EXECUTIVE SUMMARY

* FOR MANY COUPLES, THE MONEY THEY HAVE in employee benefit plans represents the most valuable asset accumulated during their marriage. Dividing these funds in the event of a divorce is a complex process fraught with serious tax implications CPAs need to be aware of to counsel divorcing clients.

* UNDER IRC SECTION 1041, TRANSFERS BETWEEN spouses in a divorce are generally tax-free. But the code is silent on what happens if the transfer includes unpaid income, encouraging the IRS to apply a court-developed assignment of income doctrine to tax the person making the transfer. For IRA or qualified plan transfers, a Court-issued qualified domestic relations order (QDRO) can override the assignment of income doctrine.

* THE TIMING OF THE QDRO CAN HAVE MAJOR TAX implications. A spouse transferring qualified plan benefits before the court issues a QDRO may not only disqualify the plan but can also cause negative tax consequences.

* WITH THE POPULARITY OF STOCK OPTIONS, virtually every state now considers vested options to be marital property. Some courts are even going after unvested options. A client who transfers a nonqualified option to a former spouse under a divorce decree is taxed at the time of the transfer.

* THE TRANSFER OF AN INDIVIDUAL'S INTEREST IN AN IRA to a former spouse under a divorce decree is not taxable to the individual. The interest is treated as the former spouse's IRA. To qualify for tax-free treatment, the transfer must be of the participant's interest in the IRA and must be made under an IRC section 71(b)(2) divorce or separation instrument.