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What Are the Tax Implications of the Brangelina Divorce?

Byline: Ed Silverstein

The media is still buzzing about the Brangelina divorce more than a month after it was announced.

The famous power couple Angelina Jolie are very high net worth individuals and reportedly have a prenuptial agreement that states each will walk away with the money he or she brought to the marriage and income earned as a couple would be placed in trust for the children. With this much wealth, multiple children and other considerations, the issue of tax is a big one.

Although the couple was together for 12 years, they were only married for two. They have six children together and reports indicate since their marriage in 2014, the two have combined to earn in excess of $117 million, before taxes. Of that sum, Pitt earned over 76 million, and Jolie brought in about half that amount.

Inside Counsel decided to take a look at the tax consequences. Many of our readers are very high net worth people, with yearly bonuses, or performance-based incentive pay in the millions--not to mention lucrative stock options. For these and other reasons, tax issues are going to be more important to the high-powered former couple, and any wealthy couple.

Pitt and Jolie's prenup allegedly states that each will leave the marriage with the money he or she brought to the marriage and any income earned as a couple would be placed in trust for the children. But that still could leave plenty of territory for disputes.

David Bulitt of Joseph Greenwald & Laake sat down with Inside Counsel to discuss the tax implications on the recent Brangelina divorce.

Generally speaking, a prenup is a contract between two people planning to marry. That contract, assuming it is enforceable, usually sets forth the parties' respective rights in terms of an asset division, alimony and other obligations in the event that the two ultimately divorce, according to Bulitt. While Jolie has a lower net worth than Pitt, she is not seeking alimony, or any kind of spousal support payments.

"Alimony or spousal support does have tax implications, as alimony is taxable to the recipient as ordinary income--which much be considered both when drafting a prenup or, during divorce settlement discussions, absent such an agreement," he explained. "A benefit to the payor is that alimony they must pay out is in fact deductible as an above the line deduction, meaning that it is available as a deduction even for those taxpayers who don't itemize."

Most couples must decide how to divide up their assets--bank accounts, retirement assets, and real estate as well as other valuables like artwork, automobiles and jewelry. In fact, according to the news coverage, they will each leave the marriage with any assets they brought in, and any income earned during the marriage will be placed in a trust for their children. Without a prenup, division of the assets can be a point of contention for divorcing couples, and this does raise tax issues as they can lead to tax gift liability or taxable gain.

For example, Jolie's engagement ring alone was reported to cost $250,000 in 2012. Most states have laws that allow the bride to keep the engagement ring, and Jolie will be keeping hers, according to Bulitt. Not to mention, Jolie and Pitt have many properties around the world. Division of these properties is something that would likely be outlined in their Prenup. For tax purposes, if a married couple chooses to sell their property when divorcing, they are able to exclude $500,000 in home sale profit from taxable income. A single homeowner only gets half that tax-sheltered savings.

Additionally, the couple owns a winery together, which they reportedly purchased for $60 million. The Chateau Miraval estate in the south of France is a well-regarded wine maker, with four different wines on the market today.

"In the case of a jointly owned business, they could choose to sell in order to liquidate assets that were acquired during their relationship, or perhaps one party could buy out the other," explained Bulitt. "Either way, there would likely be tax implications with the sale to an outside party or if one chooses to purchase the other's share."

The Jolie Pitt divorce brings to light many of the complex and difficult issues that people deal with in divorce on a daily basis. While you may no longer get along, divorcing couples must make tough decisions regarding finances, property, and children. "Many of these decisions could have long-term tax implications for one or both parties, so making these kinds of decisions with the help of experienced counsel and free of emotions is key to avoiding costly mistakes," he said.

According to Bulitt, child support and child custody presents one of the most significant tax concerns, as child-related tax breaks will be impacted depending on whether one parent has primary custody, or the custody is split evenly. Jolie is asking for physical custody of the six children, but it has been reported that she will not ask for child support. However, for other couples where child support is applicable, it is tax neutral, meaning it is neither taxable nor deductible.

For most states, tax filing status is determined by marital status on the last day of the tax year. In the event that Pitt and Jolie are still married on December 31, 2016, they may elect to file separately or jointly, assuming that the prenup does not dictate their respective filing status. Absent a specific provision fin the prenup, Jolie, Pitt and their lawyers may have discussions about when to obtain the divorce, their filing status as well as who claims the child tax credits in future years.

So, can divorce be free of taxes? Will it be in Pitt and Jolie's case?

"The old adage that Cythere are only two things in life that are certain, death and taxes' is probably correct in the Pitt-Jolie case as well," said Bulitt. "Assuming that the parties acquired jointly titled assets during their marriage, there may very well be provisions in the prenup that anticipate the possibility of one spouse buying out the other's interest."

If there is no such provision in the prenup, one can be certain that the transfer of assets or trading of assets in exchange for other assets, cash, retirement interests, etc. most definitely will be part of the settlement discussions.

Either way, some jurisdictions permit the transfer of real estate that is made as part of a divorce settlement can be a non-taxable inter-spouse transfer. The party who may end up with a piece of property in that situation, however, may have to deal with the possibility of capital gains when the property is sold. Similarly, if one party waives the right to a joint bank account, there may be no tax impact now, but if and when the time comes that the then owner disposes of assets within the account, the gains may be subject to being taxed.

Further Reading: Navigating State Tax Credit Transfers: A Legal Perspective How the proposed IRS & treasury regulations affects high-net-worth individuals & businesses International tax implications of Brexit for multinationals
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Publication:Inside Counsel Breaking News
Date:Nov 1, 2016
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