When It Comes To Divorce 50/50 May Not Mean Equal

Some people mistakenly believe that if their marriage ends in divorce that assets will automatically be split 50/50.  However, this is not the case.  Laws regarding how to split marital property vary from state to state, but there are two general systems for dividing property in divorce.

Community Property – In community property states, any assets accumulated during the marriage are split equally.  Property owned before the marriage or income produced from that property is separate.  Additionally, inheritances and money awarded as a result of a personal injury case would be separate.

Equitable distribution – In an equitable distribution states, property division should be “fair and equitable”, but not necessarily equal.  There is no set measure for what is “fair and equitable” but certain factors such as length of the marriage and needs of the spouses are considered when determining “fairness.”

Given the property laws of your state, deciding how to split assets is more than just dividing the values on paper.  People need to pay attention to the decisions they make about dividing property since they have only one shot at doing so.  Some are tempted to rush through this process simply to end the stress.  People sometimes mistakenly believe that dividing everything in half is the simplest and fairest way of handling things.  This is not necessarily true. 

First, you must understand that assets differ in a number of ways.  Here are a few questions to consider:

Are they liquid?
Are they tax deferred?
Are they tangible?
Are they risky? 

Not all decisions should be made on dollars and cents.  Sometimes people have an emotional connection to a particular asset that is worth more than the value: antiques, a house, collectibles.  These assets need to be considered in the settlement as well.

Assets also differ from paper values because of tax implications: cash is different than the after tax value of a stock, for example.  Cash is pure, but to sell a stock, you may have capital gains taxes to pay that reduce the paper value of the stock.  Similarly, assets may have costs to consider.  Let’s assume that a couple has a savings account with $300,000 in it and a house that they own out-right worth $300,000.  The assumption is that if one spouse takes the house and the other takes the cash that it would be even.  However, that is an extremely short-sighted view.  The party accepting the house should have also considered other costs such as property taxes and upkeep and maintenance.  So, while $300,000 savings account will be earning interest and making one spouse additional money, the other spouse will have extra expenses that they may not have considered.

Assets are not the only part of marital estate, so are debts.  Unlike assets, however that may be transferred easily by title without any immediate taxable consequence, debts cannot be transferred easily.  Federal law, not state divorce laws, governs most debts.  Allocating debts in divorce may mean paying them off, refinancing, or applying for new debt.  Hoping one spouse makes payments on debt in the name of their ex is at best hopeful, and at worst, risky.  Different types of debt carry different fees, charge, penalties and terms.  If debts are to be settled in divorce, it is important to do it before the divorce is final if possible.  Just because you have $10,000 left on your car loan and $10,000 credit card debt doesn’t mean that the car loan should go one spouse while the credit card debt goes to the other.  It’s just not that simple.

Even in the best of circumstances, divorce settlements are often agreed upon with limited insight into the long-term consequences.  As a result, settlements that seem to be fair and workable initially do not necessarily stand the test of time.  Therefore, it is highly recommended that a divorce financial planner be brought into the process so that you can see how decisions you make today will affect the rest of your life.