Divorce: Dividing Your AssetsCORNERSTONE – The Ultimate Guyvorce Guide
Note: This article is for educational purposes only.
Starting the process of dividing up your assets as part of your marital settlement agreement will likely be at the very top of your list as soon as you’ve decided to divorce. Who gets what household goods, real estate or retirement accounts can get figured out relatively quickly if you’re willing to remain amicable.
Get it going early on by taking an inventory of your valuables and of who wants to walk away with what. It’s always better to have an organized list and valuation of what you came into the marriage with and what was accumulated during the marriage. Only marital property is subject to division in a marital settlement agreement. Everything you brought with you into the marriage, leaves with you after the divorce.
Your Marital Settlement Agreement: The First Steps
Being fair, open and honest during this time is the best path to take. If you have money socked away in a personal account, that money is marital property. Don’t hide it. Divorce attorneys are smart cookies and one of the first things they’ll look for are assets you’ve tucked away out of sight.
Honesty is the best policy, and it’ll keep you from being penalized later on.
Once you’ve taken an inventory, try to negotiate your own settlement without the help of a mediator or the court system. You’ll save yourself a ton of money if you can do this part on your own. Don’t just assume it’ll end in an argument and jump into expensive legal bills without at least trying it. Do that only after negotiations fail.
Find Out Whether Your State Uses Equitable Distribution or Community Property Distribution
Most states follow equitable distribution. It’s largely based on the earning power of each spouse, contributions during the marriage, age and health, and the future financial needs of each spouse.
If you create a property agreement with these requirements in mind, you’re increasing the chances that your presiding judge will accept it without amendment.
Currently, all but nine states practice equitable distribution. The nine that do not are California, Texas, Arizona, Idaho, Louisiana, New Mexico, Nevada, Wisconsin and Washington.
Community property distribution divides assets down the middle regardless of who earned more or did more to enrich the household in the marriage.
Separate Property vs. Marital Property
Be they tangible furniture, jewelry, or intangibles like investments and retirement accounts, all marital property is subject to distribution. Marital property consists of assets that were acquired during the course of the marriage.
Separate property includes assets that are wholly owned by each party before the marriage. Anything you brought with you into the marriage (i.e., real estate, vehicles, inheritances and heirlooms), unless commingled, goes back with its original owner with no lawful claim by the other spouse.
Where your lines tend to blur is when you have shared your separate property with your spouse. For example, let’s say you inherited money and used it to improve your wife’s house that she owned before you two married. Anything mixed up or mingled in this way may require the help of an attorney to draft up a settlement agreement outlining a fair division if you cannot agree together.
Decide a Valuation Date
Fix the value of your property (especially investments like stocks and interest-bearing bank accounts) by choosing a date and noting the asset’s value on said date. Get an updated balance on your assets. Calculate the equity in real estate for buy-out or asset trading purposes by first obtaining an appraisal and pay-off amount.
Dividing Tangible Property
If you’ve moved out of the home you shared, you’ve probably already claimed most if not all of your stuff. If not, start with the easier items like your clothing, accessories and momentos. Now’s when you’ll be glad you took your inventory ahead of time.
You should be able to apportion out household items evenly without much challenge. One person always wants the china, while the other the sporting equipment.
Furniture and decorative pieces should be next on your list. Even if both parties used them, equity says that heirlooms should revert to the original owner as separate property. However, as long as it is fair and reasonable, divide up knick knacks as it works best for you. The kids’ furniture should remain with whomever they’ll live with primarily.
Jointly titled vehicles typically get awarded to the party who drove that specific vehicle most often. The loan debt and monthly payments go with the car. Afraid to lose your project car or classic Mustang? That depends largely on whether it’s separate property and if marital money was used to restore the car.
Which leads me to sentimental items like family photo albums, mementos, vacation souvenirs and collectibles. The easiest way to divide these is to scan them and share them digitally. If you need prints, take them to a local photo processor and have copies made.
As you move down your list, have your spouse initial everything as you go. You do it, too. It’ll prevent future arguments and can be attached to the settlement agreement if you need it. It also serves as proof that you both behaved yourselves and mutually handled the division fairly.
Be reasonable. But if you’re met with challenges, you may need the help of a lawyer or mediator to help you continue the process. Weigh the monetary value of the items against the stress of arguing over them. You can always buy another big screen TV and a Laz-E-Boy.
Dividing the House
If you can get a fair price for it, sell it before you divorce. If you can’t, consider a short sale or swap other assets for it. From a tax perspective, there’s not much difference between selling before or after the divorce, but selling it before would imply a completion of the transaction sooner.
If one of you has moved out and hasn’t lived there for several years by the time it’s finally sold, you could be responsible for capital gains tax on any gain in value, for example. Selling it ahead makes you eligible for a $500,000 exclusion on capital gains. Once you’re divorced, the exclusion drops to half that.
Selling the place and dividing up the profits from the sale is the least messy of all possible scenarios.
What If You Can’t Sell?
If you’re in a down market or are upside down in value, consider moving out and renting out the house instead.
Or if there’s a huge emotional attachment to your house or if you decide that keeping it is best for your kids, buy out or get bought out by your spouse. Removing emotions from the equation is always best, but that’s easier said than done.
With a buyout, there isn’t an actual sale involved. A professional appraisal is done of the value. The figures are pretty subjective. Often, homes are placed on the market at a reasonable price but rarely to sellers get full-price offers. Until there’s a buyer willing to pay actual money, it’s just a hypothetical number, one you’re banking your future on.
If you or your spouse aren’t in a position to purchase it at the time, another option is a delayed buyout. In this scenario, the spouse who stays with the place continues making monthly mortgage payments until he or she can afford to buy out the other, or until the kids move out.
It all sounds nice and tidy on paper, but expect more than a few headaches to arise with neat, little plan.This arrangement often lasts a few years. People move on in that time. If the maintenance goes south or if she starts dating someone new who moves in, will you be upset? If you’re the spouse who let her stay with the house, you’re in a vulnerable situation should something go awry.
Your name will still technically be on the mortgage. If she falls behind on the payments or if the house falls into foreclosure, you’re liable. It can even affect your ability to buy another house.
If you absolutely have to keep the house, avoid any messes and hash out all the what-ifs with a lawyer. Come up with a written plan of action. Who’s responsible for repairs? Who’ll play for them? What if mortgage payments aren’t made? As long as worst-case scenarios are hashed out, no one is left holding the bag.
And speaking of worst-case scenarios, some divorced couples choose to live together in a home after divorce if they can’t sell it and neither can afford to live elsewhere until it sells. Being roommates is extremely complicated, both emotionally and physically. Sure, one can take the upstairs and the other the downstairs, but what about common areas? Can you have guests? There’s a lot to work out, and it’s harder than it even sounds, but literally dividing up your house is an option.
Splitting Your Retirement
Grab all your statements for each account for both parties that are current as of the mutually agreed-to valuation date. Retirement accounts include 401K plans, IRAs, Roth IRAs, pensions, and trusts that mature at retirement age, typically 65 years.
If each of you has a separate plan from an employer, you can easily agree that each will retain theirs without distribution. But if you have a huge disparity in balances, consider handing over some of your valuables to make up the difference.
Federal Laws for Each Plan Vary
If you have a variety of different kinds of retirement accounts, do some homework to determine how federal laws pertain to the distribution. Tax consequences can arise from mistakes in classification. Not sure about what you have? Contact your CPA or attorney to have them laid out for you.
A qualified domestic relations order (QDRO) divides up retirement accounts ahead of a divorce. It’s basically a court order instructing your employer’s retirement plan administrator to pay out a portion of the balance to the receiving spouse. The amount is typically 50% of the value from the time the marriage began through to the date of divorce. Penalties and taxes are paid by the receiving spouse.
IRAs and other private retirement accounts are divided up using a transfer incident to divorce. The settlement can designate individual accounts in part or full to one spouse. Banks will roll over or distribute depending on the divorce decree verbiage.
Don’t write your own QDRO or transfer. Leave that to the professionals. Once you have them drawn up, ask your lawyer to attach them to the property settlement.
Dividing Military Benefits
Survivors benefits and pensions, even in the most amicable of divorces, are incredibly complicated to fight over. Before you start to even think about this, sit down with an attorney skilled in The Uniformed Services Former Spouses’ Protection Act (USFSPA).
The accrual date will be the later of the date of marriage or the date of entry into service. To qualify, you must meet the 10/10 rule which states that the marriage must have lasted at least 10 years and overlapped time in service by at least 10 years.
Your order must specify if calculations are based on Gross Retirement Pay or Disposable Retirement Pay and take cost-of-living increases into consideration. If one spouse is active during the divorce proceedings, the requirements of the Servicemembers Civil Relief Actmust be met.
Once the divorce is final, non-military ex-spouses can apply to the military via form DD 2293 to begin payments. Be sure to submit a certified copy of the decree showing the property settlement that orders division of military pension benefits.
Legal assistance for active duty military and retirees may be available from the Judge Advocate General (JAG) office. However, check to make sure the attorney has specialized training and experience in sensitive financial matters related to divorce.
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