What You Need To Know About Property Division: Why What’s Fair May Not Be Equitable
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By Divorce U Solutions, LLC, Guest Author - June 19, 2017

Marital Property Tug of War.jpg 

 

Division of marital property is a stressful part of the divorce process and causes a lot of angst for most people. When emotions run high, it can be hard to think clearly, and this hinders your ability to make important financial decisions. One of the biggest questions I’m asked as a Certified Divorce Financial Analyst and a trained mediator is, “Is this settlement agreement fair?” Unfortunately, this is the wrong question to ask about settlement agreements because what may seem “fair” on paper is not always equitable in the long run.

What’s most important to me as a CDFA is that you are able to move forward with confidence in the financial decisions you make while transitioning into this new phase of your life. It’s my job to ensure that I make my clients aware of the possible long-term implications of different types of settlement agreements. One of the best ways to ensure your settlement agreement is equitable (notice I didn’t use the word “fair”) is by taking inventory of your assets and liabilities. Just by understanding what you have, what you owe and what you want, you’ll be able to make more informed decisions during settlement negotiations.

Divorce Assets and Liabilities: What’s Mine, What’s His and What’s Ours?

Let’s start with assets. Understanding what assets are and what assets you have provides clarity when making important financial decisions about your future and the future of your children. To understand more about assets and specifically, which assets are marital, below is a list of common types of marital assets.

  • Cash: Money you have in the bank or in a safety security box or UNDER YOUR BED!  
  • Mutual Funds: Assets invested with like strategies of other investors to purchase a collection of stocks, bonds and other securities.
  • Individual Stocks and Bonds: Stocks are ownership in a company and bonds are when you lend money to a company.
  • Real Estate: Your marital home and other properties are an asset if they have a positive net value.
  • Business: If you or your spouse owns a business, there may be a value that’s considered marital.
  • Retirement Plans: IRA, Roth IRA, SEP, Defined Benefit Plans, Defined Contribution Plans, 403B and 401K.  If these assets were acquired during your marriage, they may be divided during the settlement.

It’s also imperative you know what liabilities you have. Liabilities are credit card balances, mortgages, loans, or any money you owe to someone else.

After taking note of your assets and liabilities you’ll have a clearer picture of your finances so you can be a part of the negotiation process in creating an equitable settlement.

Why What’s Deemed “Fair” May Not Be Equitable in Divorce

Here’s an example of a cash flow analysis so you can see the difference between fair and equitable. What may look “fair” on paper may not be “equitable” in the long run.

To ensure any settlement is equitable, it’s important to understand tax ramifications of property settlements. Harry and Sally have decided to get a divorce.  They have three assets - real estate investment property valued at $250,000, an IRA worth $75,000 and a savings account with a balance of $325,000.00.  Harry needs cash, and so he suggested he keep the savings account and offers Sally the real estate investment and IRA.  Harry assumed Sally could sell the real estate to get cash if she needed it.  Everyone, including the attorneys, agreed this was fair and a simple way to divide the assets, so that’s what they did.  However, this division was not equitable.  If Sally decides to liquidate the IRA account or sell the investment property, Sally will pay capital gain taxes which will reduce the amount of money she actually receives from this settlement agreement.

Because of these very unique financial situations, engaging a Certified Divorce Financial Analyst is very important.  Getting an analysis showing the short and long-term implications of different settlement proposals, with expenses, taxes, inflation, and investment earnings factored in, allows you to make informed decisions.  Be Clear!  Property Settlement Agreements are not modifiable once final.  

If you are facing divorce, or currently in the process of divorce, take inventory of your assets and liabilities. Be sure to include all assets, even the ones you may not think are marital. The more information you have about your finances, the better able you are to negotiate for what you want.

If you don’t currently handle the finances, finding the assets might prove a bit challenging at first. You can always review your tax returns or financial statements from the past 3 years to better identify what assets and liabilities you have.

We know it's difficult with all the emotions flooding you right now to focus on the financial aspects of your divorce, but it is critical to know what you have and what you owe so you can make informed financial decisions for you and your children.

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