The entertainment news has recently been dominated by the very high profile divorce of one of Hollywood’s power couples, Angelina Jolie and Brad Pitt. Although the couple was actually 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 himself earned over 76 million, while Jolie brought in “only” about half that amount.
While Pitt and Jolie are two very high net worth individuals and off the charts wage earners, the issues raised in their divorce are actually the not that different from others in the throes of breakup, whether A-list magazine cover movie stars or not. The fact of the matter is that the Jolie-Pitt divorce highlights conflicts and questions that bleed into many divorce cases, including that dastardly five-letter word and its much loathed purveyor – taxes and the Internal Revenue Service.
Impact of the Prenuptial Agreement:
Jolie and Pitt apparently executed a Prenuptial Agreement in advance of their marriage. Generally speaking, a “Prenup” is a contract between two people planning to marry. That contract, assuming it is enforceable (a discussion for another time) 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.
While Jolie reportedly has a lower net worth than Pitt, she is not seeking alimony, or any kind of “spousal support” payments. It is possible that she waived her right to make a claim for alimony in the Prenup, but either way, however, if she was free to seek some kind of spousal support, Pitt may have been exposed to paying Jolie enough to cover the “reasonable” costs of maintaining the standard of living that she and Pitt enjoyed when they were an intact family.
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. 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.
Division of Assets:
Most couples must decide how to divide up their assets – bank and securities accounts, retirement assets, and real estate as well as other valuables such as artwork, automobiles and jewelry. It is likely that much of this is provided for in the Jolie-Pitt Prenup. 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 often 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 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 of course, the Prenup does not dictate their respective filing status. Again, absent a specific provision fin the Prenup, Jolie, Pitt and their lawyers may well have discussions about when to obtain the divorce, their filing status as well as who claims the child tax credits in future years. It should also be noted that some Pitt and Jolie do have adopted children and some adoption expenses can be deducted on personal tax returns, but usually only in the year that the adoption is finalized.
Jolie’s engagement ring was reported to cost $250,000 in 2012. Most states have laws that allow the bride to keep the engagement ring – Jolie will be keeping hers.
Child support and Child Custody:
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. 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. It should also be noted, parenthetically, that a Prenup cannot generally dictate future custody and visitation arrangements.
Jolie and Pitt have many stunning 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.
The couple also 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. 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 incredibly tough decisions regarding finances, property, and most importantly 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.
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For more than a decade, Bulitt has been selected as one of the DC Area’s “Top Divorce Lawyers” by both the Washingtonian Magazine and Bethesda Magazine. Additionally, he has been recognized as one the “Best Lawyers in America” and as one of Maryland’s and Washington, DC’s “Super Lawyers.”
The grandson of a New Jersey bartender, Bulitt was the first member of his family to get a professional degree. An aspiring fiction writer, Bulitt spends his spare time working on his novels. His first book, CARD GAME, was published in 2015 to a bevy of five star reviews. His new novel, BECAUSE I HAD TO, is due to be published by Roundfire Books in January 2017.
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