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What is a transfer incident to divorce?

On Behalf of | Jan 18, 2024 | Property And Asset Division

A transfer incident to divorce is an important aspect of the financial proceedings in a divorce. It refers to the process of transferring specific retirement assets between spouses as part of a divorce settlement without incurring tax penalties that typically accompany such transfers.

Certain types of accounts and assets typically require a transfer incident to divorce. These include non-qualified retirement accounts that don’t require a qualified domestic relations order (QDRO). Understanding a few specific points in this regard is crucial for anyone going through a divorce.

What it is and how it works

A transfer incident to divorce allows for the transfer of ownership of retirement assets, such as individual retirement accounts, from one spouse to another as dictated by a divorce decree. This is done without the usual tax consequences. Transfers of retirement accounts typically incur taxes and penalties if done outside the divorce context. Avoiding specific monetary penalties is possible when such transfers are conducted within the context of divorce.

The Internal Revenue Service (IRS) has specific guidelines on what constitutes a transfer incident to divorce. Generally, a transfer should occur within one year after the date of divorce and be related to the cessation of the marriage. The terms of the transfer should be outlined in the divorce decree or a related agreement. Ideally, anyone who needs a transfer incident to divorce will ensure everything is spelled out in their property division order.

Role in property division

A transfer incident to divorce plays a crucial role in facilitating property division by allowing assets to be transferred between spouses with fewer penalties. This ensures that both parties can retain their fair share of marital assets. Having a suitable transfer incident to divorce may require a valuation of related accounts.

It’s crucial to handle these transfers correctly to avoid unintended tax liabilities. Professional advice is often necessary to navigate these rules and execute transfers properly. Even seemingly minor errors can lead to serious consequences, so anyone going through the divorce process must ensure they have everything appropriately documented.