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Gift and Estate Tax
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Some interesting issues arise in divorce settlements that involve gift and estate tax consequences.
Like Internal Revenue Code §1041 in the income tax context, Internal Revenue Code §2516 in the gift tax consequences makes certain divorce-related payments or transfers nontaxable. But section 2516 only applies to payments under agreements signed within two years before and one year after the divorce judgment, and only to payments traceable to support of a former spouse or minor children or to settlement of certain property rights. If section 2516 does not apply, it may be possible to avoid gift tax consequences by showing that the transfer was for "adequate and full consideration in money or money's worth" or was pursuant to certain legal obligations imposed by court order. See Harris v. Commissioner, 340 U.S. 106 (1950). The breadth of these rules is not entirely clear.
Transfers to a current spouse may qualify for the unlimited marital deduction for gift and estate tax purposes; but  there are very significant limitations when the spouse is not a U.S. citizen. Transfers to former spouses do not qualify for this deduction.
Sometimes divorcing parents find it easier to transfer assets to children rather than to the other spouse or former spouse. Be careful, however, because transfers not in satisfaction of legal support obligations may be subject to gift taxes.
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