1. How are Assets Split in a Divorce?

Featured Resource: Blog – Financial Considerations for Dividing Assets in a Divorce

Dividing assets in a divorce involves more than just splitting things down the middle. It requires a thorough understanding of your financial situation, the laws in your state, and your long-term financial goals. A well-structured asset division can help both parties achieve financial stability and independence after the divorce. Conversely, a poorly planned division can lead to long-term financial hardship. Consequently, the division of assets can be one of the most complex and emotionally charged aspects of the divorce process.

The State You Reside In Matters

The legal framework governing asset division varies significantly depending on whether you live in a separate property state or a community property state. Understanding these differences is fundamental to navigating your divorce proceedings.

Separate Property States

In separate property states, asset division focuses on what is considered "just" or "equitable" when splitting assets. It's crucial to understand that "equitable" does not necessarily mean "equal." The court will consider various factors to ensure a fair distribution, even if it's not a 50/50 split. For example, in Missouri, courts consider the following factors:

1. Each spouse's current and future earning potential, education, and overall financial health.
2. Contributions to marital property, including both financial and non-financial. Non-financial contributions may include homemaking, childcare, and supporting the other spouse's career. The value of these contributions is often a significant factor in determining an equitable division.
3. Nonmarital property is generally considered separate property and may not be subject to division. However, the value of these assets can still be a factor in determining the overall equitable distribution of marital property.
4. The conduct of parties during the marriage.
5. The financial needs of children are a priority. Custodial arrangements and child support obligations can significantly influence how assets are divided.

Community Property States

Community property states take a different approach. Generally, they aim for an equal (50/50) division of community property. Community property typically includes all assets acquired during the marriage, regardless of which spouse earned or acquired them. Separate property, such as assets owned before marriage or received as gifts or inheritance, is generally not subject to division.

Nine states operate under community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. It's important to note that even in community property states, the division of assets may not always be perfectly equal in practice. Factors such as prenuptial agreements, commingling of separate and community property, and other circumstances can influence the final distribution.

The Asset Division Process

Splitting assets effectively requires a systematic approach. Here's a breakdown of the key steps involved:

1. Gather all relevant documentation.
2. Inventory all the assets.
3. Categorize by asset type.
4. Value each asset.
5. Categorize the property as either marital property or separate property.

Featured Resource: Download our FREE Marital Asset and Debt Separation Worksheet 

How the above steps are followed depends on the path you take to divorce. If you are following a method outside of court, such as mediation or collaborative divorce, you may be working on this together with your spouse, mediator, and/or your attorneys. Generally, these steps are completed collaboratively and the value and completeness of each item in the inventory is agreed upon. Then, you may negotiate to come to an agreement on how to divide the assets.

If your divorce is contested or you have separate legal counsel, you may still attempt to “settle” how the assets are divided without the need for a court intervention. Still, however, you (with your attorneys) will follow the above steps ahead of determining how to split everything. In some cases, if a settlement agreement cannot be reached, it may be necessary to go to court for a decision on the asset split.

2. How are Debts Split in a Divorce?

Featured Resource: Blog – Divorce and Debt: General Financial Considerations

Generally, the division of debts follows the same process (and is completed at the same time) as the division of assets. As with assets, the state in which your divorce takes place dictates how debts are divided. Debts incurred before the marriage may be considered separate property and remain the responsibility of the spouse who incurred them. It is important to document all separate and non-marital debts.

There are several aspects of dividing debts that are important to consider.

Secured vs. Unsecured Debt

Debts are typically categorized as either secured or unsecured.

• Secured Debt: This type of debt is tied to an asset, such as a mortgage on a house or a loan on a car. The spouse who receives the asset is generally responsible for the associated debt.
• Unsecured Debt: These are personal debts not backed by a specific asset, such as credit card balances, personal loans, and student loans. The division of unsecured debt can be more complex.

Common Types of Debt

• Credit Cards: Generally, credit card balances incurred for the benefit of the household are considered marital debt, regardless of whose name is on the card. However, secret credit cards used for individual purchases may be treated differently.
• Mortgages and Auto Loans: As secured debts, the spouse who retains the home or vehicle typically takes on the responsibility for the associated loan.
• Business Debts: These can be complex, especially if personal guarantees from one or both spouses exist. The spouse who keeps the business is usually responsible for its debts, but you must review all loan agreements to ensure compliance.
• Student Loans: The treatment of student loans varies by state. Loans incurred before the marriage are often considered separate, while those incurred during the marriage may be marital, depending on how the funds were used.

Recommendations and Best Practices for Debts in a Divorce

• Get a Release of Liability: A divorce decree only governs the relationship between you and your ex-spouse. It does not supersede your agreement with the creditor. If your name is on a joint debt, the creditor can still hold you responsible. Therefore, it is crucial to request that your ex-spouse refinance the loan in their name or have you formally removed from the debt.
• Close Joint Accounts: To prevent future liability, any joint credit cards or revolving credit lines should be paid off and closed as part of the separation agreement.
• Create a Repayment Plan: Understand your new financial responsibilities and develop a clear plan for paying off the debts assigned to you. In some cases, it may be necessary to sell assets to cover outstanding debts.
  
  

3. Are there any special divorce considerations for the marital home?

Featured Resource: Blog – Financial Planning for the Marital Home in Divorce

For many couples, the marital home is the one of the most significant asset they own, making its division a key and often emotional part of the divorce. Before you decide to fight for the home, it's essential to consider the financial realities of keeping it.

Plan for Affordability

Many people want to keep the family home for emotional reasons, especially if children are involved. However, it's crucial to assess if you can truly afford the property on your new, post-divorce budget. Consider all the ongoing costs, including mortgage payments, property taxes, insurance, utilities, and maintenance. Your financial situation will change significantly, and you must determine if the home is a realistic long-term expense.

A financial planner can help you analyze your post-divorce income sources and expenses to create a detailed budget. This objective look at your financial situation will help you make a sound decision rather than an emotional one.

Plan for Taxes

The tax implications of the marital home can be complex and lead to costly mistakes if not properly considered.

• Cost Basis: It's vital to have adequate records to document your home's "cost basis," which is its purchase price plus the cost of any capital improvements (e.g., additions, remodels). This is essential for calculating any future capital gains tax.
• Capital Gains Exclusion: When you sell a primary residence, you may be able to exclude a portion of the profit from taxable income. The IRS allows a $250,000 exclusion for single filers and a $500,000 exclusion for married couples filing jointly. To qualify, you must have owned and lived in the home for at least two of the five years preceding the sale.
• Post-Divorce Sale: The timing of a home sale can have a significant tax impact. If you sell the home after the divorce is finalized, you may only be eligible for the single-filer exclusion, which is half the amount of the married-filing-jointly exclusion. This can result in a much higher tax bill. In some cases, a divorce agreement can stipulate that an ex-spouse who no longer lives in the home can still qualify for the exclusion, but this requires careful planning.

Navigating these financial and tax considerations with a divorce financial planner and a tax professional is highly recommended to protect your financial future.

4. Are there any special considerations for divorcing with a business or private investments?

Featured Resource: Blog – Divorcing With a Business or Private Investments: Key Financial Considerations

Absolutely. When business ownership and private investments are involved, the complexities of divorce multiply. Unlike dividing household items or liquid assets, these situations require a nuanced approach and specialized expertise.

What do we mean by “private investments”?

Private investments are any investment owned within the marriage that lacks a readily available, public valuation. Think rental properties, investments in private equity, hedge funds, or private real estate partnerships. These contrast with public stocks, whose values are transparent and updated daily on regulated markets. Importantly, private investments involve passive ownership, where neither spouse actively manages nor controls the business entity.

What do we mean by a “business ownership”?

When one or both spouses own all or a significant portion of a private business. Typically, one or both spouses are actively involved in its day-to-day operations and have significant control over the operations of the business.

A Key Challenge: Determining Proper Value

A fundamental challenge in divorce cases is determining the right value to assign to a small business or private investment. Divorce attorneys and judges, while skilled in legal matters, generally lack the specialized expertise needed to accurately value a private business or investment. This is where the need for professional valuation comes into play. In cases where values may be significant, it is highly recommended to obtain a professional valuation.

Other Issues of Business Ownership in a Divorce

Beyond valuation, other issues must be addressed. Who controls the business during the divorce? How is income from the business distributed to both spouses? And finally, how will the business be divided when the divorce is finalized? Common options for splitting a business include:

1. Selling the business and splitting the proceeds. This provides a clean financial break but eliminates the economic engine for both parties.
2. One spouse "buys out" the other. Under this arrangement, an agreed-upon value is assigned to the business, and the spouse who gives up ownership receives an equivalent amount of non-business marital assets. This is only viable if there are sufficient other assets.
3. Continuing to jointly own the business. This is generally the least-used option due to the high likelihood of continued conflict.

5. How are pensions handled in a divorce?

Featured Resource: Blog – Divorce and Pension Plans: Valuation and Planning

Pension plans, especially defined benefit plans, present unique challenges during a divorce. Understanding these complexities is vital for a fair and equitable division.

What Is a Defined Benefit Pension Plan?

A defined benefit pension plan is a retirement plan where an employer promises a specific monthly benefit at retirement. The benefit is typically calculated using a formula based on salary and years of service. Unlike a 401(k), the employer manages the investments, which can complicate the process of valuation and division in a divorce.

Division of Private vs. Public Pensions

The rules for dividing a pension vary depending on whether it's a private or public plan.

• Private Pensions: Governed by the Employee Retirement Income Security Act (ERISA), these are typically divided using a Qualified Domestic Relations Order (QDRO). A QDRO is a court-approved order that directs the plan administrator on how to distribute a portion of the pension to the former spouse. It is crucial to have a legal professional with experience draft this document to ensure it complies with the plan's specific rules.
• Public Pensions: These, such as plans for state or government employees, may have different rules. For instance, while some public plans accept QDROs, others, like Missouri's State Employees' Retirement System (MOSERS), require a "Division of Benefits Order" (DBO).

Valuing and Dividing a Pension

Valuing a pension requires careful consideration. A key distinction is between the pension's estimated future benefit and its present-day value. A future benefit expected is not the same as cash today. A professional valuation discounts those future payments to their present value, which is a more accurate representation of the pension's worth in the context of a divorce.

Two common methods for division are:

1. Present Cash Value Method: The present-day value of the pension is calculated and assigned a total dollar value (a “lump sum”) and is then "offset" by other assets. The pension holder keeps the full pension, and the other spouse receives assets of equal value, such as a larger share of the marital home or investment accounts.
2. Reserve Jurisdiction Method: This method grants the non-employee spouse the right to receive a portion of the monthly pension payments as soon as the employee spouse begins receiving them in the future. This requires a specific legal order (like a QDRO or DBO) to be submitted to the plan administrator.

Not all pensions can be divided. Some public pensions may be considered non-divisible under state law. However, even in these cases, the pension's value may still be considered when negotiating other aspects of the divorce settlement.

6. Are there common tax issues divorcees face?

Featured Resource: Blog – Divorce and Taxes: Five Common Mistakes to Avoid

Absolutely. Many couples make critical tax-related mistakes during their divorce. We want to help you avoid the same pitfalls. Here are some of the most common mistakes we see:

Mistake #1: The Illusion of Fairness—Ignoring Taxes When Dividing Assets

On paper, splitting assets 50/50 might seem fair, but it can lead to a lopsided financial outcome. The "illusion of fairness" arises because not all assets are created equal from a tax standpoint. For example, a pre-tax retirement account and a cash account with the same statement balance have very different after-tax values. The retirement account comes with a future tax liability that reduces its real spending power. When negotiating your settlement, it’s essential to consider the potential tax liability attached to each asset to ensure the division is truly equitable.

Mistake #2: Failing to Consider the Tax Benefits of Dependents

When children are involved, deciding who claims them as a dependent on their tax return is a major negotiation point. Common arrangements include splitting the children or alternating years. However, it’s important to assess whether the tax benefits, such as the Child Tax Credit or education credits, are the same for both spouses. Because of income limitations on certain tax credits, the financial benefit of claiming a dependent can be significantly higher for one spouse over the other, making a 50/50 split worse for all parties.

Mistake # 3. Failing to Plan for Early Retirement Withdrawals, If Needed

Divorce often requires a significant financial shift, and you might need access to retirement funds to cover living expenses, pay off debts, or start over. But withdrawing from your retirement accounts before you're 59 ½ usually comes with a hefty 10% penalty. If there is no way to avoid withdrawing from retirement accounts before you turn 59.5, there may still be ways you can structure the distribution to avoid the extra 10% penalty cost. Given the complexity of these considerations, however, you should consult with a qualified tax or financial professional.

Mistake #4: Filing Taxes Separately When Still Married

Filing separately before your divorce is finalized might seem like a way to untangle your finances, but it can be a costly mistake. For tax purposes, you are considered married until your divorce decree is final. Filing separately can cause you to lose out on valuable tax credits and deductions and may limit your ability to contribute to certain retirement accounts. If you are still legally married at the end of the year, it’s often more beneficial to file a joint return. Be sure to have a clear agreement on how to handle any tax refund or bill.

Divorce has significant tax consequences that can impact your financial future. By understanding these common mistakes and proactively planning with a qualified tax professional and a divorce attorney, you can make more informed decisions and protect your financial well-being.

Mistake # 5. Not Dividing This Year’s Refund (Or the Bill) Fairly

Even if you're separated, you're still legally married for tax purposes until your divorce is finalized. If you were separated before year-end but still legally married as of December 31^st, you must still file as married. Meanwhile, tax payments should continue to be paid by both spouses.

If you're getting divorced before your final married return has been filed, you should have a clear agreement in place on how to handle any tax refund or any taxes owed. This can prevent arguments and potential financial hardship down the line.

7. Will I be financially okay after my divorce?

Featured Resource: Blog – Begin With Your Destination in Mind: A Comprehensive Financial Plan for Divorcees

This may be the toughest question to answer on your own. The good news is that a path exists to getting a clear answer.

A divorce financial plan is an essential tool for navigating the financial complexities of divorce. It serves as a comprehensive roadmap, offering clarity and confidence as you make critical decisions about your future. Instead of feeling adrift, a solid plan empowers you to take control of your financial journey and secure a stable post-divorce life. This proactive approach allows you to anticipate challenges and opportunities before you even agree to a settlement, helping you steer clear of common pitfalls and arrive at a fair outcome.

Why You Need a Divorce Financial Plan

A divorce financial plan is the key to understanding the real-world impact of your settlement options or divorce outcome. It helps answer crucial questions that affect your long-term financial health, such as:

• Can I afford to keep the marital home without sacrificing my lifestyle?
• Which assets—like a pension, investment accounts, or the family home—are best for me to retain, considering my financial goals?
• How will my taxes change if I accept more pre-tax funds, like a 401(k), versus post-tax assets?
• Will I need to re-enter the workforce, or can I maintain my financial independence?
• How will my day-to-day lifestyle be affected after the divorce is finalized?

By exploring these questions, you can make informed decisions during negotiations. For example, you might discover that keeping the family home is financially unsustainable and that it's more beneficial to prioritize other assets that better align with your future goals. This insight can save you from a settlement that looks good on paper but doesn't work in practice.

A qualified financial advisor can help you develop and evaluate a comprehensive plan. This professional guidance ensures that your plan is tailored to your unique circumstances and that you consider all possible scenarios as settlement conversations evolve. Ultimately, a financial plan is your most powerful tool for achieving a settlement that truly aligns with your long-term goals and priorities.

Qualities of a Comprehensive Financial Plan

To be effective, a financial plan for divorce should have a few key qualities:

• Begin With the Desired Outcome: A good plan starts with your goals. What is your ideal monthly income? What other financial milestones do you hope to achieve? The plan should clearly outline how you can work toward these objectives.
• Optimize Opportunities: It's not just about managing what you have. A comprehensive plan helps you find potential financial benefits, like specific tax deductions or investment strategies, that you may have overlooked.
• Minimize Risks: Life after divorce can be unpredictable. A solid plan helps you anticipate and prepare for potential risks, such as unexpected expenses or market fluctuations, by incorporating strategies like building an emergency fund.
• Provide a Clear Plan of Action: The plan must be actionable. It should provide specific, detailed steps for you to take to achieve your goals, detailing what to do and when. There should be no ambiguity.

Are you interested in speaking with our professional team about divorce financial planning services? Click the link below to schedule a FREE 30 minute consultation with one of our Certified Divorce Financial Analysts.