Splitting the Taco-Divorce, Mexican Style

By Orlando Gotay, Tax Attorney

Divorces are like root canals. Imagine the scenario of a local national and the expat, married in Mexico in happier days.

I want to comment on a big-ticket item: retirement plans that may be located in the US and a Mexican divorce. Those US retirement plans could constitute, next to the family home, the largest asset available. What part of the plan is distributed to the other spouse? Who gets to decide? Does the Mexican court get into this? As you will see, there can be pitfalls for either spouse if this is not done right.

Let’s assume expat has retirement plans (includes IRAs, 401(k) or pensions or stock options) as part of that spouse’s assets. Some of those are expectancies today, meaning they will “vest” or become actual at some future time. That does not mean they are not valuable today and they should definitely be disclosed come property distribution time. Local spouses could have things like AFORE accounts with similar issues.

Could one try to conceal them from the other and the court? How could the other learn of plans and their terms? All are obviously critical in fashioning equal or even equitable property distribution plans. Federal retirement law (ERISA) says spouses have a right to receive information from Plan administrators. Spouses perhaps do not know that, or how to go about finding information.

On the flip side, improper distributions from retirement plans may have very onerous tax consequences to plan participants. In connection with divorces, retirement plans can be split free of tax to the participant, and ownership changed between spouses through a Qualified Domestic Relations Order (QDRO), issued only by US courts. Mexican (foreign) divorce decrees cannot be QDROs.

Plan administrators often have “pre-approved language” for QDROs. Would the boilerplate be neutral, advantageous to participants or hurt spouses? How does spouse get to understand what’s in the English language document before agreeing to what it says?

I can only wonder if a Mexican court will enter a property distribution decree that includes US pension plans or just punts that away for later adjudication elsewhere.

One could take a Mexican divorce decree to a US court and “domesticate” it but expecting it to correctly characterize that property as community or separate, and address federal laws on pension plans, may be a recipe for catastrophe. Bad tax consequences may abound. Depending on the scenario it can be a disaster for plan participants or spouses. As I always say, plan ahead.

 

Orlando Gotay is a California licensed tax attorney (with a Master of Laws in Taxation) admitted to practice before the IRS, the U.S. Tax Court and other taxing agencies. His love of things Mexican has led him to devote part of his practice to the federal and state tax matters of U.S. expats in Mexico. He can be reached at tax@orlandogotay.com or Facebook: GotayTaxLawyer.

 

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