There is a duality of rules and considerations applicable to the valuation of assets in New Hampshire divorces. One set of rules and considerations is applicable prior to trial and another at trial. The difference in these two sets of rules is whether tax consequences upon the sale of an asset shall be considered in valuing the asset.
The New Hampshire property settlement statute listing the factors that the trial court may consider in making an equitable division of assets in a divorce includes: “The tax consequences for each party.” N.H. RSA 458:16-a, II (j).
The New Hampshire Supreme Court, however, has held that in valuing marital assets subject to division in a divorce, the trial court “may only consider potential taxes in valuing marital assets if a taxable event such as a sale or other transfer of property is required by the property distribution, or is certain to occur shortly thereafter.” In the Matter of Telgener & Telgener, 148 N.H. 190, 192 (2002). The Supreme Court in Telgener stated that otherwise the trial court would be engaging in speculation. Id. at 192-193.
The Supreme Court, nevertheless, has made another exception to the Telgener rule. It has held that where “potential future tax liability reasonably affects the fair market value of a marital asset the trial court may consider that liability in determining the present fair market value of the asset. In the Matter of Wolters & Wolters, 168 N.H. 150, 158 (2015). The Wolters decision referenced the case of Rattee v. Rattee 146 N.H. 44 (2001) where it approved the trial court taking “into account accrued tax liabilities in determining the fair market value of the parties’ properties. Rattee dealt with the valuation of stock in a closely held corporation. Rattee, 146 N.H. at 50.” Wolters & Wolters, 168 N.H. at 157.
Thus, where the price a willing buyer might pay for stock of a corporation is affected by potential future tax liability, the trial court may consider evidence of such tax liability in determining the fair market value of the stock. The distinction between the Rattee and Telgener cases is that in Rattee, evidence of potential tax liability was considered to determine the present fair market value of assets to be distributed in the divorce proceeding. Telgener, held that the trial court may not consider potential tax liability to the parties upon sale of an asset after distribution , “unless the sale or transfer is required by the court’s order or is certain to occur shortly thereafter.” Wolters at 158, citing the Telgener case, 148 N.H. 192-193.
The New Hampshire Supreme Court in the case of In the Matter of Cohen and Richards, 170 N.H. 78 (2019) stated in a footnote: “Any equitable division of such marital property may include the consideration of any tax consequences. See RSA 458:16-a, II(j) (the trial court may consider the ‘tax consequences for each party’ in determining the equitable division of marital property).” 170 N.H. at 91. While this comment by the court might suggest a possible future revision of the Court’s holding in Telgener limiting the circumstances when the trial court may consider the tax consequences in valuing assets, the Telgener decision contained similar language.
Until the Telgener rule is changed, the present status of the law creates two standards for the valuation of assets in a divorce. During negotiations and at mediation a significant factor to be considered in the division of assets is the tax treatment those assets will likely receive when liquidated after distribution. When funds are withdrawn from IRA or 401(k) accounts, for instance, the proceeds are taxed as ordinary income and may be subject to a ten percent penalty. Stocks or other assets with a high basis will incur little or no taxes upon sale. Those with a low basis will suffer a greater tax, but at capital gains rates. This creates a hierarchy of assets in divorce negotiations, something like the following:
- Cash;
- Stocks and assets such as precious metals and collections with high bases.
- Savings bonds; (the owner-transferor generally pays the tax on accrued interest up to the date of transfer). Almost as good as cash if you are the recipient.
- Qualifying marital residence, presently subject to a $250,000 exclusion on gain, $500,000 if filing jointly;
- Retirement accounts: IRA’s, 401(k)s, profit-sharing plan accounts, etc.
Thus, the Telgener case created a practical dilemma in dividing assets in a divorce where each party desires the least taxable assets. These can be bargained for in negotiations, but if the matter goes to trial, the trial court is to ignore the tax treatment the assets will receive after divorce, unless immediate sale is mandated or certain to occur.
These tax consequences upon the sale of assets are even more significant in today’s world, where in most cases, 401K plan accounts have replaced stock portfolios as the parties principal investments. At trial, such tax consequences, except in the special circumstances noted, are to be ignored by the Court. Cash and 401(k) accounts are to be valued equally.
Conclusion
It is prudent to revise demands during settlement of a divorce in consideration of the consequences of the tax liability associated with the assets as at trial the court will treat cash, 401(k) accounts and all other assets as equals.