Inflation can have significant impacts on many different areas of our lives. Since inflation reduces the value of a currency, the same amount of money can buy fewer goods and services over time. With less purchasing power, and no parallel increase in income, we’re forced to adapt and adjust various aspects of our lifestyles. The U.S. Inflation Rate is currently at 6.04%, higher than the long term average of 3.28%.
Yet many of us are unaware of how inflation can affect legal situations such as divorce and family law cases. In New Jersey, inflation can significantly impact factors like equitable distribution, child support and the distribution of assets in domestic cases. Read on to learn about inflation’s role in determining the outcomes of divorces from our New Jersey family law attorneys at Stolfe Zeigler.
Inflation Changes the Value of Assets Over Time
One of the main ways that inflation can affect equitable distribution in a divorce case is by shifting the value of certain assets. Inflation can cause the value of assets such as real estate or investments to increase or decrease, which may impact how they are divided between spouses. However, the exact impact of inflation on asset division will depend on various factors, such as the timing of the divorce or separation and the specific assets involved.
In some cases, the court may use the original purchase price of an asset rather than its current value to determine how it should be distributed. This concept is known as the “time of acquisition” rule, and it may be applied in situations where a shift in value is due primarily to inflation rather than any actions taken by either spouse. Alternatively, the court may rely on the current value of an asset as a starting point for equitable division but then consider any factors that may have contributed to the shift in value, such as changes made to a home or investments made by one spouse.
Monetary Settlements Lose Significance With Inflation
When one spouse receives a fixed sum of money in a divorce settlement, they may find that the value of that sum decreases over time due to inflation. This means the purchasing power of the money they receive will be weaker than at the time of the divorce.
For example, with increasing inflation over ten years, the economic value of a $100,000 settlement will be significantly diminished from the time of its initial payment. This can impact the financial well-being of the spouse who received the fixed sum, which may leave them feeling as though they’ve been treated unfairly.
This is why it’s important to consider the long-term impact that inflation can have on monetary divorce settlements. One way to address this issue is to structure the settlement in a way that considers unpredictable economic factors. For instance, spouses could receive payments over a time adjusted for inflation instead of a lump sum payment. This can ensure that the purchasing power of the money they receive is maintained for years.
Inflation Can Affect the Basis of Assets for Tax Purposes
Inflation can also have a significant impact based on assets for tax purposes. The basis of an asset is the amount that is used to calculate capital gains or losses when it is sold. Inflation can increase the basis of an asset over time, which can shift the amount of capital gains taxes owed upon the asset’s sale. This can be critical for those whose assets have changed over time.
For example, if an individual or couple purchased a property that increased in value over several years and then decided to sell the property, they would owe capital gains taxes on the difference between the sale price and the basis of the property. This can have significant implications when it comes to divorce cases. Note that the spouse who receives a property in a settlement would also receive the existing basis of that asset.
Therefore, that spouse could sell the property the day after finalizing the divorce and end up with federal taxes due based on the difference between the sales price and the basis. However, if the basis of the property has been adjusted for inflation over time, the amount of capital gains taxes owed will be lower.
Call An Experienced New Jersey Family Law Attorney Today
Overall, inflation can play a huge role in divorce cases, particularly regarding the division of assets and financial support. Significant factors should be considered during mediation to reach a fair settlement for both parties.
It is important for individuals going through a divorce to work with experienced attorneys to discuss the potential impact of inflation on their case. To understand how the shifting economic landscape can affect the equitable distribution and division of assets in New Jersey, those seeking divorce need to develop a strategy to protect their financial interests in the long term. New Jersey Family Law Group’s team of knowledgeable divorce attorneys can help you secure the equitable share of assets you deserve. Call 732-240-9555 or complete our contact form to schedule a free consultation today.