Understanding Assets in Divorce

Many people enter mediation with impressions from friends, colleagues, the internet, and even attorneys who don’t practice family law about how to divide assets in divorce.  All too often, this information proves misleading, incomplete, or just wrong.

Common misstatements include:

  • “If she took out her student loan before our marriage, it’s just hers—right?”
  • “We’ve already agreed to how to divide things, so we don’t have to disclose financial information.”
  • “I get half the value of the business he owns—when can I get my check?”

Providing full information on assets proves vital

When people enter the divorce process with misinformation, reaching agreement becomes more difficult.

Couples need to understand:

  • the various types of assets and how they differ,
  • what the law presumes, and
  • the many factors that cause judges—and couples themselves—to deviate from presumptions.

Couples make better decisions when fully informed.

Because the marital estate generally includes everything brought into the marriage and everything amassed during the marriage, couples need to fully disclose to each other all their assets and liabilities–even if they generally agree on how to divide their property. When couples have all the information upfront, they make decisions more confidently–and more quickly, which saves time and money.

Assets include all bank accounts, all retirement benefits, all income sources, all interests in a business or trust, all personal property, and anything else that has value. Liabilities include mortgages, all loans (car, student, family, and others). All credit cards must be disclosed–even if they have a zero balance and have not been used in years.

This full disclosure helps ensure the settlement agreement provides thorough protection for each person from future liability for unknown debts. More, full disclosure of all information ensures that financial decisions are well-grounded and no one makes permanent decisions without all the needed information.

For example, a recent couple on their second marriage had agreed to let “him take his assets and her take hers.” They balked at providing any financial information because “they already knew what they were going to do.” At the insistence of full financial disclosure, Wife learned that Husband had over $2,000,000 in retirement compared to her $150,000. She was aghast.

Because the mediator insisted on full disclosure, Wife understood the true cost of her initial agreement. The couple still ultimately agreed to each take their own retirement, but they made adjustments on other assets. Most importantly, their final agreement was based on knowledge—not presumption.

What are the different pots of money and how do they work?

Once each person has a clear picture of the kinds of assets in the marital pot, they must then understand the differences between the assets–how they are accessed and how they can be used. A few common assets include:

House equity. The equity in the home often represents the major asset for couples. Generally, there are no tax consequences for accessing (however, keep potential capital gains tax in mind). In a hot housing market, this asset can provide ready cash for both spouses. Yet, to access the equity, the house must usually be refinanced by one spouse with a cash-out to the other or sold and the proceeds divided.

If one person is going to refinance the house, the mortgage company usually can’t move forward while the divorce is pending.  Couples may need to time the filing for divorce if quick access to this money is crucial.  More, the person refinancing the home must consider whether the higher mortgage payment (due to paying spouse their portion of the equity and a possibly higher interest rate) makes keeping the house viable.

Retirement plans. There are a variety of retirement plans, each with it’s own rules and benefits. The most common include:

  • Pensions. Pensions can only divide future values—the money cannot be currently used. Further, to divide a pension the couple will need a Qualified Domestic Relations Order (QDRO)—an order from the judge instructing the administrator of the pension plan on how to divide the benefits. Finally, pension money is harder to value because various factors can render the pension holder ineligible to receive benefits. So, the pension is a huge benefit IF it comes through, but may not be a benefit at all—making division in divorce complicated.
  • Plans like 401(K)s or 403 (b)s can be divided via a QDRO without penalty or tax—and, under certain circumstances, the receiving spouse can access the funds for current use without paying penalty (though income taxes will still be due).
  • IRAs do not need a QDRO to divide but can be less flexible in use by the receiving spouse. A traditional IRA provides wonderful retirement benefits but payment of penalties and income tax to access these benefits make it more expensive ready cash for now. A Roth IRA, however, offers great flexibility in divorce. Understanding what kind of IRA is owned helps define options.

Business interests. The ownership of an interest in a business is a marital asset—but how to value the interest proves one of the most complicated issues in divorce. Generally, any portion of a business based on skill is not included in the value (i.e., the expertise of a photographer) making service-oriented businesses tricky. To get a full understanding of the business value, many turn to business valuations. However, these cost anywhere between $5,000 and $25,000–sometimes more than the actual value of the asset.

More, once the value of the business interest is determined, determining how to pay half the value without wiping out the business can be tricky. Though the value of the business is on the table, assessing and dividing that asset will take thorough consideration and careful planning.

Every person wants to emerge from divorce financially whole. Judges use presumptions to divide assets because they don’t have time to understand the nuances of different families’ financial pictures or needs. Mediation offers couples the opportunity to explore how to use all the assets at their disposal to create stability for both. Understanding differing assets helps each person make informed choices for their future.

If you would like more information on achieving financial security in divorce, please email info@TheResolutionCenterIndy.com or call 317-344-9740. We look forward to serving you.

Please note that the content of this blog is very general and for information only. Because each situation is unique, consult a divorce professional to assist you in making sound decisions in your process.

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Though we come from a variety of experiences and backgrounds, the team at The Resolution Center shares one common goal: to bring healing and hope to those going through turmoil. ‘We know conflict wreaks havoc and wrecks dreams. Each of us brings specialized skills and a proven process to move people through the conflict to a place of stability, peace, and the possibility for their future.

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