By Eric Bank
Normally, divorce cases require marital assets to be divvied up and distributed. Marital assets are ones that were obtained during marriage, and do not include the assets brought into the marriage by each spouse. Assets bequeathed to a single spouse are also exempt from division in a divorce.
States has their own laws regarding property division during divorce, but two basic rules apply:
Community Property: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Puerto Rico Texas, Washington and Wisconsin have adopted community property laws. Under these laws, each spouse’s property is classified as either equally owned by both spouses (community property) or as the separate property belonging to one spouse or the other. During a divorce, community property is usually split down the middle (with regard to dollar value) and distributed to each spouse, while separate property is kept by its original owner.
Equitable Distribution: All the other states use some type of equitable distribution scheme for divorces, in which property is divided fairly rather than equally. This injects a degree of subjectivity, because someone (a judge, the couple, lawyers) must agree on a fair distribution of assets. A judge might order one spouse to contribute some of his or her separate property in order to attain an equitable resolution for both spouses.
A court judge may decide not to divide certain physical property to achieve equal or fair distribution. The judge may instead provide each spouse with a percentage of the total property value. In community property locales, this value split is 50-50, but the split can reflect some other ratio in equitable-distribution states. Shared debts are also divided according to the value-split formula.
It is illegal for either spouse to conceal property in order to evade asset-sharing during a divorce.
Certain assets require special considerations. In this guide, we’ll survey the details regarding the division of a home, of other property and accounts, and of retirement accounts.
The marital home is often the costliest shared property to be divided in a divorce. Beyond its dollar value, a home may create emotional attachments, and dividing it can be made more difficult by concerns involving children, including visitation/custodial rights, moving children to a new location/school, etc. And truthfully, a number of couples fight to keep the home out of greed, spite, anger or some other sensitive reason.
Often, a home is assigned to one of the spouses, but if that proves to be unwanted or impossible, the property may be sold and the money divided on the basis of the value split. Up to $0.5 million of capital gains from the disposition of the primary home is not subject to income tax. Sometimes, a judge may assign the home to one spouse, who is then obligated to pay off the other spouse using the split-value formula.
When deciding whether to request title to the marital home, a spouse would do well to consider the affordability of the property. If you are assigned the home, you most likely will need a new mortgage under your own name. If you aren’t assigned the home, you should have your name deleted from the mortgage as quickly as possible. This is a prudent safeguard to defend your credit rating in case your ex-spouse can’t make the mortgage payments, causing the lender to foreclose on the home. It is important for the spouse who is getting the property to have a realistic outlook concerning the costs of maintaining the property, including property taxes, upkeep, utility payments, and so on.
The distribution of accounts and other property may precipitate considerable squabbling between divorcing spouses. Property such as bank accounts and CDs, brokerage holdings (mutual funds, stocks, bonds), cars, vacation homes, investment property, timeshares, household property (including antiques, jewelry and other valuable items), frequent flyer points, the surrender value of joint annuities and insurance contracts, lottery winnings and other assets may be distributed according to the agreed value split or may be liquidated for cash that is then divided between the spouses. An impartial third-party may be employed to evaluated assets that one spouse wishes to retain rather than liquidate, in order to ensure that the other spouse gets the appropriate cash compensation.
Other points to bear in mind that
The sale of property for a profit will generate capital gains tax for one or both spouses.
There may be expenses stemming from the restructuring of legal agreements such as deeds, wills, annuities, insurance policies and trusts.
A partnership or joint business arrangement between the spouses will no doubt increase the cost and complexity of a divorce.
Occasionally, one spouse may have suspicions that the other spouse is concealing assets. When this is the case, a private investigator might be retained to expose any hidden property.
During a divorce proceeding, the judge might issue a qualified domestic relations order (QDRO) for the income and gains earned by retirement accounts (such as IRAs, 401(k)s, 403(b)s, or defined benefit pensions) since the beginning of the marriage. In situations in which the entire account is transferred from the owner to the other spouse, the account can be re-titled in the other spouse’s name. For partial distributions, a new IRA can be established and assets transferred tax- and penalty-free.
When dealing with your spouse’s pension plan, it is a good idea for your attorney to estimate the plan’s expected value as of the anticipated retirement date rather than at the current value, as you are eligible for the former, usually a greater amount. By the same token, if your spouse has earned employee stock options, you might favor collecting your portion at the time the options are exercised, as they may be worth more at the later date. If you have haven’t reached the age of 59 ½ years, but want to withdraw IRA assets awarded you through divorce, you can establish substantially equal periodic payments (essentially, an annuity) and receive IRA payouts without coughing up the 10-percent penalty for early-withdrawals.