Dividing Assets in a Divorce

Deciding how to divide a divorcing couple’s assets can be a complicated process. Emotions are already running high, and couples can become contentious. The longer a couple is married, the more assets they have, and the more complicated asset division can become. How assets are classified and the type of asset can influence how the property gets divided.

Understanding Types of Assets in a Divorce

Assets acquired by either spouse during the marriage that are subject to division in a divorce. The first step in dividing assets in a divorce is determining the type of assets the couple owns.

Marital assets are typically obtained together or to benefit the marriage. Examples include the family home purchased after the marriage, opened joint bank accounts, retirement benefits earned during the marriage, and income earned by either spouse during the marriage.

Separate property is assets owned by one spouse before the marriage or acquired individually during the marriage under specific conditions. Examples of separate property include inheritance or gifts received by one spouse, assets acquired before the marriage and kept separate, and compensation from a personal injury lawsuit. Separate property is typically retained by the original owner unless commingled with marital property. Look at the ownership documentation and prenuptial agreement to identify the marital or separate property. It can also help to speak with a divorce attorney.

Cary J. Mogerman is a family law attorney at Carmody MacDonald in St. Louis, Missouri. He explains that spouses can unknowingly convert separate money into martial money by combining their assets. “If it’s an account and marital money is commingled [with separate money] in the account, you run the risk of transmuting the entire account into marital money unless it can be well traced, which is not always easy to do over many years. And many financial institutions aren’t keeping their records as far back as they used to.”

Common Types of Assets Involved in Divorce

Because a divorce requires the separation of two people’s lives, there can be an extensive amount of assets to address. Real estate is one of the most common asset types. The marital home is often the most valuable and emotionally significant asset in a divorce. However, the couple could also own a vacation home or investment real estate. The couple may sell the home and split the proceeds; one spouse buys it from the other, or they could continue to own it jointly. Courts may prioritize the needs of minor children when determining who retains the home.

Other common assets are bank accounts or cash reserves. The couple could have joint and/or individual accounts. Joint accounts are typically treated as marital property, while individual accounts may or may not be. The determination depends on whether the funds were earned during the marriage. Typically, the court will order the accounts frozen during the divorce proceedings to prevent unauthorized spending and withdrawals.

A couple may have retirement accounts, such as IRAs, 401(k)s, pensions, and other employer-sponsored retirement plans. These are typically divided using a Qualified Domestic Relations Order (QDRO) for employer-sponsored plans. IRAs may not require a QDRO but are subject to tax implications. Contributions made during the marriage are usually considered marital property.

Investments, stocks, bonds, mutual funds, and brokerage accounts may be considered community property. It depends on when they were acquired. Courts will consider the tax implications of dividing these assets, as many have significant penalties for early withdrawal or distribution. The court will require a current market valuation and analysis of potential gains and losses for the division.

The largest and most varied category of martial assets is personal property. It could include vehicles, furniture, art collections, jewelry, and other valuable tangible assets. Courts often allow parties to negotiate the division of smaller, personal items. High-value personal property, such as luxury cars or antiques, may require appraisal.

Less commonly, a married couple may own a business. It could be a sole proprietorship, partnership, or corporation. It could be owned by one or both spouses. Business appraisers will evaluate the worth of the business, including assets, revenue, and goodwill. There are a few methods for handling a business division. One spouse may buy out the other’s ownership share. Both spouses could sell the entire business and split the proceeds. The ex-spouses could continue to won’t the business together. Ownership stakes acquired before the marriage may be classified as separate property, but the value accrued during the marriage could be marital property. Prenuptial or postnuptial agreements may influence division.

Legal Framework for Dividing Assets: Equitable Distribution vs. Community Property

Each state has laws governing the division of property when a couple divorces. The goal is an equitable distribution of property. Sometimes, the couple may have a prenuptial or postnuptial agreement stating how they wish to proceed. The court will consider this agreement and other factors.

The majority of states follow an equitable division model. The marital estate is divided fairly but not always equally. The court considers various factors to determine the best method of division.

Less commonly, some states follow community property laws. Under this approach, assets and debts acquired during the marriage are split 50/50. Some exceptions exist, such as separate property (e.g., gifts, inheritances) remaining with the original owner unless commingled. Premarital sets are typically excluded unless they increase in value due to marital efforts. This approach simplifies asset division but doesn’t always account for unique circumstances. Some states have unique exceptions to how the property gets handled. Alaska lets couples opt into community property rules by executing a written agreement. Wisconsin uses a community property system but has specific exceptions for certain inheritances.

Mogerman gives as an example the approach that Mirrouri family courts take when dividing a couple’s assets during a divorce. “Missouri is an equitable division state, and so there’s a list of factors that the statute describes that the court is supposed to consider when dividing the property that’s identified as marital property.”

Role of Prenuptial Agreements

Some couples sign a contractual agreement before marriage. This agreement outlines how assets and debts will be divided if they decide to divorce. Generally, a prenuptial agreement overrides default state laws in equitable distribution and community property states. The agreement allows couples to protect their individual property and premarital investments. For example, it can protect one spouse’s ownership of a piece of property that they bought before the relationship.

For a prenuptial agreement to be enforceable, it must be entered into voluntarily by both parties. It requires full disclosure of each party’s assets and debts. It also needs to comply with state laws. A prenuptial agreement cannot dictate child custody or spousal support arrangements. A spouse can also challenge a prenuptial agreement if they feel it is unfair or they signed under duress.

Court Considerations in Dividing Assets

When dividing assets, a court will consider several factors. The longer a marriage, the more equitable the division of assets. This is because the couple likely has more jointly owned property and contributed to joint efforts more.

Shorter marriages are more likely to have a greater separation of assets that the spouses came into the marriage with. With this, the court will consider each spouse’s contribution to the marriage. This could include financial and non-financial contributions. The health and age of each spouse are considered. Older or ill spouses may receive a larger share of assets to ensure future financial stability. In addition, the court will consider the future financial needs and earning potential of each spouse. There may be disparities in the ability to earn between the divorcing spouses. The court may order spousal support or alimony to create a more equitable distribution.

Another consideration is any potential misconduct committed by any party. This could include hiding money, extravagant spending, or other attempts at fraudulently influencing the division of assets. Courts require accurate valuations for significant assets like businesses, real estate, and retirement accounts. Experts such as appraisers or financial analysts may be consulted. In equitable distribution states, judges have significant discretion to determine what constitutes a “fair” division. Community property states leave less room for discretion due to the strict 50/50 split rule.

Special Considerations in Asset Division

Some assets or liabilities of the married couple require special handling and consideration. Retirement accounts, such as 401(k)s, IRAs, and pensions, are often significant marital assets. They are in one spouse’s name but will be divided between the two parties. A Qualified Domestic Relations Order (QDRO) is a legal order required to divide certain employer-sponsored retirement plans, such as 401(k)s and pensions, without triggering early withdrawal penalties. A QDRO outlines the division of retirement benefits between spouses. The process of creating a QDRO can be complicated. Because of this, it is beneficial to work with an experienced attorney. Making mistakes can lead to financial loss or additional tax consequences.

When a couple separates or divorces, there can be additional financial consequences. If they own real estate or investments, they may incur capital gains taxes. Selling or transferring ownership can generate additional tax liability. Retirement accounts often have penalties or tax liability for early withdrawals. A QDRO can protect against these. When the couple begins filing taxes separately, additional taxable income changes can occur. The couple may find themselves in a different tax bracket with varying tax liabilities.

Often, couples have debt for which they are liable. Dividing assets also involves dividing outstanding debt. Marital debts, such as mortgages, car loans, and credit card debt, are typically divided along with assets. Equitable distribution states allocate debt based on fairness, considering factors like income and who benefited from the debt. Community property states divide debts equally. Even after a divorce, creditors may hold both spouses responsible for joint debts if payments are not made. an example of this would be a jointly owned piece of property. Both ex-spouses would be liable for the mortgage payments. The spouse keeping the property would need to refinance and remove the other spouse to remove the financial liability. Spouses should monitor credit reports during and after divorce to ensure debts are handled appropriately. Legal agreements for debt division should be enforced with the help of an attorney.

Special consideration needs to be taken during property division for divorcing couples with extensive and complex assets. A common situation is the couple owning a business. The business interests can be challenging to value due to varying appraisals and potential future earnings. The court will examine the business’s value during the marriage and each spouse’s contributions. A common solution is to arrange a buyout, where one spouse pays the other to own the business as a whole. Another common example is when the couple owns a significant amount of investments. Stock options and bonuses earned during the marriage are typically considered marital property. There could be potential tax implications for transferring or exercising options. Determining the value of investments that have not been vested yet can also be challenging.

Asset Division in the Divorce Process

Divorce attorneys and financial advisors provide essential expertise to ensure a fair and legal division of assets. Attorneys help navigate state-specific divorce laws, such as equitable distribution or community property rules. They review settlement agreements to ensure they comply with state laws and are equitable for their clients. The lawyer will represent the client in court hearings and trials if negotiations fail. They can also gather and review evidence and documents for discrepancies.

Financial advisors analyze the long-term implications of asset division, including retirement planning and tax considerations. They assess the true value of complex assets, such as businesses or stock options. An advisor can work with couples to develop post-divorce budgets, estate planning, and financial plans tailored to new circumstances. For couples with extensive assets, a financial advisor can provide guidance on tax-efficient strategies for asset division, particularly for retirement accounts and investments.

Negotiation

Negotiating a settlement agreement allows couples to have complete control over how assets get divided. Negotiating outside of court reduces costs, preserves mental well-being, and allows for more flexible outcomes. Mediation or collaborative divorce can foster cooperative discussions between spouses. A trained mediator can guide discussions on contentious topics like spousal support or custody arrangements. Before attending a negotiating proceeding, each party should gather financial records and any relevant documentation. Identify which assets are most important and which can be relinquished for compromise. Evaluate assets not just for their immediate value but for their future benefits, such as retirement accounts or property appreciation.

Finalizing the Division of Assets

Once an agreement is reached, it must be submitted to the court for approval. The court ensures the agreement is fair and complies with state law. Deeds, titles, or account ownership must be updated to reflect the new division of assets. Retirement accounts may require a Qualified Domestic Relations Order (QDRO) for proper transfer. If circumstances change, such as a significant financial shift, modifications to the agreement may be necessary. Couples should monitor the execution of all terms, such as asset transfers or debt prepayments. This can enable them to take action if the other party fails to comply with the agreement.

Find Legal Help

Dividing assets in a divorce can be a complex and emotionally charged process, with each decision impacting your financial future. Whether addressing marital property, retirement accounts, or debts, it’s critical to understand how state laws and agreements like prenuptial contracts affect the process. Consulting a knowledgeable divorce attorney is essential to gain legal advice and safeguard your financial future. Partnering with a trusted divorce attorney ensures your rights are protected.

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