Maurer v Maurer and Tax Issues During Divorce

Maurer v Maurer and Tax Issues During Divorce

Under Minnesota law, the division of property during a divorce must be equitable. Minn. Stat. §518.58 (2016).  All property at the time of divorce is presumed to be marital property, this means that it is the challengers burden to prove that the property is nonmarital according to Minn. Stat. §518.003 Subd. 3b. Marital property; exceptions.

Quick Case Summary

In the case Maurer v. Maurer, 623 N.W.2d 604 (Minn. 2001), the trial court considered the future tax consequences on the husband’s retirement assets, totaling $98,406. The court found that the assets would be taxable upon distribution and applied a 35 percent combined federal and state marginal tax rate. This brought the husband’s retirement assets to $63,964. The wife appealed. The Court of Appeals reversed the trial court holding that the trial court’s consideration of 35 percent marginal tax rate was speculative because there was no evidence presented at trial that a taxable event was required by the dissolution or certain to occur shortly after. The court of appeals found that the trial court’s consideration of future tax consequence rendered the division of property inequitable.

The husband challenged the Court of Appeals judgment. The wife contended that the trial court’s consideration of future tax consequence constituted an impermissible speculation.  The Minnesota Supreme Court looked at whether or not the trail court had a “reasonable and supportable basis” for using the 35 percent tax rate and if the court’s number fell outside of a reasonable range of figures. There was no evidence presented by the parties that a lower marginal tax rate would be appropriate. The Supreme Court found that the trial court’s number was within their discretion.

The Supreme Court’s decision was that the consideration of future tax consequences in valuing the husband’s retirement assets was not speculative or required or likely to occur within a short time after dissolution.  Stating that the trial court didn’t abuse their discretion when it applied the 35 percent marginal income tax rate. The Court of Appeals was correctly reversed.

What the Maurer Case Did

The Maurer case gave the district courts discretion to consider future tax consequences in property division if (1) the tax is a “virtual certainty;” and (2) calculation of the tax falls within a “reasonable range of figures.”

In an unpublished Minnesota case, Feldick v. Feldick, No. A03-956, 2004 Minn. App. LEXIS 529 (Minn. Ct. App. May 18, 2004), the appellant argued that the trial court should have considered future tax consequences associated with the sale of the businesses.  Neither of the business were going to be sold, and the tax consequence of any sale were not clear. The Court cited Maurer stating that consideration of tax consequence is discretionary with the trial court and speculative tax consequences should not be considered.

In another unpublished Minnesota case, Ellingson v. Ellingson, Nos. A06-1221 & A06-1522, 2007 Minn. App. LEXIS 692 (Minn. Ct. App. July 3, 2007), the Court of Appeals refused to recognize the tax consequences associated with the possible sale of a business to the parties’ son. The trial court found that from the appellant’s testimony, it didn’t appear reasonably certain or even probable that he would be selling the businesses in the near future and incur the liability. Because the evidence presented on the imminent sale of the businesses was speculative, the trial court didn’t abuse their discretion by declining to consider the future tax consequences of a possible sale. The Ellingson case clarifies that the consideration of future tax consequences is not a bright-line rule.

In the most recent spousal maintenance case decided by the Minnesota Supreme Court, In re Marriage of Curtis, 887 N.W.2d 249 (Minn. 2016), it referenced the Maurer case. The court gives two reasons why the Court can’t under Maurer ignore the tax consequence of a decision that requires one of the spouses to reallocate their assets.

The first reason is that Maurer dealt with the equitable distribution of marital property and not the need for a spousal maintenance award. The context of the situations was different because the effective tax rates could change by the time the parties liquidated their accounts, therefore the same concerns were not present in Curtis.

The second reason the court gave referenced Aaron v. Aaron, 281 N.W.2d 150, 153 (Minn. 1979), cited within Maurer.  Where the court had discussed if there is a required or likely sale of property shortly after dissolution, that the court should consider tax consequences. From the court’s reasoning, Aaron was the proper case to apply and not Maurer.

It is within the discretion of a trial court to consider future tax consequence while equitably dividing marital property, however, speculative tax consequences should not be considered.

If you have Divorce and Family Law questions, please contact the Family Law experts at Minneapolis based Lake Harriet Law Office at 612-750-4843.

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