Dividing Your Assets

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If you cannot or will not agree, you will submit your disputes to the court, which uses the laws of your state to decide. You will want to acquaint yourself with the applicable state laws as soon as you start planning a divorce. Your attorney should be able to fully explain laws and how they will affect you.

To understand what might be at stake, take a look at the difference between property division in states that use the concept of community property and those that use equitable distribution.

Community Property

When a couple divorces, community property is generally divided 50-50, equally between the two spouses (exceptions exist in some states). Community property includes all earnings during marriage, everything acquired with those earnings and debts incurred during the marriage, with several exceptions.

Separately owned property — generally including assets and debts acquired before the marriage, individual inheritances and gifts, proceeds of a pension vested before the marriage and other property specified by law — may be retained by the spouse who owns the property. It is imperative to keep records of all separate property.

Equitable Distribution

Factors, such as length of the marriage, each partner’s financial contribution to the marriage and each spouse’s ability to earn a living, may contribute to the court’s resolution. Generally, a partner’s separate property, such as premarital assets, is unaffected by divorce, unless a judge believes it should be included in the property division to maintain fairness.

If you have a comprehensive prenuptial agreement, you should have few questions about who gets what in a divorce.

Ideally, your agreement spells out the treatment of assets accumulated before you married and those you acquired during the marriage. You should be able to divide property just as your prenuptial agreement specifies, even if you moved from one state to another during your marriage. Enforceability of the agreements can vary from state to state.

As you begin to work through the details of your divorce with your spouse, consult your attorney and a tax accountant or a financial planning professional with tax expertise.

Common Issues In A Divorce

The loss of a tax deduction for mortgage expenses may impact the tax status for a spouse who does not get the house. It is often best to work this out with your spouse.

If you and your spouse are joint account holders on your mortgage, generally, you are both responsible for making the payments. If your spouse keeps the house but fails to make the payments, you could be responsible for making the payments. If you fail to make the payments, your credit record could suffer. One of you may decide to buy out the other.

You may also consider selling the house jointly, prior to the divorce. Tax laws allow eligible married couples to exclude as much as $500,000 in capital gains when they sell or exchange a primary residence.

Similarly, any other major asset, such as a vehicle or boat, may have serious financial implications for one or both spouses including loan payments, repairs and insurance. Some spouses may opt for a lump-sum cash property settlement rather than taking hard assets. Before making this decision, talk to your attorney and a tax accountant about the tax consequences of such a transaction.

Child support. Generally, both parents are expected to share in paying for the care of a child according to their ability and means. Each state, however, has its own complex formula for determining who pays what amounts.

Parents should agree in writing about who pays for extras such as summer camp, private schooling and travel between parents. Generally, child support stops when a child reaches the age of 18 (in some states, 21). But if both parents are college graduates, for example, a court may sometimes require the wealthier parent to underwrite the expense of the children’s college education.

Child support payments generally have no direct tax consequences. They are typically neither tax deductible to the parent paying them nor are they taxed as income to the recipient. If you plan to request child support, make a monthly and annual expense budget that your attorney can use to support your case.

In the divorce settlement, include a requirement for adequate life and disability insurance coverage on the individual making payments with the individual receiving the payments (or a trust, if appropriate) as the owner and beneficiary so that income will continue. Consult a financial planning professional and/or attorney about the benefits of a trust.

Finally, negotiate who gets the dependent tax exemptions for the children. Generally, the custodial parent takes the exemptions, but you can agree to allocate them in any way.

Spousal support/alimony. Former spouses could previously look forward to years of steady income payments until they remarried or died. In some states and under rare circumstances, they still can.

Where alimony — now generally called spousal support or maintenance — is still awarded, it seldom lasts more than 5 years. If you want alimony, document monthly and annual expenses to support your case for maintenance, and if it is awarded, consider including a requirement in the settlement for adequate life and disability insurance coverage on the individual making payments (the individual receiving the alimony, or a trust, should probably own the policy and be the beneficiary).

Alimony or spousal support is tax deductible to the spouse who pays it and taxable as income to the spouse who receives it if alimony is based on a written agreement or is ordered by the court. An agreement can also require one spouse to provide life and health insurance to cover the former spouse and children. Federal law, the Consolidated Omnibus Budget Reconciliation Act (COBRA), also allows a divorced spouse to purchase health insurance coverage provided by the other spouse’s employer subject to COBRA at group rates for up to 36 months after a divorce. That coverage may be extended beyond 36 months if the purchasing spouse is disabled.

Debts. Close joint accounts and make every effort to eliminate as many debts as possible before you divorce. If you cannot eliminate debts before you divorce, work with your spouse to divide them.

If you cannot agree to a division, state laws will dictate how to divide debts you incurred during marriage.

Remember that even though you are divorcing and may no longer use an account, you cannot disregard the debts you have incurred.

Federal income taxes. Talk to a tax accountant before you make any divorce decisions. Consequences can be serious if you do not plan properly.

Dividing assets generally does not have any immediate federal income tax consequences. You are allowed to make tax-free transfers of houses, vehicles, real and personal property, business ownership interest and investments held in taxable accounts while you are still married or as part of your property settlement. But if you take appreciated assets in the divorce (for example, stocks, art, collectibles), you may eventually owe federal income taxes when those assets are sold.

With future federal income tax liability as a consideration, think about what assets could eventually cost you more than you anticipated.

Your marital standing at the end of the tax year — generally December 31 — determines your tax filing status for the entire year. If you are married at the end of the year, you can choose to file jointly with your spouse or use the married, filing separately status. You and your spouse will have to decide how to divide potential deductions such as home mortgage interest, property taxes and child care expenses. When you file jointly, you are each generally liable for what the other individual puts on the federal income tax return.

If the IRS discovers that your spouse misrepresented income or deductions, both you and your spouse could be liable for back taxes, penalties and interest. The IRS generally can take action against either spouse to receive payment.

Retirement benefits and pensions. In most states, retirement benefits and pensions are marital property to be divided. These plans are complex and full of tax implications. Make sure you know how your and your spouse’s retirement plans work.

The most common retirement benefits are defined-contribution plans. They are valued based on what you and your employer have contributed and vested, plus any accrued earnings. Take great care as you divide these to avoid incurring unnecessary fees and taxes.

Consult your attorney and a financial planning professional before you make any decisions.

Military benefits. If you are divorcing a military servicemember, you may be able to claim a share of your spouse’s military benefits if certain requirements are met.

As much as 50 percent of your spouse’s military retirement pay may be yours if you were married at least 10 years and the servicemember completed at least 10 years of creditable service for retirement during that time. You may also be designated as a beneficiary of your spouse’s Survivor Benefit Plan (SBP).

Other temporary or permanent benefits including medical services and commissary and exchange privileges, may be available to you if your servicemember spouse served at least 20 years and other requirements are met.

Social Security benefits. If you are divorced after at least 10 years of marriage, you can collect retirement benefits on your former spouse’s Social Security if you are at least age 62 and if your former spouse is entitled to or receiving benefits. If you remarry, you generally cannot collect benefits on your former spouse’s record unless your later marriage ends (whether by death, divorce or annulment). For additional information, visit www.ssa.gov/gethelp1.htm or call 800-772-1213.