TO LISTEN TO EPISODE 15, CLICK HERE.
Hi, everyone, and thank you so much for tuning in to the Divorce Field Guide. My name is Ani Mason, and I’m divorce lawyer and mediator, and I’m also the creator of this podcast.
INTRO
Today, we are in Episode 15 and we are going to be talking about the division of assets and debts in a divorce.
I want to say that this is, in some respects, a continuation, slightly out of order, of Episode 12.
In Episode 12, we talked about identifying different financial assets and debts, and gathering relevant information on those financial assets and debts. That is really the groundwork that you need to do before you can have an informed discussion about how you want to, or whether you want to, divide a particular asset or a debt. You need to know, first of all, that it exists. Secondly, you need some basic information about it like what is its value, what was its value when you came into the marriage, and so forth.
In essence, this is like a Part Two of Episode 12, just a few episodes later.
I will make the same caveat that I have made in prior episodes with regard to custody and with regard to financial support. I don’t know the law of asset and debt division in your particular state. I don’t want you to take any of what I’m saying as legal advice that’s specific to you or your situation. Think of this more as a general overview, sort of, observational roadmap of common issues that come up when couples are negotiating the division of assets and debts in their divorce.
MARITAL VS. NON-MARITAL ASSETS + DEBTS
I will share a general legal concept around asset and debt division. That is that the law in your state defines which assets and debts are to be considered part of the marital pot and, thus, divided in some way between you, and which assets and debts are not to be considered part of that marital pot.
That, by the way, is independent of what you and your spouse may have assumed about those assets or may have said to each other about those assets.
Just flagging here, I’m assuming you don’t have a prenuptial or postnuptial agreement. If you do, that’s a whole another story.
Assuming you don’t have a contract addressing what’s in the marital pot and what’s outside of it, the law in your state will define that for you independently of what your own working assumptions have been during the marriage.
I will refer to assets and debts that are inside that marital pot to be divided in a divorce as “marital property” or “marital debt.” Similarly, for those that are outside the marital pot and under the law of your state would not be addressed in a divorce, I will refer to those as “separate property” or “separate debt.”
EQUAL VS. FAIR DIVISION
The law in different states differs in a key way in terms of what it says about how you are supposed to divide marital assets and marital debt in your divorce.
In some states, the law simply advises a judge to divide assets and debts that are marital equitably, or fairly. So it gives the judge some discretion. Maybe that’s a 50/50 division, maybe it’s a 60/40 division, maybe it’s 51/49, but it’s not a prescribed exact percentage.
Whereas, in other states, the law specifically says that marital assets and marital debt, sometimes called community property, will be divided 50/50, that is, equally, between the spouses.
At the end of the day, I won’t say to you that the law does not matter because I do think it’s important for you to understand the law as a backdrop to your negotiation and your decision-making in your divorce. But, you are generally permitted, you and your spouse, if you agree, to do whatever you want, within reason, with your assets, your division of assets and debts.
What I thought I would do in this episode – this is going to be a slightly shorter episode – is just to give you a couple of examples of very common assets that get divided in a divorce and common debts that get divided in a divorce, and run through some of the most frequent or common ways that people will deal with the division of that particular asset or debt.
DIVIDING BANK ACCOUNTS IN DIVORCE
Let’s start with bank accounts. I’m talking about your average checking account, savings account. It might be in your sole name, it might be in your joint names.
The most typical way that I see accounts like that divided would be either “in kind,” meaning, you have a savings account with $50,000 in it, and you each take $25,000 out of the account. (I just want to reiterate, the division in your case might not be 50/50, but I’m going to use 50/50 just to keep things simple.)
The other way that is very common for people to divide accounts is to say, “Okay, well, you have $40,000 in your checking account, and I have $30,000 in mine, and then we have a $10,000 joint account. I’ll take the joint account, so that I have $30,000 + $10,000 = $40,000, and you keep your separate account, which is also $40,000,” so sort of trading off assets against each other, but to equal out in to a relatively equal division.
Finally, it’s always an option that each person just keeps the assets in their own name, meaning the accounts in their own name. Oftentimes, for couples who really kept their financial lives quite separate, that’s the option that makes the most sense.
DIVIDING RETIREMENT ACCOUNTS IN DIVORCE
Retirement accounts are another type of asset that’s very common to deal with in a divorce. Those can both be, what are called, “defined contribution accounts,” or more of a 401(k), where what’s defined is what you are putting into it. That’s, overwhelmingly, the more common type of account these days. Then, there are, what are called, “defined benefit accounts,” which are more like your typical pension that you might still receive, for instance, as a city or state or government employee, that you used to receive and sometimes still do as an employee of a very large corporation.
For retirement accounts – let’s take a 401(k). Let’s say one spouse has $100,000 in a 401(k), and the spouses are agreed that they want to divide, share equally, in that asset.
One very common way to divide it would be to divide it “in kind,” meaning, to transfer half of that $100,000 401(k) to the non-titled spouse.
With 401(k)s and other, what are called, “qualified retirement assets,” you can’t simply do that without some sort of specific required divorce paperwork to enable the transfer. You might be thinking, “Well, actually, I can’t transfer my 401k.” Actually, pursuant to a divorce, you can.
It’s a little bit complicated, and your mediator or your attorney will help you with that, but a lot of people will choose to do that – just simply transfer whatever amount that they’re agreed on of their 401(k) balance to their spouse. There’s not tax penalty to doing that, and you are able to do it as part of a divorce.
Another approach people would take, sometimes, people want to keep as much as they can in their retirement accounts. They will prefer, rather than to transfer half of their retirement asset out, they will prefer just to give their spouse cash in exchange for not transferring half of the retirement account.
Keep in mind there that retirement assets are, typically, with the exception of a Roth IRA, they are pre-tax dollars. If you have a $100,000 in a retirement account, and you are trying to weigh whether to transfer $50,000 of that account to your spouse, or to give to your spouse $50,000 in cash, like in a checking or in a savings account – there may be good reasons for doing both! – but bear in mind that $50,000 of cash is worth more, because it’s post-tax, than $50,000 in a pre-tax retirement account like a 401(k).
However, I’ve seen people do both things.
I’ve seen them transfer a reduced amount of cash, tax-impacted, reduced for taxes. I’ve seen them transfer the exact amount, half in cash, $50,000 in the example that I was using, to their spouse because it’s very valuable to them, there’s like an added value for them, to keep their 401(k), or their IRA, or whatever, intact, and they are more comfortable parting with the cash.
DIVIDING REAL ESTATE IN DIVORCE
Another common type of asset that gets divided in a divorce is real estate. That could be your home or your apartment.
There are three typical approaches with, say, the marital residence.
One is to go ahead and put it on the market, sell it, both move to other places, and then divide the proceeds when you receive them from sale.
Another, if one of you prefers to stay in the marital residence, in the home, would be that that person keeps the asset, and then you figure out what the value of that asset is, and the person staying buys the other spouse out.
I want to flag there that when you are figuring out what the value of your marital residence is, typically, you have a fair market value or a sale value of that property, but then you often have debt that is secured by the property and debt against the property.
In figuring out the value of the property as an asset to be divided, you want to consider both things. What could this property sell for? Also, are you keeping any debt on that property? That should reduce the value for you.
There are also tax-related considerations to be taken into account, specifically, capital gains considerations. That gets a little bit more into the weeds and details than we’re going to get into in this episode, but I would really encourage you to make sure to run that question by any mediator or attorney that you’re working with, if you’re contemplating what’s called a “buyout” of your spouse, where you stay in the home and you pay your spouse their interest in the home for you to retain the entire home.
Sometimes, this is a good problem to have, if the equity of your home, the value of your home is so great that you don’t have, if it’s worth a million dollars, you don’t have $500,000 lying around to give to your spouse so that you can keep the home.
What couples would sometimes do is agree that one spouse can remain in the home and that the home will be sold at a later date. Then, they divide the proceeds. And it may be that, at a future time, you’ll divide the proceeds 50/50. It may be that the spouse who stayed in the home and, say, paid down the mortgage during that time, maybe they would get more 50% of the proceeds.
Again, this gets in to a little bit more complexity than is my intention to get in to in this episode, but it just gives you some ideas of how people will typically handle the division of an asset like the marital residence which is, usually, one of people’s most valuable assets.
DIVIDING CARS IN DIVORCE
Oftentimes, people will have a shared vehicle or vehicles. If you’re in a city, it’s often just one car, but outside of a city, it’s often two, like, a car per adult, basically.
Sort of similar to the home, you can either sell the cars or vehicles and share the proceeds; one person can keep, if there’s only one vehicle, you can keep it, and buy the other spouse out by giving them half or another percentage of the value; if you each have a car, and they’re roughly worth the same thing, or if they’re not, you can each keep your own car and either do some sort of other trade-off to even things out, or you can just decide that you’re each going to keep your own car and that’s it.
The final thing that I’ve seen, and this does not happen in a majority of cases, and it’s pretty specific to living in a city, but sometimes where a couple, especially if they have kids and they have one car in a city, they will continue to share the car for some period of time, so neither person is buying the other out. Maybe they will share the car for as long as either of them wants, and then, when either person says, “Hey, okay. I’m tired of sharing the car,” then they’ll sell it and divide the proceeds, or then one person will buy the other person out. But that is a possibility.
CREDIT CARD DEBT IN DIVORCE
Now, let me talk about three common types of debt that I see very frequently in divorces. The first is credit card debt.
What I will see people do with credit card debt in terms of dividing it between them in a divorce is either divide it equally between them… Usually, what I see them do is take a marital asset, let’s say, a chunk of what they have in their savings account, and use that to pay off the marital debt, which is equivalent to splitting the debt equally. (If you take an asset that you are going to split equally, and then you pay off your credit card or any other debt with it, you have, in essence, split that debt equally.) I’ll see people do that a lot.
Sometimes, one person will offer to keep the debt in exchange for being able to also keep another asset, maybe of comparable value, so they sort of even each other out. Sometimes that happens where a person is a higher earner, and they are able to both carry the debt service on the debt, as well as, maybe it’s a vacation home that they’re keeping, and they’re able to also cover the carrying cost of the vacation home, and they will keep both.
Finally, sometimes where people have really used their own separate credit cards throughout the marriage, each person may just say, “You know what? I’m going to responsible for my own debt, and you be responsible for yours.”
STUDENT LOAN DEBT IN DIVORCE
Pretty similar with regard to student loans, except that I see the third scenario a lot more frequently, which is that each person keeps their own responsibility for their own student loans.
That doesn’t always happen. Again, sometimes similar to a credit card, people may divide them equally, and that often will happen by paying off the remaining loan with a marital asset. Rather than dividing that asset, you use it to pay off a debt.
Again, sometimes somebody will say, “Okay. I’m going to keep my student loans that we would otherwise be dividing, but I’m also going to keep some additional asset,” similar to what I was describing with regard to credit card debt.
Or, as I was saying initially, I will commonly see people on students loans each keep their own.
REAL ESTATE DEBT IN DIVORCE
The final kind of debt that I see people commonly deal within a divorce is debt on real estate – a mortgage or a home equity line of credit. What I would say about that is that it generally stays with the home.
If your home is being sold, the mortgage or the line of credit that you have on the home will be paid off.
If your home is not being sold, if, for instance, there is a buy-out, and one spouse is staying in the home, and the other spouse is being bought out of the home, the mortgage and the home equity line of credit, if there is one, will be rolled into the value of the home and calculated, basically, they will reduce the sale price of the home that you agree on, to come up with, “Okay, what is the true equity in the home right now, considering its value, its market value, and the debt on it?” They will factor, in that way, into the ultimate buy-out price for a piece of real estate.
Typically, a mortgage and even a line of credit, but not always, certainly with a mortgage, it’s typically too large to just pay off with another marital asset without actually selling the home. Some people are in a position to do that, but many people are not.
Usually, someone’s mortgage may well be their largest debt, and their home that it is securing that mortgage may well be their largest asset. It can be hard, with a mortgage, to treat it like credit cards or even a small amount of student loans and say, “Oh, cool. We’ll just take the savings in our savings account and pay it off.” I don’t typically see that, although, certainly, you could do that if you had the money to do it.
The last thing I do see people do, where one person is going to remain in the home and keep the home, and keep the mortgage in place, is to refinance the mortgage, so that is paying off the mortgage with a new mortgage. It’s a more complex topic and, again, this is one for you to really discuss with a mediator or an attorney. There are a couple of complicated issues that come in there.
The person who is keeping the home may or may not be able to qualify for a refinance to take over the mortgage in their sole name. Whether or not the person who is not staying in the home has their name on the debt has some serious legal implications for them or can have some legal implications for them. If you have a mortgage and a home that you’re anticipating one person may stay in, you want to put on your radar the issue of whether or not, if the mortgage is in both spouses’ names, it would be refinanced or assigned, if you can get the lender to allow you to assign the mortgage to the spouse’s name who is remaining in the home, but that’s far less common. It’s just a topic you want to clarify.
MIXING MARITAL AND NON-MARITAL PROPERTY
I want to throw out some quasi-advanced concepts around property and debt division for you to be aware of as you are talking through these issues in your negotiation process.
It is very common that people will, if we rewind to the concept of marital property and non-marital or separate property, this idea of, there are assets and debts that are on the table in a divorce to be divided, and there are assets and debts, from the perspective of the law (and your perspective can be different), there are assets and debts that are not on the table to be divided in a divorce.
Usually, people are not aware of that distinction while they are married.
It is very common that there will be some kind of mixing up and intertwining of marital, or community, property or assets with non-marital or separate property, and that can get a little messy.
It could be that you have a bank account into which you put funds that are both marital or non-marital. Or maybe you took an asset of yours that was not marital, would not be on the table for division in a divorce, and you contributed it to a marital asset in the form, for instance, of a down payment on a marital home. Or maybe you took marital assets, in the form of some savings accrued during the marriage, and you used it for to do something for a non-marital asset.
The point I want to make, and I hope your eyes are not crossing – or, I don’t know, your earbuds are not crossing – at this point. The point I want to make is that most people do not go in to a marriage or go through their marriage with a concept of, first of all, (a) looking forward to their divorce or (b) with any concept of the distinction between what assets and debts are on the table for division in a divorce and which ones are not.
It’s more common than not, I would say, where you have a mixture of some assets and debts that are marital and some others that are not, that they may have been intertwined and “comingled” (is the phrase that we use) throughout the marriage.
That can make your discussion of what to divide and how to divide it more complicated, but it’s just something to put on your radar and to be aware of.
TAX TREATMENT OF PROPERTY
Another thing I want to put on your radar is to be aware of the different tax treatments of different types of assets.
I mentioned this earlier, with regard to, say, just a joint savings account you have at your local bank, which is post-tax money or… Let’s just use a checking account, and you earn no interest on it, all post-tax money. There’s no tax liability on that joint checking account as compared to your 401(k).
Your 401(k) is pre-tax money, and you will have to pay tax on that when you take it out. Hopefully, you’ll take it out after the age when you’re allowed to so you won’t have any penalty on it, but you will pay income tax on it when you take it out.
Be careful not to compare apples and oranges, and to be mindful of what tax liabilities may be baked into a particular asset that you’re not aware of.
Same with a house, by the way. If your house has increased in value or will increase in value substantially, you may have a major capital gain that you will owe tax on when the house is sold. That may be something that you want to take in to consideration in figuring out how to divide both the asset that is the house and then other assets related to it.
CARRYING COSTS OF AN ASSET
Another concept for you to think about when considering how to divide assets is the cost of maintaining an asset.
Compare the cost of maintaining the asset that is your home with the cost of maintaining, say, an investment account. They’re very different. Your home is a costly asset to maintain, typically, especially if you have a debt service on it.
You want to do that, not just so that you’re not comparing apples and oranges, where you’re not aware that you’re taking an asset that actually has a really high carrying cost, and your spouse is keeping an asset of equal “value,” so to speak, but has no carrying cost or no cost to maintain it.
Also, before you sign up to maintain an asset, you want to understand the carrying cost so you know whether it’s viable for you to actually maintain that asset.
This really comes up with real estate a lot in the asset column, and then in debt column, it comes up with credit card debt a lot. Do you have the income, if there’s a debt service on your credit card debt, to take on that debt and cover that debt service?
TRANSFERRING TITLE TO ASSETS
For both assets and for debts, is a title transfer permitted?
Sometimes, if you’re invested in, with some sort of complex investment through, a private equity firm, they may not permit you to transfer half of your investment to your spouse. Same with a hedge fund and other complex forms of investments. You may not be allowed to transfer title or to transfer half of your investment to your spouse.
Similarly, as I was saying with a mortgage, your lender may not be willing to transfer the mortgage from the two spouses as co-obligors on the mortgage to just one spouse being named on the mortgage.
Sometimes, if the one spouse is the higher earning or a very high-earning spouse, they may be fine with it. Oftentimes, they’re not, because a lender always wants to maximize their chance of getting their loan back, so they like having more people legally responsible on the loan.
That’s something to be aware of before you come up with a plan to, “Okay. Well, I’ll keep the house, and I’ll take your name off the mortgage.” You want to suss out whether or not you actually are going to be able to do that, either because your lender will allow you to assign the mortgage to your sole name, or because you’ll be approved for a refi and can satisfy the current mortgage.
INCOME-PRODUCING ASSETS
Finally, another consideration to keep in mind as you’re looking at how to divide assets, specifically, is: will any of the assets that you’re keeping or that your spouse is keeping produce income or could they or should they produce income?
For instance, like vacation home, which, in theory, could produce some income as a rental property. What impact, if any, should that income or potential income have on your negotiation of child and spousal support, if those are issues in your divorce?
NEXT UP
That is it for Episode 15 on the division of assets and debts in your divorce. Next up, in Episode 16, we will be talking about taxes and specific divorce-related tax issues. Until then, thank you so much for joining me and I will look forward to speaking with you soon.