Divorce can be difficult for many reasons, one being the division of property during divorce. Many of things purchased during the course of the marriage are obviously cherished by both people. That being the case, certain items can bring the divorce negotiations to a screaming halt. Somehow, the two of you are going to have to come to an agreement and figure out a way to compromise or the divorce could drag on forever, costing both of you a lot more money.
Fair Does Not Mean Equal
Before we go any further, it is important to note that every state has its own guidelines concerning property division in divorce. It is important to know these specific guidelines prior to opening up the negotiations with your spouse. You also need to understand that while the courts focus on “fairly” dividing property, it does not mean the split will necessarily be 50/50.
The reason it may not be an exact split in dollar value is based on the types of assets being divided. For instance, if one person agrees to give up a $50,000 401(k), the future earnings will be taken into account when applying an actual “value” to the asset. In addition, as individuals, you may decide to give up one asset in favor of another that is less valuable simply because that asset is more important to you.
Community Property or Equitable Distribution
As we alluded to earlier, each state has its own guidelines for distributing property. Your state will follow either community property guidelines or equitable distribution guidelines.
- Community Property – when this method is used, the court will divide all assets 50/50. This method of property division is not the rule of thumb, however. Currently, only ten states still use this as the guideline for property division in divorce. These states are:
- Alaska
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
- Equitable Distribution – the rest of the states in the country use this method for property division in divorce. In this case the court looks at numerous factors to decide how the property will be divided. Some of these factors are:
- Length of marriage
- Earning power of each spouse
- Future value of asset
- Which spouse actually earned the asset
Inventory Assets
Once the decision has been made to divorce, you need to sit down and make a list of assets owned. This includes everything from the family home, car, financials, and even the family pet. Any property that is jointly owned will be included in the divorce, so make sure you are completely aware of everything and its value.
This is where you will also figure out what property in the home is not actually marital property. Both of you more than likely had certain times that you brought into the marriage. In addition, there may have been gifts received meant for the individual, not the couple. If this is the case and the gift was not comingled with marital property, it should not be included in asset list.
An example of this could be a monetary gift received. If that money was kept separate and never become part of the household financials, the person that received this money is still entitled to it. However, if that money was comingled with marital funds and used (for instance, purchasing a home or used in marital investments), then it is now considered marital property.
This is where it starts to get tricky. Once you have your list together, try and sit down with your spouse to get a general idea of the items that are important to each of you. It is almost unavoidable that both of you will have certain items on this list that you both want and feel you both deserve. This is where reaching some type of compromise will help keep the divorce civil. If you cannot find common ground, the divorce is destined for a long court battle.
Deciding Who Gets the Home
In many marriages, the family home is the largest and most valuable asset. It is often assumed the wife will get the home, especially in divorces involving children, but that is not necessarily true. If there are no children, things can become a bit more difficult.
If there are children, realize the courts would prefer their lives be disrupted as little as possible during the divorce. That being said, the courts will often try to offset the cost of the home by offering the spouse that does not have custody equal value of other assets. Realize, though, the asset value will be the value of the equity in the home, not the actual home value.
When there are not enough assets to offset the home, the judge may decide the home needs to be sold, with equal equity proceeds going to both parties. However, if one party would like to remain in the home, he or she can buy out the other party. This is usually done by remortgaging the home and paying the other spouse his or her share of the equity that was already in the home.
Retirement Accounts
This is another large asset that often creates problems in a divorce. The concern here is the current value vs. future value of the asset. In many cases, you will need to hire a specialist to evaluate all financial accounts to come up with a fair value for dividing the asset.
Business Assets
If one or both spouses have a business, it adds even more complications to the property division. Just like a retirement account, the business must be evaluated for both its current value and future earning potential. For instance, if the business has a proven record of turning a $100,000 profit ever year, additional compensation will be awarded to the spouse this gives up his or her share of the business. Or, as a couple you may decide to remain business partners. An additional solution would be for the spouse that runs the business to continue to pay the other spouse a share of the profits for a specific period of time.
How Can We Keep This Out of Court?
The more and complex assets you have, the more difficult it will probably be to keep the case out of divorce court. However, the two of you can work together as mentioned above, or you can hire a mediator to help expedite the property division. This is a great way to keep the two of you out of the same room, especially if you are not getting along and seemingly cannot work together on your own to settle these issues.
If you have not already, it is probably time to hire a divorce attorney to help you through this. He or she will be familiar with the actual laws of your state and can serve as your representative during mediation sessions.
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During the divorce. Neither one of us had a lawyer. And she got half my 401k. My question is. She also has a IRA, my 402k got split 50/50, her IRA didn’t get split, should it have been included and split like mine?
This really depends on a number of factors, including what state you live in and where the divorce was filed. There are 2-types of ways courts divide “marital property” (that is, property acquired during the marriage): FYI: there are ALWAYS exceptions, such as inheritances, gifts, and other items that might NOT be divided during divorce:
1. Equitable Distribution States: The majority of states are equitable distribution states. The court divides all property acquired by the party’s on what the court deems is “fair” – note: this does NOT mean “equal”. Fair might be 50/50 – but it could also be 70/30, depending on the circumstances.
2. Community Property States: Nine states are community property states. They handle things a little differently than equitable division states, and each of those 9-states is a bit different even. Texas, for example, is a community property state. Primarily speaking, community property works like this: all property acquired during the marriage is deemed “community property.” That means that it is subject to a 50/50 division at divorce.
Texas courts, for example, might say that 401k and IRA’s should be divided equally, or take into account some other factors to still distribute a bigger portion to one person than the other (ie. a lower wage earning spouse in a long marriage; a homemaker spouse in a long marriage; etc.).
Now, to take an example and apply it in a community property state like Texas versus an equitable distribution state like Illinois, this is a common result (note, again this is what is most common, many exceptions exist!):
John and Mary have been married for 15-years. On the day they were married, Mary had an IRA with $10,000 and John had a 401k with $25,000. At time of divorce, Mary’s IRA is worth $40,000 and John’s 401k is worth $100,000.
A. Equitable Distribution: Many factors including future earning capacity of each spouse, amount of other assets, and other factors. Generally speaking, courts do what they believe is “fair”, which starts at a 50/50 division and then goes one way or the other. Let’s say they both earn similar (within $25,000/year) incomes. If both parties added to their investments, the addition and growth should be divided equitably (maybe 50/50) but the initial amount in their account before marriage would and should remain separate property. If one or neither of them added any additional money to either account, and this higher-value is simply stock market growth, the entire balance remains separate property and thus, not subject to division. Now lets assume that they both continued to add money to the accounts throughout the marriage. An oversimplification looks like this: Mary has $10,000 of separate property out of her $40,000 and John has $25,000 of separate property out of his 401k. The remaining balances ($30,000 for Mary, $75,000 for John for a total of $105,000.00) is marital property, and subject to “equitable” (fair) division. Fair might be 50/50, so, that would give Mary $52,500.00 and John $52,500.00. This means that Mary does not divide her IRA with John, but John will send a portion of his 401k to Mary ($22,500.00) to get her the $52,500.00.
B. Community Property: Many Factors involved, but primarily a 50/50 split of the property acquired during the marriage. Property acquired before the marriage will stay with each party as separate property and the increases will be deemed marital property and subject to division (50/50). Whether either Mary or John add to the investment or not, the growth above the initial amounts is community property and subject to division. So each party would receive $52,500.00 of the total community property ($105,000.00). This means, again, that Mary receives $22,500 from John.
Exceptions to either states rules: Many exist, and some factors might be what a court decides is fair. For example, lets say Mary earns $25,000/year in the above example and John earns $100,000/year. In either state, a judge might say that Mary should receive a “disproportionately larger share” of the marital estate (of the marital property). This might mean that Mary gets more than $22,500, and maybe gets $40,000.00 from John.
The only way to know for sure is to speak with an expert on divorce and division or property in your particular state and go over the details – as you can see, there are many factors to go into the decision to award money from one spouse to the other, but this should provide a good starting point!