Divorce Information and Property: It's About the Money

Know It Yourself…Divorce and Property

1. Much to the dismay of your neighbor down the street, community property in a divorce belongs not to the inhabitants of the community at large but to the inhabitants of the marriage—a community of two. (Isn’t that romantic?)
   
2. Equitable distribution sounds great, but getting to a place that everyone would consider “equitable” is often very difficult, as many factors go into deciding it.
   
3. Ante-nuptial is not some bizarre poker term. It is a pre-marital contract regarding, among other things, property ownership. It is often known as a pre-nup.

What is property? Property is anything that is owned: a house, furniture, money, stock options, land, time shares, patents, retirement plan savings, professional licenses, bank accounts, autos, boats, antiques, jewelry, art, washers, dryers, frequent flyer miles, prepaid life Insurance, tickets to sporting events, even the big screen TV, pots and pans, and loveseat. Property may also be beneficial interests in trusts and other estate planning documents. Property can be classified as either marital or separate.

Marital property, known in some states as community property, is owned jointly by the spouses. It consists of all assets acquired by the couple, or by either spouse, during the time they were married. That time is defined as the period from their wedding day to the day the couple separated (or plan to separate). Careful now! Sharing and sharing alike cuts both ways. Most of one spouse's debts accumulated during marriage are also considered marital property and are shared by both partners. It’s part of that “in good times and in bad” vow.

Separate or non-marital property, on the other hand, is owned separately. Often defined as the money or property owned by each party before the marriage, it may also include gifts or inheritances received during the marriage. (Or it may not; equal distribution states that also recognize separate property rights consider inheritances and gifts as marital property, in certain situations.) Each party in the divorce will keep his or her separate property while all the other goodies are divided between the spouses. Be aware that if spouses commingled money and property that was earned before the marriage into the joint funds and property of the marriage, the property is considered a marital asset and can be divided between the parties.

The Great Divide

How marital property is exactly split depends on state law. Some states employ community property laws. Others feature equitable division laws. Which your state enforces is just one of the myriad details you should know about your state when researching divorce.

Community Property – In these states, all property is divided evenly between the spouses, even if there is only one breadwinner in the home. Debts are divided in the same manner. That means that if one spouse fails to pay his or her debt, the other spouse may be on the hook with the creditor for a portion of that debt. Putting property in only one spouse's name won't help, either. It does not change the fact that the property is considered community property. The only way around this classification is to “gift” an item to a spouse. If the item is expensive, a community property state may require the spouse doing the gifting to say so in writing, which is often called a transmutation.

The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Puerto Rico, a U.S. territory, also recognizes community property.

Equitable Division – It reeks of fairness, doesn’t it? And who could argue about what is fair (or equitable)? Truth is, nearly everybody does. In most states, instead of a strict fifty-fifty split, the goal is a more complicated, fair distribution of the assets and earnings accumulated during the marriage, regardless of how property is titled, and based upon a host of factors. Hence the term “equitable distribution." Marital debts are also considered in an equitable distribution award.,

ON YOUR OWN

1. If you want to keep your separate property from your spouse, keep it clearly separated and record how it is used. Otherwise, it may slide into marital property, to be divided with your spouse.
   
2. If you and your spouse cannot agree how to divide retirement benefits, look to use other assets comparable in value to make an equitable property division.
   
3. If you live in a state that recognizes at fault divorces, the judge hearing your case may take note of the fault in dividing when deciding the division of property and award your spouse more (or less) marital property as a consequence.
   
4. Make sure you understand the bottom line of your property arrangement. There are financial strategies that you can use to preserve the value (and maximize worth) of those assets for your life after the divorce. For example, though motoring around in a $130,000 HUMMER H1 Alpha appeals to you, the Hummer will depreciate. A more prudent choice would be to take your share of the property in the form of, say, a stock investment, with the same current market value as the car. With luck, the value of the securities will appreciate in the future. Another option that might make sense is to take a cash settlement which you can invest. Stock and other investments can create income; a gas-guzzling car cannot.
   
5. Get your affairs in order (starting with a list like the one below). Line up and organize all the financial information. Get confirmation of your spouse’s salary, bonuses, stock options from his or her employer. Get copies of any pension plan documents, W-2 tax forms, pay stubs, driver’s license, checking account statements, tax returns, insurance policies, and brokerage accounts.
   
6. As with most other family issues, the true answer to a successful split lies in the “Three Cs”: civility, cooperation, and compromise. If you and your spouse can work on the nuts and bolts of the division of the joint assets and debts between you, you will save money all around. That said, we strongly suggest you have an attorney review your proposed property agreement to ensure compliance (more C's!: counsel and compliance) with the law and that your rights are safeguarded. Frankly this is money well spent. Don’t be penny-wise and pound-foolish. You will be living with the provisions of the agreement for a long time.
   
7. If you and your spouse exchange title to property as part of the divorce agreement, the good news is that there is no tax liability as a result of the transfer. The bad news: The spouse who gets the property will be responsible for any taxes due on sale.

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Additional Divorce Information:
Divorce Information: More On Equitable Division
Divorce Information: Pre-marital and Post-Marital Asset Protection
Divorce Information: Split It Right the First Time
Divorce Information: Divorce Complications (Five Examples)

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