One thing that can be said about life is that it changes constantly. Divorce, death, business closure and many other life changing events happen every day. Many of these events are very emotional. These events also have a hidden potential problem. Investments, including stocks, bonds and real estate are often jointly owned. Businesses have assets that may or may not be owned by the principals or the business entity itself. When the relationship no longer exists, those assets, business or personal’s ownership must be addressed.
Let’s take Mr. and Mrs. Jones. Early in their marriage they purchase some bonds in a joint account. Several years later, they divorce, and Mrs. Jones gets the bonds, but never puts them in her name alone. Then she sells the bonds, but since Mr. Jones is the first name on the account, the bond company reports the sale to the IRS under his tax identification number.
To make it worse, neither party keeps records of the original purchase. If Mr. Jones decides to simply accept the liability, and there is no audit trail, he has a potentially significant liability. Of course there are ways his representative can protect him, but they can be time consuming, and expensive.
One significant lesson is the need for good recordkeeping. I am often asked how long one should keep their tax records. After all, those receipts can take up a lot of room and if a question comes up, searching for a specific record can take a very long time. So, what is the answer?
The Internal Revenue Code specifies a statue of limitations of three years from the date of assessment, except there are exceptions. If a taxpayer fails to report 25% or more of income, that limitation goes to five years. If fraud is reasonably suspected, there is no statute of limitations.
The real answer is that it depends. One should keep records of any investment from the date of purchase until at least five years after the investment is sold. Especially for businesses, keep records for any item that has been depreciated until at least five years after the equipment has been sold or scrapped. Returns and supporting documentation should be kept until there is no reason to keep them and that depends on the nature of the return. A simple job funded (W2 only) return can reasonably be purged after three to five years. Returns for businesses should be kept for as long as possible for a variety of reasons.
In this digital world where virtually every printer is a scanner, that may be the best way to keep the record. Otherwise, put them in well labeled file folders, in file boxes in a place safe from moisture. In both cases, one must insure the records are kept securely.
The other lesson to learn is that when a relationship ends, either in business or one’s personal life, it is incumbent on all parties to change any accounts or deeds to list only those who benefit from the account or property. In our example above, Mr. Jones should have taken his name off the account as soon as he gave the account to Mrs. Jones. Mrs. Jones should insure she keeps the records of the original purchase.
This can be time consuming and complicated, and it is a great idea to work with a professional to help accomplish this important task. In the case of securities, this can generally be done with a call to the brokerage. In the case of real estate, hire a professional.
If the relationship dissolution is a business, it can be very complex. Who owns the assets? This is especially true in a partnership. The business generally needs to file a final tax return and the way the assets are divided will affect all those who have a vested interest in the company.
This is no place for a do it yourself solution. You need a competent tax professional. There is a lot of emotion in many of these business closings. There is a great need for professional and objective assistance to make the transition as smooth as possible. After the business does close, each person who has a vested interest should retain a copy of the final tax return for at least five years after the final tax year.