So You’re Thinking Of Getting A Mexican Quickie Divorce

January 25, 2016 Edition
BY: ORLANDO GOTAY

Google “divorcios rápidos Tijuana” and you will get over 200,000 hits.  That’s because Mexican divorces are a growth industry.  They may be rápido but they may come with surprising, unintended consequences—especially division of marital assets, deferred compensation and pension plans.  Worse, the decree (or key parts) could be deemed invalid or unenforceable by U.S. courts or have a really, really bad tax result.

Is anyone out there reading this domiciled in Mexico? Domicile is a key driver in recognition of foreign divorces.  For instance, California will not recognize an out of state divorce if both persons were domiciled in California at the time the divorce proceeding were started.  Domicile is different than residency. It requires more than the physical residency itself, it requires the intent to stay there.  So, (in our example) California domiciled couples can’t go to Mexico, divorce and come back with a valid divorce. At least one has to be domiciled where the divorce action is pursued.  This is where that FMM Visitor Visa may be inconvenient. It’s hard to establish ‘domicile’ from a state court perspective, if the first thing one does is label oneself as a “visitor” in Mexico—or worse, living with no documentation at all.

The dissolution of the marital estate is often the key financial ingredient of divorce.  A Mexican court may adjudicate asset division according to Mexican law.  It may be very likely that Mexican courts are not well versed in the intricacies of U.S. tax deferred compensation, such as pensions or stock options.  Spouses, former spouses and others may have rights under these deferred compensation plans. Simply saying “everything by half” may not be proper or correct when it comes to stateside pensions. And when it comes to division of employee benefit, pension and deferred compensation plans, a Qualified Domestic Relations Order, a “QDRO” (pronounced “quad-roe”) is a critical document.

As a general rule, all distributions from a pension or employee benefit plan, no matter who receives them, are considered taxable income to the plan participant unless pursuant to a valid QDRO.  Federal law says that QDROs must be issued “pursuant to state domestic relations laws”. Guess what—your Mexican divorce may not count as a QDRO because it may not have been issued “pursuant to a state domestic relations law”.  Don’t mess with this.  You should go to a state court to get a QDRO.

If you are intent on divorcing in Mexico - or if you have no choice - domestication of foreign divorce decree is imperative if there are U.S. assets. The U.S. court may then issue orders based (or not!) on what happened in Mexico.  This is the perfect time to ask the stateside court for a QDRO for each pension plan to be divided.

Is your spouse a non-resident alien? Generally, the transfer of property to a spouse (or former spouse) during marriage, or after marriage, incident to a divorce, is not subject to tax.  Did you know that the general rule does not apply if the person receiving the property is a non-resident alien?  There may be U.S. withholding obligations towards the former spouse. 

Surprises abound in the world of divorce taxation.  Proper prior planning is essential so that you do not get stuck with an unexpected tax bill.

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 tax matters of U.S. expats in Mexico.  He can be reached at tax@orlandogotay.com.