In almost every divorce case there will be assets or debts that must be divided between the parties.
This post discusses the issues associated with property division and how Family Law Software can help.
Marital versus Separate Property
Only marital property is divided in the divorce in most states, and in most situations. This sounds simple but can actually be fairly complex when the law is applied to the complicated facts of some people’s assets.
Many couples are surprised that the right to an asset is not automatically established by ownership or title but depends instead on the legal designation of property as “marital” (or not).
Property that is not marital is typically called “separate property” (although there are different names in some states).
So the first question is, “what is marital property?”
Typically, marital property is property that is received or earned during the marriage.
Separate property is the reverse – property that is received before the marriage or after the separation or date of the divorce.
Separate property also typically includes gifts or inheritances designated to one spouse, unless that spouse takes an action to incorporate the property into marital property.
An action that incorporates separate property into the marriage typically includes regularly drawing on an account for marital expenses, or using money in an account to purchase a home with joint ownership, without specifying that a portion of the home will remain separate property.
Some assets can be partially marital and partially separate.
Examples of partially marital and partially separate property include the following:
- A home where the parties live that was purchased by one party before the marriage, with mortgage payments continuing during the marriage.
- An IRA or 401(k) account that existed before the marriage, where contributions to the account occurred during the marriage.
- A defined benefit pension, where the participant worked during the marriage, but started in the plan before the marriage, and/or continued to participate after the separation.
Equitable Distribution versus Community Property
Now that we know what property is subject to division between the parties, we have to determine what rules govern the division.
This depends on whether the case is occurring in an “equitable distribution” state or a “community property” state.
Very generally speaking, in an “equitable distribution” state, the law requires that marital property be divided equitably, that is, fairly, between the parties, considering all the facts of the situation.
Salient facts of the situation typically include the duration of the marriage, how much each party’s earnings contributed to the assets, and whether one party left earning potential on the table in order to help care for the family.
In community property states, marital property is divided 50/50, regardless of any of the above factors.
The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Organizing the assets
In either case, it is essential to gather and list information regarding all assets and liabilities.
This is for the benefit of the parties, but also because the law in most jurisdictions requires full disclosure of all assets and debts (and income and expenses) by each party to the other.
Assets to marshal include digital assets, real property, cash and investment accounts, retirement accounts, and even personal property.
Family Law Software makes it easy. For each asset you enter, you can designate a portion as marital and a portion as separate, if that is the case. You can also designate the asset as entirely separate.
You can also designate an asset as a child’s asset, so it appears in some totals, but is not counted in the property division.
Also, for a defined benefit pension, Family Law Software will help you determine the present value, and automatically compute the coverture fraction to show how much of that value is marital property.
In several states, the software will also prepare the state’s financial statement, based on the assets you enter. Those states are: California, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, and Pennsylvania,
Dividing the Assets
Once you enter the assets, Family Law Software will create a spreadsheet of just the marital amounts, so you can easily divide that among the parties.
For each asset, you can enter either the dollar amount or the percentage that one party will keep.
The software will then calculate the amounts not entered (dollars and percentages) for both parties.
This allows maximum flexibility and creativity while using the property division worksheet.
You can also view the division with separate property included, so you can see not only the marital split, but also the total property, including separate property, that each party will end up with.
In equitable distribution states, the final result must be fair under the circumstances.
A divorce does not generally trigger a sale of all assets where proceeds are to be split.
Each party will walk away with specific property, typically including “their” vehicle, favorite personal items, and obligations that are difficult to walk away from including student loans or credit card debt.
Once the assets and debts are allocated to the natural party for that asset, the result may be that one party is left with more property than the other. And often, the expectation is that somehow the total property will be split 50/50.
To help resolve the difference, Family Law Software shows what is called an “equalization amount.” This is the amount of assets that must be moved from one party to the other to reach a 50/50 split.
There is also an option to specify any other split (e.g., 60/40), and Family Law Software will show the amount of assets that must be moved from one party to the other to achieve that target result as well.
Sometimes, there is no property available to equalize the asset division.
For example, there may two assets: a house and a pension. And one may be worth $300,000 and the other may be worth $400,000.
So $50,000 has to be moved somehow from one party to the other in order to achieve a 50/50 split.
In that case, one party can promise to pay the other party $50,000 over a period of years.
That payment is called a “property settlement.”
Family Law Software allows you to enter a property settlement amount and specify terms, including the interest rate and number of years for payment.
The software will then calculate the annual payment amount, including the interest.
It will also include the property settlement in the property division spreadsheet and printed report, so these can show the parties ending up at 50/50, or other specified division, including the property settlement.
Property Division Scenarios
There’s more than one way to divide an orange, and property division in a divorce is no different.
That is why Family Law Software offers side by side property division scenarios.
In these scenarios, you can change not only the allocation of the property, but also the value of each asset.
So, for example, if one party claims that the home is worth $350,000 and the other party says $500,000, you can see the impact on the property division of both valuations.
Family Law Software creates charts and graphs that are perfect for comparing the final proposed division. Looking at different options, in multiple formats, allows the parties to collaborate, negotiate, and reach resolution faster.
Property Division After Tax
In the heat of negotiations parties may not appreciate the extent to which the division or liquidation of assets could result in tax consequences.
Tax consequences can make a division that seems fair actually be unequal.
The simple example is one where there are two equally valuable stocks, one of which has a low basis and the other of which has a high basis. The after-tax value of the high basis stock is more than the after-tax value of the low-basis stock.
So if each party took one stock, and both parties sold their stock after the settlement, the ultimate amount received after tax would not be equal.
Or, there can be a home and a pension, of equal value. But the home may be able to be sold tax-free, while the pension will be taxable income.
Properties that typically have built-in tax consequences include IRA and 401(k) plans, defined benefit pension plans, appreciated real estate, and appreciated investment accounts.
Family Law Software is the only program that will, in a sophisticated way, tax-effect the proposed marital property division.
The software looks at each asset’s tax basis and current value, at the likely marginal tax rate in retirement (for retirement assets), and at the current capital gains rate (for other capital assets).
All the calculated tax rates can be adjusted by users.
Then, the software calculates the percentage to be paid in tax upon sale or distribution of each asset.
This gives you an apples-to-apples way to compare all assets on an after-tax basis that is unique and valuable.
In conclusion, we observe that dividing marital property effectively requires careful consideration of applicable law, marital versus separate property, property division, property settlement amounts, and after-tax property division.
Family Law Software is there to help you with all these aspects of property division, no matter the size of the marital estate.
Want to see this all-in action? Check out our Power Webinar on Property Division here: https://www.youtube.com/watch?v=VEYp-eRvY68
How can I create different scenarios in Family Law Software?: https://www.familylawsoftware.com/faq/different_scenarios.html
IRS Topic No. 409, Capital Gains and Losses: https://www.irs.gov/taxtopics/tc409
IRS Publication 551, Basis of Assets: https://www.irs.gov/publications/p551
IRS provides tax inflation adjustments for tax year 2023: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023