Legal separation may avoid tax consequences, but brings high risk

Many Massachusetts couples find it challenging to know the best approach to ending a marriage. Some couples opt to enter into a legal separation while they determine whether or not to work on saving their marriage. Others move directly to a divorce filing. Each option has its pros and cons, but savvy couples will carefully weigh the financial implications of both choices before moving forward. While a legal separation may help a couple avoid some of the tax consequences of divorce, it can also leave both parties open to a high level of financial risk.

A legal separation is a court-approved separation of two spouses, with the responsibilities of each spouse clearly laid out as a part of the agreement. The parties remain legally married, and one advantage of such an arrangement is that the spouses can continue to share benefits such as health insurance. They can also continue to enjoy tax benefits, inheritance rights and access to jointly owned properties. However, there is a degree of risk associated with legal separation, because spouses can also continue to spend jointly owned savings and enter into contracts, leaving open the possibility for a significantly reduced net worth before divorce papers are filed.

Many experts advise against legal separation, pointing out that the opportunity to enjoy certain benefits is far outweighed by the risks inherent in remaining legally tethered while the marriage is in a state of flux. For example, if the legal separation outlines a spousal support or child support payment, the individual who receives the payment may have difficulty asking for a larger amount in a future divorce proceeding. An argument could be made that a history of successfully living on less has been established.

Massachusetts couples who are considering legal separation should give careful consideration to all of the potential implications involved. It would be a wise choice to consult with professionals who can take a comprehensive look at one’s assets and future financial needs, and then advise on the proper way to proceed. While many couples reunite following a period of separation, many others move on to divorce. The choices made during a legal separation can have significant ramifications on the eventual terms of divorce. While couples may find a separation appealing for the possibility to avoid tax consequences associated with divorce, such a move may not best serve the future financial stability of either spouse.

Source: Fox Business, “Separation or Divorce? What each means for your finances,” July 25, 2012

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