Related Tax Considerations
To understand why property division and tax matters in divorce are often more complex than a single rule or law would imply, one must consider the various forms of marital property that are subject to division in a divorce as well as how those types of property are taxed or will be taxed in the future. The types of property that are commonly divided in divorce include:
- Real property, including items like a home or acreage
- Accounts, including bank, investment, retirement, and others
- Personal property, such as vehicles and furnishings
The tax basis of property received in divorce and the tax consequences of the transfer and ownership of the various types of property should be considered by the court in determining what an equitable distribution is under Indiana divorce laws regarding property. To achieve this, all potential forms of tax should be considered, including income tax, capital gains, and gift taxes.
Each spouse’s general position with regard to taxes, including factors like income, investments, and pending tax liabilities or credits, will impact the tax consequences of various distributions—and methods of distribution—of marital property. The cost basis of each spouse in the assets in question, the division of that cost basis between the parties, and other factors—like whether a home is a primary residence or not—should be taken into consideration as well in formulating an equitable distribution of property.
It may be the case that a sale of property with proceeds distributed to the parties is more beneficial for tax purposes for one spouse or the other, or for both. It may be more beneficial for one spouse to transfer property like a home to the other in return for compensation, or it may be beneficial for one spouse to continue to live in the marital home and both retain ownership. With multiple types of property in question and many factors that impact the tax considerations related to each asset, determining a truly equitable distribution of property can be a difficult task, especially for someone without the appropriate experience and knowledge.
If you fail to consult a knowledgeable divorce lawyer who can identify and anticipate the relevant tax consequences of the division of your marital property, you could end up with what appears to be an equitable distribution that turns out to leave you holding a large tax bill and less property or assets than you expected.
Federal and Indiana Divorce Laws Regarding Pensions and Retirement Accounts
While state laws generally govern the distribution of property in divorce and the IRS Code governs tax consequences, the federal Employee Retirement Income Security Act (ERISA) also has implications regarding the distribution of assets in qualified retirement plans. Under ERISA and IRS Code, qualified retirement plan benefits may only be assigned to someone other than the employee if there is a qualified domestic relations order (QDRO). This is typically a court order based on state laws that meets certain requirements to be “qualified” at the federal level and outlines to whom and how retirement benefits in a qualified plan should be allotted. If you or your spouse is entitled to benefits in a qualified retirement account, it is critical that you discuss the application of ERISA and the related tax considerations with your attorney and/or tax professional.
An Indianapolis Divorce Lawyer to Help You Navigate Indiana Divorce Laws Regarding Property
There are extensive potential scenarios for division of assets in a divorce. To protect your interests and financial future, it is critical that you work with an attorney who understands both Indiana divorce laws regarding property and the various related tax considerations in divorce cases. An Indianapolis divorce lawyer at Keffer Hirschauer LLP will help clients understand issues like the tax basis of property received in divorce, what factors the court will consider when distributing property, and more. To schedule a consultation and protect your assets, call Keffer Hirschauer at (317) 857-0160 or complete this online contact form.