This installment of “Mara’s Minute” goes into an overview of what to expect once you are in the thick of the divorce process. The details of every divorce are different, but when you’re looking in from the outside on something as daunting as divorce, it may help to know what the future may hold in your own divorce proceedings. In a time when we may feel a loss of control and instability to a higher degree than ever before, there is comfort in knowing what this process could look like. Taking even a little bit of the guesswork out of it can ease some anxiety. I had the best of intentions to make this just one blog post, but once I got to typing, it became very evident that there is just too much information for one installment. So here is Part 1 of “During the Divorce Process.”
Asset Division:
Probably the most talked about aspect of divorce is asset division. Who gets what? Who keeps the house? Which accounts go to which party? Asset division may be a monster in and of itself, so I will only highlight a few points on this topic now. A
crucial part of asset division comes down to whether you live in a community property state or an equitable distribution state, and if property is considered marital (sometimes called community) property or separate property. Keep in mind, there are state-to-state variances of these statutes, so while I am going over the generalities of both, your specific state may have its own way of handling property division.
To put it simply, in community property states, property acquired during the marriage is considered marital property, and all assets are subject to division by the court. These states usually adopt the classic 50/50 division of marital assets. However, courts will usually take into consideration the property you owned prior to the marriage or property you inherited or were gifted–called your separate property–and give that property solely to you. You bought a home during the marriage and the deed is only in your name? The law still considers that community property. You bought a car prior to the marriage? That’s your separate property. As you can see, this legal structure may prove to be a point of contention during divorces in community property states if spouses feel like some property acquired during the marriage belongs more to one of them than belonging equally to both of them.
In equitable distribution states, there’s a bit more separation of ownership. Not all property is subject to distribution by the court. Thus, there is less property in question to have to divide amongst parties since some property will be deemed to belong to one of the parties before the court gets involved (as opposed to everything being looked at off the bat as a commingled asset). These states tend to focus on a fair, equitable distribution of assets, versus a 50/50 distribution of assets. Keep in mind, this doesn’t mean your spouse won’t try claiming property that you believe should be kept under your ownership, but your lawyer will have a solid case under the law as to why you should be able to keep that property.
I’ve thus far only touched on assets in community property versus equitable distribution states, but debts work similarly under the respective laws. Did your spouse take out a $100,000 personal loan during your marriage, and you live in a community property state? While your lawyer may try fighting a 50/50 division of that debt, the law views half of that debt as yours. Conversely, in an equitable distribution state where that debt is solely in the name of your spouse, it’s easier to separate and assign that debt to your spouse in the division process. Again, that doesn’t mean your spouse’s lawyer won’t try arguing that you should share in that debt, but in an equitable distribution state, it is easier to assign debts to specific spouses during the divorce process.
The other counterpart to physical asset division is the division of financial assets. The rules of community property versus equitable distribution still apply here, but there are additional considerations that too often are overlooked when assessing where the physical property and/or financial assets go. Let me give an extremely common example of the importance of running a full-fledged analysis taking into account both physical property and financial assets during an asset division.
Historically and statistically, in a marriage between a man and a woman, women more often than not keep the family home in a divorce as opposed to the home being sold and the proceeds split between spouses. When you dig into these cases and look at the reasoning behind the woman keeping the house, it’s rarely because the woman can afford the mortgage, taxes, and maintenance on her singular salary, and more often because we women don’t love the idea of selling the family home and uprooting our children from one of the only familiar things they find comfort in when their family dynamic is changing. You’ll see in just one moment how, in many instances, this can be incredibly detrimental to the long-term financial health and independence of the woman, and how important it is to analyze both the short-term and long-term effects of asset division before it is finalized.
Let’s say in this example, the woman keeps the $800,000 house that has a $5,000 per month mortgage, which includes taxes and fees. Because the home was the largest asset in the marriage, her spouse keeps possession of their 401(k) and the money the couple had in their joint accounts during their marriage in an attempt to keep the division of assets even. As is the case with many divorce proceedings, let’s also say this woman had taken a step back in her career during the marriage to help raise the children and run the household. Post divorce, after months of trying to find a new job, she is able to land a job that pays her $80,000 a year. For the sake of this example, if we look at federal tax rates and the standard deduction, let’s say her take home pay is right under $5,400 per month. This leaves her with $400 left over to cover all of her other expenses per month because she maintained ownership of the house. Since she wasn’t awarded any of the financial accounts of material value, there are no liquid assets for her to dip into when that $400 doesn’t cover all of her basic living expenses.
On the other hand, let’s look at her spouse in this situation. Let’s say he earns $150,000 per year because he never took a step back from his career, thus having higher earning power than does his wife, and he rents an apartment for $4,000 per month after the divorce. Using the same averages and calculations I used for the wife’s take-home pay, the husband’s monthly take home pay is right around $8,700 per month. Not only would the husband have $4,700 left over for the month, but he also has access to his 401(k) and the more liquid former joint accounts that he was granted in the divorce in case he had to access additional money for any reason, whether in the short term or in the future during retirement.
While a simplified example, this type of division of assets happens every single day during divorce proceedings if a detailed financial analysis of the division of assets is not run. An even division of assets dollar- and cents-wise does not equate to a fair division of assets. The family home may seem like one detail in the overall picture, but if there’s one takeaway you get from this blog, it’s to make sure that the asset division being decided upon is actually a viable option for both parties that will set them up for a financially successful future. In a broader sense, the takeaway is the fact that divorce professionals need to put more emphasis on how dividing these different accounts, in conjunction with the division of physical assets, all of which have different tax considerations, liquidity, rules, and time horizons of when you can make a withdrawal without penalty, might really have a huge impact on the future of the divorcing couple.
Other key players in the asset division process are the individual contributions to the marriage and the length of the marriage. At the end of the day, the court is going to be the ultimate judge of how these factors affect the asset division. My example above touched on one of the most common disagreements a divorcing couple has: if one party took a step back in his/her career to run the household and spend more time raising the children, is it fair that this person receives less than the breadwinner just because the homemaker was not the one bringing in the money? If it wasn’t for the homemaker, would the breadwinner have been able to dedicate so much time and energy to the lucrative career that gave the couple and family unit a certain lifestyle? On the other hand, the breadwinner may argue that he/she is the reason the family has the lifestyle, house, and assets that are now in question. Not everyone put in the same position would have been able to provide for his/her family to the same degree that the breadwinner has, right? No matter which side of this equation you are on, you should prepare for how to approach this argument. As you can imagine, it can be extremely hurtful to feel like what you brought to the marriage was not valued like you would have hoped it would have been.
Regarding the length of the marriage, this topic mainly comes into play when discussing alimony/spousal support considerations. In general, courts tend to award more spousal support to the homemaker if the couple has had a longer marriage. It’s easier to argue, and extremely valid, that you have grown accustomed to a certain lifestyle after being married for 10+ years as opposed to 10 months.
Tune in next month for Part 2 of the blog to learn more about spousal support, child support, and the tax implications of divorce to consider!
