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How to Split Assets During a Divorce

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Various professionals, including attorneys, mediators and CDFAs can help make the divorce process manageable.

Getting divorced is already difficult enough with the end of the relationship, family complications and stress. Unfortunately, talking about money is an unwelcome but necessary part of the process. To finalize a divorce, couples must write up a legal document showing how they’ll split their assets. A judge can only validate this document if it’s fair and equitable. Here’s how to reach an agreement even if you and your spouse can’t seem to agree on anything.

A financial advisor can help you create a plan to organize your finances after divorce.

How to Split Assets During a Divorce

Splitting assets during a divorce means dividing property, financial accounts and investments between you and your spouse. You have several options for how to do so, from sitting down with your spouse and working out the terms on your own to arguing over your right to specific assets in court. Ultimately, assets must be split in some way for the divorce to go through, and a judge must deem the split fair before finalizing the divorce. As a result, it’s a critical step in the process of ending a marriage.

Types of Divorce

Because marital situations are complex and unique, different types of divorce are available to help spouses navigate the process. Here are eight options for how to do so:

Contested Divorce

Divorce can be contentious, and agreeing about who gets what isn’t always possible. In such cases, the divorce proceedings go to trial, where a judge will be responsible for dividing the assets based on applicable laws and the evidence presented during the trial. Going to trial is generally considered a more adversarial and formal process, where each party presents their case. It’s also far more expensive than the first option because of extensive attorney fees and court fees.

Uncontested Divorce

This divorce option involves a cooperative approach that may or may not involve divorce attorneys. The divorcing spouses work together to write up a plan that they both approve to split assets. If the court finds it fair and legal, it becomes an official part of the divorce settlement. The court will issue a divorce judgment that finalizes the agreement and dissolves the marriage. Because there is no trial or debate between attorneys, this option is called an uncontested divorce.

Fault Divorce

In the past, fault divorces were the norm, requiring proof that one spouse committed a wrongdoing leading to the end of the marriage. However, today, no states mandate fault divorces. Instead, couples can decide between fault and no-fault options when dissolving their marriage. Grounds for a fault divorce vary by state and may include adultery, habitual intoxication, felony conviction, insanity, desertion, or extreme cruelty. Opting for a fault divorce necessitates proving these grounds. Interestingly, even if one spouse is at fault, some may choose a no-fault divorce for simplicity.

No-Fault Divorce

No-fault divorces are widely accessible and many couples choose this option for its straightforwardness. A no-fault divorce is based on irreconcilable differences, signifying that the marriage has irretrievably broken down due to insurmountable disparities between the spouses with no possibility of reconciliation.

Litigated Divorce

If both spouses cannot come to an agreement or resolve their issues independently, they have the option to go to court and pursue a litigated divorce. In this type of divorce, a judge will make decisions regarding custody and asset division.

Mediation Divorce

If coming to an agreement is a struggle but spouses don’t want to go to court, mediation can help. A neutral third party known as a mediator can facilitate communication between spouses who can’t agree on how to split assets. Mediators don’t have the legal authority to define divorce terms, but can help spouses come to an agreement to present to the court. While mediators charge a fee, the cost is less than a divorce trial. Additionally, the negotiation and settlement during mediation are private, while the contents of a court case become part of the public record.

Arbitration

Arbitration is like mediation but has some crucial differences. First, the arbitrator has the legal authority to create and approve an agreement. Second, the spouses can dictate the timeline for the arbitrator to decide on the divorce terms, preventing a prolonged process.

Collaborative Divorce

In a collaborative divorce, each spouse engages a collaborative divorce attorney. The aim is to steer clear of the court and the lawyers make every effort to reach a settlement. Consequently, both spouses need to reach an agreement by compromising and communicating.

Marital Property vs. Separate Property

Another complication to splitting assets during a divorce is how your state defines property ownership between spouses. Understanding this aspect is crucial to creating a divorce agreement that a judge finds equitable.

The first step is distinguishing marital property and separate property. Unless your state has community property laws, separate property is off the negotiating table during a divorce. The agreement only governs marital property.

Marital property means any wealth, property, or asset that either spouse earned or received while married (each state has its own way of defining property ownership of assets you earned while separated from your spouse). While state laws vary on how judges divide marital property, the general rule is to assess assets the couple co-owned or co-managed (such as a residence, bank account, or retirement account) and divide them equitably between spouses.

On the other hand, assets obtained before the marriage are separate and therefore aren’t part of the divorce. Likewise, property identified in a signed prenuptial agreement is considered separate, even if it’s an asset that would otherwise be considered marital (such as a house the couple buys together).

Equitable Property Division in Divorce

Judges are legally obligated to ensure the divorce settlement is equitable. Remember, equity isn’t equality, meaning the judge considers each spouse’s financial and personal circumstances. The goal is to ensure a foundation of financial well-being for each spouse. Here are the characteristics that determine how equitable a divorce agreement is:

  • Who is the primary caretaker of any children
  • How much debt and wealth each spouse will have after the divorce
  • Each spouse’s annual salary
  • The age and health conditions of each spouse
  • Tax implications splitting assets
  • How responsible each spouse was with assets during the marriage
  • How reasonable it is for a spouse to own certain properties (such as residences and businesses) after the divorce

Community Property States

In community property states, both spouses have equal ownership rights to these assets and responsibilities for these debts, regardless of who earned or incurred them. During a divorce, the judge will try to divide the assets 50/50 instead of aiming for equity. However, only nine states have community property laws, and some of these states have recently oriented their statutes toward equity. If you live in one of the following states, your assets will be community property if you’re married:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

How Is Your House and Other Property Divided in Divorce?

A couple meeting with a divorce attorney to discuss the legal procedure for signing divorce papers.

Your house is likely a center point in your divorce agreement because it’s an asset of financial and emotional significance. Additionally, it’s typical for at least one of the spouses to want to continue raising their children in the home. However, retaining a home and other assets after a divorce isn’t always feasible. Here are the three options divorcing spouses face when dividing property: 

Buy out your spouse: In this scenario, one spouse buys out the other’s share of the property, allowing them to retain sole ownership. For a house, the spouse refinances the existing mortgage to fund the buyout if necessary.

Sell the asset: Selling the family home (and other assets) and dividing the proceeds is a straightforward way to liquidate the property and distribute the value between spouses. This option is often chosen when neither spouse wants to keep the home or if selling is deemed the most practical solution. However, divorcing spouses may hesitate to do so for sentimental and familial reasons.

Co-ownership with a deferred sale: In some cases, divorcing spouses may choose to continue co-owning the home for a specified period, delaying its sale until a later date. For example, a couple with minor children may decide for one spouse to live in the home with the kids until they reach adulthood. Once this milestone has passed, the couple sells the house. The divorce agreement also defines financial responsibilities for mortgage payments and home maintenance.

Remember, for disputes over a car, judges usually assign it to the spouse who drives it most or needs it to get to work. Additionally, the spouse receiving the car also takes over the financial responsibilities for it.

How to Reach a Property Agreement in Divorce

Reaching a property agreement in divorce means getting on the same page as your spouse about splitting your assets in a way a judge will approve. Here are the steps to doing so:

Take Inventory of Your Assets

First, it’s essential to list every asset to split. Your list should include all the real estate, vehicles, bank accounts, investment accounts, stocks and bonds, among others. Remember, it’s illegal to attempt to conceal assets from the property agreement during a divorce. Being transparent and thorough is the best way forward.

Appraise Your Assets

Once you have a complete list, estimate each asset’s value. For example, you can look on Kelley Blue Book to estimate your car’s value. On the other hand, you might need an appraiser to come look at your house to understand its current market value.

Distinguish Between Marital and Separate Assets

Next, it’s crucial to understand which assets the law requires you to split. Separate property is exempt from division in most states. For example, a classic car you bought before marriage won’t be part of the split; it will remain yours after the divorce.

Negotiate With Your Spouse

Coming to an agreement with your spouse is usually the most challenging part. Doing so involves reviewing the list of marital assets and deciding how to divide them between yourselves. If you’re having trouble, a mediator can help before the situation escalates to a trial.

In addition, it’s advisable to bring on a certified divorce financial analyst (CDFA) to support the process. A CDFA is a financial professional specializing in the financial aspects of divorce. They are third-party, neutral consultants who advise spouses, mediators and attorneys to help ensure a fair division of assets, foresee unwanted tax implications, structure alimony and establish grounds for child support.

Submit the Agreement to a Judge

Once you and your spouse reach an agreement, put it in writing and submit the signed document to a judge. If the divorce is uncontested, the judge will review it along with the rest of the documents you submit to begin the legal process for divorce. Otherwise, submitting the document will allow the court to begin the trial. The agreement should receive approval if it’s equitable.

How to Spit Retirement Benefits and Business Assets

Splitting retirement accounts and businesses is another hurdle for divorcing couples. Although 401(k)s and IRAs usually have one spouse’s name on them, courts usually consider them marital assets. As a result, judges usually divide ownership between spouses equitably, ensuring both parties receive distributions.

Additionally, businesses can be tough to split. Like a house, a business is usually a high-value asset involving emotional attachments and conflicting ideas. For example, one spouse may want to continue running the business, while the other spouse wants to liquidate it and take a payout. In these situations, solutions involve one spouse buying out the other’s share or a judge assigning a portion of the future profits to the spouse not running the company.

How to Split Debts

Judges usually treat debts like marital assets, meaning they split them between divorcing spouses regardless of who opened the account. For this reason, getting divorced can mean taking on a portion of your spouse’s loans or credit card debt.

As a result, your ex-spouse’s financial habits can continue to haunt you after the divorce if they don’t make their monthly payments. Unfortunately, the more responsible spouse usually ends up making payments to make up for what the other spouse misses. Otherwise, your credit could take a hit. In these situations, you may need to go to court again to have a judge order your ex-spouse to reimburse these extra payments. 

Making Smart Financial Planning Moves After a Divorce

Divorce can be financially ruinous, especially if it involves a trial. Here’s how to reestablish stability after a divorce:

  1. Make a budget for your new circumstances: After divorce, your income, expenses and financial goals may have changed. Creating a new budget is crucial to understanding your financial picture and making informed decisions. Adjust the budget to reflect changes in housing, utilities, insurance and any other expenses the divorce changed.
  2. Build an emergency fund: Divorce can deplete savings, so it’s essential to rebuild an emergency fund to protect yourself against surprise expenditures. Aim to set aside three to six months’ living expenses in a readily accessible account.
  3. Review investments: Reevaluate your investment strategy based on your changed financial goals, risk tolerance and time horizon. Consider consulting with a financial advisor to ensure your investment portfolio aligns with your new circumstances.
  4. Update insurance policies: Review and update all insurance policies to reflect your changed circumstances. Doing so involves changing coverage levels for auto, home and health insurance based on your new living situation.
  5. Understand tax implications: Your tax situation will change after a divorce, impacting your filing status, deductions and credits. As a result, it’s crucial to know how alimony, child support and any property settlements can affect your taxes.
  6. Revise your estate plan: Your estate planning documents, such as wills, trusts and powers of attorney, should reflect your new wishes and circumstances. Update beneficiary designations on accounts, insurance policies and retirement plans to reflect your current circumstances. You may need to appoint new individuals for roles like executor, guardian, or healthcare proxy. 

Bottom Line

A couple and their lawyers discussing the divorce process at an office.

From uncontested negotiations to contested trials, all divorces require a fair and equitable division of assets to proceed through court. The challenges posed by property categorizations, competing intentions for properties and businesses, and the ramifications of shared debts underscore the need for professional guidance. Various professionals, including attorneys, mediators and CDFAs, can help make the process manageable, ensuring your divorce agreement reflects fairness and informed decision-making for both parties involved.

Tips for Navigating a Divorce

  • A financial advisor is an important member of the team when you are going through a divorce. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now. 
  • Splitting up assets can require the sale of real estate, investments or business interests. Fortunately, there are moves you can make to protect your assets from divorce, such as obtaining a prenuptial agreement and residing in a state where divorcing spouses retain their separate property.

Photo credit: ©iStock.com/Jacob Wackerhausen, ©iStock.com/Antonio_Diaz, ©iStock.com/skynesher

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