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How does property division affect estate plans and taxes?

There are many different ways that property division can affect you when you go through a divorce, but you might not realize what effect it can have on your estate plan and taxes. If you have any assets that are shared with your spouse that will be divided during the divorce, you should know a few basic points before you agree to a settlement.

Will I have to pay taxes on property and cash transferred to me?

Typically, the Internal Revenue Service won't require you to pay any taxes on cash and property that is transferred between you and your spouse because of the divorce. The important thing here is that you will have to be able to show that the divorce is the reason the assets were transferred. Of course, there are some types of assets that might be subjected to taxes. This includes assets that will require you to pay the capital gains tax.

How can we handle the sale of our marital home?

If you sell the marital home as part of the property division and split the proceeds or if one spouse buys the other out, it is possible to avoid having to pay the capital gains tax if you reinvest the money earned from the sale of the house into a new home within two years of the sale of the home. Typically, the marital home had to have been your primary residence when it was sold. This means that you have lived in it for three out of the previous five years.

What happens to my estate plan?

When you get a divorce, you need to recreate your estate plan. You have to take out the property that you didn't receive and include the property that you did receive. It might also be necessary to update the heirs and beneficiaries on the estate plan, life insurance policies and other similar policies.

Source: FindLaw, "Divorce, Taxes, and Your Estate Plan," accessed Jan. 05, 2017

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