Don’t leave money on the table during divorce! By understanding property division on divorce, and knowing what property can and cannot be included in the marital estate, you will have a better chance of getting your fair share.
Like any other misfortune in life, many of us think that divorce will never happen to us. The unfortunate reality is that the divorce rate in the US hovers between 40% and 50% – depending on where you live, among other factors. Many spouses are unprepared for divorce because they didn’t think they would ever have to face it. Along with the emotional whirlwind that comes with the filing of the divorce, the lack of knowledge during property division on divorce adds extra anxiety to an already stressful situation.
Most spouses are aware of the typical joint (or marital) assets1 – such as the house, joint bank accounts, and family vehicles – but below are some of the lesser known financial assets where you are entitled to receive equitable value.
Separate Assets, Joint Assets, and Separate Assets Becoming Joint Assets
If one spouse owns an asset coming into the marriage and keeps it entirely separate throughout the marriage, then that asset belongs to the one spouse and is not subject to property division on divorce. It is considered to be a separate asset due to the spouse having owned it prior to the marriage and not combining it with jointly-owned assets.
However, if the asset is placed into a joint account and/or is used to pay for joint expenses, joint property, or improvements to other marital property, all or a portion of the separate asset can then become a marital or joint asset subject to property division on divorce. Also, if a separate asset appreciates during the marriage and the increase in value is in relation to your or your spouse’s efforts, skills, and/or funds, that appreciation is considered a marital asset, which is subject to property division on divorce.
For example, Bill owned a rental property prior to marriage. During the marriage, his wife Sandra – who is in the business of remodeling homes – used joint funds and her skills to remodel the rental home. At the time of divorce, the rental property has increased in value due to the remodel by $10,000. The $10,000 would be considered marital property, while the remaining value of the property would still be Bill’s separate property.
One-Time Distribution from a Qualified Retirement Plan without a Penalty
It is possible to be awarded a portion of your spouse’s retirement plan(s) during the division of assets. If the retirement plan is a defined contribution plan, such as a 401(k), and you are under 59 ½ years of age, you are eligible to take a one-time distribution under IRC (Internal Revenue Code) Section 72(t)(2)(C) in a divorce without incurring the 10 percent penalty. For example, Jane, age 52, is awarded $50,000 from her husband’s 401(k) plan. Under this one-time distribution clause, Jane can take up to $50,000 as a direct distribution without incurring the 10 percent penalty. If she chooses to take less than $50,000 as a direct distribution, she can roll the remaining amount into a retirement account under her own name. She must take the one-time distribution prior to the funds being rolled into a retirement account under her name in order to avoid the 10 percent penalty. If Jane has the $50,000 rolled into an IRA in her name and then takes a distribution, the distribution will be subject to the 10 percent penalty.
One thing to consider is that any retirement funds you take under the one-time distribution clause are taxable to you in that year. The plan administrator is required to withhold taxes at a 20 percent rate when processing the distribution; therefore, if you plan to take only a portion of the funds for a specific purpose, you will need to gross up the amount you need for the 20 percent taxes that will be withheld. For example, if you need $5,000 to pay legal fees, you can request a distribution, but you should request the amount of $6,250 in order to receive the net $5,000 you need.
Property Division on Divorce: The Family Business
If you and/or your spouse started a business after you were married, the value of the business should be included in the marital estate. You should consider having a third party professional perform an independent appraisal of the business 2. A Certified Public Accountant (CPA) who files the taxes or compiles books of the company does not necessarily have the expertise to value a business. Additionally, the CPA for the business would not be considered independent.
If your or your spouse owned the business prior to the marriage and kept it separate, as explained above, any appreciation in the value of the business due to the joint efforts, skills and/or funds of you and your spouse would be part of the marital estate. Appraisals would need to be performed as of the date of marriage and as of the date of divorce in order to determine the appreciation in value. An expert would also be needed to help determine the portion of appreciation due to joint efforts, skills or funds as opposed to an increase in value due to inflation or market forces, which would not be included in the marital estate.
Your Spouse’s Social Security Benefits
If you were married for at least ten years and have been divorced for at least two years, you could be eligible for half of the value of your spouse’s Social Security benefits when you reach at least 62 years of age. It is important to note that if you start receiving benefits prior to age 65, there is a reduction in the amount of the benefit – which is even higher if you are receiving benefits based on your former spouse.
Claiming Social Security benefits based on your ex-spouse’s benefits does not reduce his/her benefits; if you remarry, however, it will disqualify you from being eligible to receive benefits based on your former spouse’s benefits. Also, you are only eligible to receive one source of Social Security benefits., so if your personal Social Security benefits are greater than the amount of half of your spouse’s benefits, you would only be eligible to receive your benefit. If your personal Social Security benefits are lessthan the amount of half of your spouse’s, you could choose to collect the higher amount and forgo your personal benefit.
By understanding property division on divorce, and knowing what property can and cannot be included in the marital estate, you will have a better chance of getting your fair share. Don’t leave money on the table during divorce and set yourself up for a brighter financial future after the divorce is final.
1 Property you own that is deemed to have value.
2 An individual with the Certified Valuation Analyst (CVA) or Accredited in Business Valuation (ABV) credential would be qualified.
This article was originally published in Divorce Magazine, it is for informational purposes only and does not constitute legal advice. If you require legal advice, obtain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.
Karla Selle is a Certified Public Accountant, Certified Divorce Financial Analyst® professional, and a forensic analyst for Workman Forensics. She has over seven years of auditing experience at an international public accounting firm.