Splitting an investment account at the end of a divorce matter can be deceptively complex. Even major financial institutions mess this up from time to time. For example, lets say a married couple purchased 1,000 shares of Amazon (AMZN) each year over the past five years (5,000 total). They purchased: · 1,000 shares at $800/share in 2016; · 1,000 shares for $1,000/share in 2017; · 1,000 shares for $1,700/share in 2018; · 1,000 shares for $2,000/share in 2019; and · 1,000 shares for $3,000/share in 2020. Since they purchased 5,000 shares of AMZN in total, it should be easy enough to just split them 2,500 shares each, right? The answer is absolutely not! In this example, say the bank gave Spouse A the shares purchased in 2016, 2017 and half of the ones in 2018, and gave Spouse B the remaining shares purchased in 2018, 2019 and 2020. This would result in a cost or “basis” in the AMZN stock for Spouse A of $2.65 million and Spouse B of $5.85 million. At a current share price of $3,300 per share, each spouse would receive $8.25 million in AMZN stock. However, Spouse A would have an “embedded gain” of $5.6 million and Spouse B would have an embedded gain of $2.4 million. At a long term capital gains tax rate of 23.8%, Spouse A would have to pay $1.3 million in capital gains taxes upon a sale of stock, while Spouse B would only have to pay $571,000. This is what I refer to as an “inequitable distribution”! Double-checking the split of investment assets, or “Covering your basis” before you cross home plate on a divorce matter can pay off big time for clients!
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