When a couple makes the difficult decision to divorce, it is never an easy process to engage in and it is understandable that the emotional aspect of it may overtake their thinking. It is very important, however, to try to keep the administrative portion in mind so that things go as smoothly as possible, all things considered, and that the terms of the legal separation are beneficial to both parties, if possible.
There will be numerous considerations involved in untangling a couple’s finances. An experienced family law attorney can provide information about finances and advice on divorce. The first thing to consider in terms of the financial impact of divorce will be whether their various assets are marital property or their individual separate property, also known as premarital property.
Key Takeaways
- In a divorce, it’s important to know the difference between marital and separate property as it affects how assets are divided. Premarital property generally stays with the original owner unless the other spouse has contributed to it during the marriage.
- Dividing assets in a divorce means splitting the value not the actual items themselves so thoughtful negotiation and potentially selling or refinancing big assets like homes and vehicles.
- The financial implications of divorce including tax consequences and qualified domestic relations orders for retirement accounts make it important to seek advice from experienced family law attorneys and financial planners to get fair results.
Marital Property vs. Separate Property
Whatever property either party to a marriage had prior to the date of the marriage is typically considered premarital property. The most common arrangement is that when certain assets are one party’s separate property, those assets will not usually be divided but will instead stay with the owner after the divorce. This has several important exceptions, however, and one spouse’s personal property may become marital property during the course of the marriage.
Examples of Premarital Property:
• A vehicle which belonged to one spouse prior to their marriage
• A house one spouse owned prior to their marriage
• Any assets that were inherited by one spouse prior to their marriage
• Lottery ticket winnings won by one spouse prior to their marriage
• Gambling winnings won by one spouse prior to their marriage
• Assets gained from a legal settlement by one spouse prior to their marriage
• A pet acquired by one spouse prior to their marriage
• A gift given to one spouse either by the other or by someone else prior to the marriage
• A savings or investment account of one of the spouses which belonged exclusively to them prior to their marriage and which was never added to by the other spouse in any way
It is important to understand which assets belong to one of the individuals in a married couple and which are considered marital property, even if one party brought some of those assets into the marriage. Absent a well-structured prenuptial agreement, any of the above examples can potentially become marital property if they are in some way contributed to by the other spouse during the course of the marriage. If this is the case, the property will need to be equitably divided between the parties.
Examples of Marital Property:
• A home purchased by the married couple after the date of their marriage
• A vehicle purchased by the married couple, usually even if one party exclusively drives it
• Valuable collectibles and art that the couple amassed together during the duration of their marriage
• A vacation property or time-share arrangement
• A pet that the couple adopted together during their marriage
• A business the couple started and ran together during their marriage
• A mutual savings account
• A mutual savings account
• A mutual investment account
• A retirement account
Splitting the Value
As evident from some of these examples, not every asset is able to be divided into two separate halves. It is not possible to split a house straight down the middle and give each half to each member of the divorcing couple, for example. What they would have to do instead is split the value of the house. This can only be done if the house is sold and the profits are divided equally between the parties or if one party buys out the other’s half outright.
The same is true with things like vehicles and other tangible property that cannot be literally physically divided in any logical manner. No one is going to cut an expensive painting in half to give each party one of those halves, just as no one is going to disassemble a vehicle and give each party an equal number of parts. Those are obviously silly notions to even contemplate, but it is important for people considering a divorce to understand that the division of assets is more about splitting the value of those assets rather than splitting the assets themselves.
Retirement Accounts
Retirement accounts that people maintain through their employer may seem like they are separate property since they are technically owned by one party via their individual job, but retirement savings are intended to benefit the couple together, not just one member of that couple. Think about it this way: if a married person has saved up for retirement with a 401(k) contribution from work, those savings will be funding their lifestyle once they retire, and their spouse will be part of that lifestyle, so they will directly benefit.
Let’s say retirement savings are paying for a married person’s monthly rent in a senior apartment complex. Assuming their spouse lives with them, that spouse is clearly benefiting from the retirement savings. They may have had an arrangement during their working life wherein one party saved for retirement while the other paid for the main living expenses, and the intention was for both parties to benefit from each other’s contributions to their married life. If they decide to divorce later on, the party who paid the bills has already benefited their soon-to-be ex-spouse and now is justifiably relying on that spouse to benefit them in retirement, even if they have parted ways. This is fair and equitable.
Some retirement accounts are less expensive and all around easier to divide. For example, Roth IRA accounts are easily split by their financial institutions, which is a standard procedure that they follow all the time. On the other hand, 401(k) plans and other types of similar pension plans cannot be easily split; instead, they require a document called a qualified domestic relations order, which they have to obtain from an attorney and get approved by a court. This is not quite as standard and actually requires some tailoring on the part of the attorney they’ve employed, which adds to the cost and time of an already potentially costly and time-consuming process of divorce.
Tax Implications
Some retirement accounts are more favorable from the perspective of the tax implications they carry. The money in a Roth IRA is not taxable when a predetermined holding period has been met. Other retirement accounts, however, are subject to full taxation because they are considered part of your regular income and will be taxed as such.
This is true of various other assets as well, which will carry significantly different tax implications depending on what they are. So, it is important for each party to assess what the value of their assets is expected to be after it has been taxed. This is where an experienced financial planner or similar professional will be very helpful. They can provide extremely useful guidance, which will lead to the most beneficial outcome. Not strategizing in this way is a surefire way to needlessly waste money or walk away from valuable assets you could have walked away with instead.
Some assets are more of a financial burden than they are worth to you. You may want to stay in your marital home, but can you afford the mortgage on your own? It may not be worth it to try to pull that weight as a single-income household. Post-divorce finances are crucial to take into consideration.
Mortgages
A mortgage on a marital home cannot have its former owner still listed, so if a couple is transferring their marital home away from their dual ownership and over to one of them individually during the course of their divorce, the person who gets the house needs to refinance so that just their name is now on the mortgage. Otherwise, they would have to pay off the mortgage altogether.
Conclusion
The process of divorce can be extremely complicated and overwhelming, not to mention emotionally charged. The financial consequences of divorce can be harsh. It is very important that the individuals who are party to a divorce perform a serious assessment of their finances and make decisions based on sound financial advice. This can be accomplished with a comprehensive financial plan that takes into account all the factors that are important to you and minimizes any potential negative financial impact of divorce. It won’t be easy, but it doesn’t have to be daunting.
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