One of the main questions divorcing couples ask is, “How do we divide our stuff?” The “Stuff “or as I call them the “Marbles” on the table, must first be Identified and then have an agreed Value.
First Steps – Values and Interests
Each of you must consider what you want to create for yourself going forward. Knowing your Financial Values and Interests and “Why” they are important to you is the best foundation to start from.
Keeping the home may be really important to you while your spouse may want to keep the RV and the boat. The value of each is compared, and if one needs to have additional cash assets to come close to being an equal settlement, that can be done.
Next Steps
The couple begins by gathering documentation to Identify all assets and debts they had prior to their marriage, what they accumulated during their marriage and even what is “new” since the date of separation.
Identifying Property and Debt
This includes the following:
- Where is the Asset or Debt Held?
- What is the Account Number?
- How is it Titled?
- Individual
- Joint
- Trust
- Date of Statement
Valuing Property and Debts
- Statements are most common way to determine a value for banking, retirement, and debts.
- Business or Pensions require another level of assessing
- Business may need a valuation by a CPA certified as a ABV – Accredited in Business Valuation
- Pensions require an Actuary to determine a Present Value and what percentage belongs to the Community
- Real Estate can be valued by any of following processes:
- Certified Real Estate Appraiser
- Certified Marketing Analysis from a Realtor
- Zillow
- Selling the property is the only sure way of determining value
Trading EQUALIZED Assets
- Understanding the Tax Ramification of Assets helps prevent regret down the road, if you discover you unwittingly exchanged a non-taxable asset for a taxable one
- Retirement Accounts and Non-Qualified investment accounts are both taxable assets.
- Non-ROTH Retirement Accounts are 100% taxable as income when distributed and there are penalties if done before you are 59 1/2
- Non-Qualified Investments have a purchase price known as Cost Basis. When one sells a share there is a Capital Gains tax, if there is an increase above the Cost Basis.
- Cash or Equity in a home are generally not going to be taxed so if you are going to trade equity for retirement you need to Tax Effect the Retirement
- Because this is based on tax “assumptions”, we advise that the retirement is divided equally based on the Community Properties portion
- Bottom-line know the tax ramification on all assets before you trade them!!!
Final Steps
When the assets are identified and valued, you can begin to draw out what dividing the “stuff” looks like. Does it provide the foundation for going forward, can you afford the asset you are keeping, do you go back to the drawing board to look at other options. In Collaborative, you have the help of the Team to brainstorm ideas to get you to better, longer lasting agreements.
Processing the division of assets/debts is the last piece. Your financial neutral will assist in these loose ends – specifically facilitating the moving of retirement accounts.
The Neutral Financial Specialist in a Collaborative Divorce
A benefit of a Collaborative Divorce is that a neutral financial specialist works with you to make sure you each have the information needed to make the agreements that you both can “live” with. They clarify the process of dividing your Stuff so you can begin to move forward with a clearer picture of what your financial future will look like.
Additional Info
Tax Code 1041 allows you to divide assets pursuant to a divorce without creating a taxable situation. Retirement accounts and pensions do require a QDRO filed with the court and the Plan Administrator to secure it not being taxed on the transfer.
Articles and resources from Kathleen Faulkner on collaborative divorce, mediation, and family law in Sacramento.