A Good Divorce addresses financials systematically, since every relationship gains assets and liabilities along the way. Couples invest in stocks and bonds, buy houses and cars, and purchase expensive toys. The inevitable acquisition of material items also leads to the accrual of liabilities. When divorce happens, one of the biggest challenges is how to divide assets and liabilities. This can be one of the biggest decisions outside of how to co-parent minor children.
Some people come to a mediator with an idea of how they want to divide things up without consideration for the numbers or what is considered fair. Say I will keep my car and you will keep your car, yet you do not realize that your car has negative equity while my car has positive equity. I have decided I won’t touch your retirement, because I have my own accounts. But you don’t realize the difference in value of the accounts, because I have a 401k at face value of $250,000, while you have a pension that does not reflect on the statement what it is really worth. There is actually a difference of $150,000, and you had no idea that gap existed.
If both parties are working together to come to an agreement, you can decide almost anything you want. However, it is useful to have a neutral party asking the questions not thought of. Since a good divorce addresses financials systematically, it is a good idea to know what systemically means. The information included here is not legal advice. Ask a lawyer if you want to know how family laws would be applied.
The biggest mistake that most divorcing couples make is to mix up the process of valuing and dividing assets and liabilities. A good divorce addresses financials systematically, following the 3 steps in this order:
- Identify all the marital assets and liabilities using the same date of time or statement date.
- Research and agree on the value of all assets and liabilities (it is often best to use the date of separation, because if this ends up in courts or with lawyers, this is what they often use).
- Divide the assets and liabilities to as close to 50/50 as possible, but make sure you are done with step 2.
In the next sections, I will ask the key questions about the different assets and liabilities that could exist.
Marital Home
Is there a marital home? What is owed on the home? What is the value of the home?
Likely the most difficult question in this section to answer will be the current value of the home. Ask 3 different appraisers, or 3 different real estate sites, and you will not get the same 3 answers. And unfortunately they can vary by more than $10,000 and sometimes even more.
But the important thing is for you and your spouse to come to agreement. You can use an appraisal, a zillow-like site, or you can use your own values by looking at the sold listings in your area. You could use a combination of methods. Just agree to the “how” and that process becomes how the value will be attained. The biggest question I usually ask, at this point, is whether or not you keep the home, can you live with the agreed-to value if it is on your side of the balance sheet?
This is because the home might start with one party and end up with another. If the value of the home minus what is owed is a net asset, then the balance sheet will be more straightforward. I was mediating divorces in California during the period of time when so many houses were upside down. We had tougher discussions around whether or not the house would go up for short sale or whether it would be foreclosed. How would a negative be handled? What if the person wanting to keep the home couldn’t afford to do so? Sometimes the marital home division was straightforward, but often times it wasn’t and had to take into account the whole picture.
Vehicles
What vehicles have we purchased during our marriage? What do we owe on our vehicles? What is private party blue book value? Do we both agree with the condition selected for private party blue book value?
After the marital home, it is easiest to identify information about your vehicles. What are the cars, trucks, RVs, and/or boats owned? Were these acquired during marriage? What is private party blue book value on all types of vehicles? The difference between the blue book and what is owed is the number used to determine worth (or just blue book value if nothing is owed).
Investments
Do we have investments such as stocks, bonds and cds (hold off on retirement)? How much are these worth?
Using the statement immediately following your official date of separation, record the face value of the stocks. You can find the value of savings bonds online at treasurydirect.com as of current date.
Bank accounts can be a little more complex. The simplest, most straightforward way to handle your joint accounts is to split the balance 50/50 and put the money in separate accounts, but this can be more challenging if you have a lot of withdrawals, because you have to determine who is paying what.
if one person pays the bils acquired during marriage, but after the bank accounts are separated, then he or she should get paid back half when the overall picture is reconciled. These credits can also happen if you separated earlier, but haven’t split the accounts, but it is tricky, especially if support should have been paid. Sometimes, it is easier to keep things status quo until you have figured out financial division. You can also give credit for 50% of child and spousal paying the bills which can ensure everyone is getting appropriate credit. The important part is that a line in the sand is drawn, and from that point forward support is paid and marital bills are split 50/50.
Retirement Accounts
What are all our retirement accounts? Did we acquire or add to these accounts while we were married? Are we comparing apples to apples such as 401ks that are pre-tax and ROTH Iras that are post-tax? What is the pension or pensions worth if we have them?
Retirement accounts can be the most tricky of all the assets for 3 major reasons a) you often need to look back at prior employers to ensure you did not leave a retirement behind, b) rarely will a pension system inform you what your pension is worth in order to evaluate it as part of the asset total, and c) you need to have a general understanding of the different types of retirement accounts (i.e. ROTH Iras have already been taxed, but traditional Iras have not).
It is easy to get statements for regular retirement accounts at date of separation. Use the face value of the accounts. If you have ROTH Iras in the mix, you need to consider a ROTH Ira is worth more, since taxes will not be taken out in the future. You cannot know what your retirement accounts will be taxed in the future, but expect to add roughly 15 percent average to a ROTH Iras current worth. There is no perfect way to do this, because it will depend on who takes the traditional retirement and what tax bracket they may find themselves in the future.
Pensions need to be evaluated. If your company does not give estimates of the total value, find someone who will. Pay to have it done. The pension is the most underestimated asset in most cases. If you are going to split the pension 50/50, it is less important to value it.
In pensions, pre-marital amounts are part of the overall calculation. Regular retirement accounts are not as easy. The easiest way to do this is to find a statement the month before marriage and subtract the amount on the statement at date of separation. Another way could be to take the total value and divide it by how long it’s been open, multiply by years of marriage, and use that figure (i.e. $100,000/10 x 5 years marriage = $50,000 marital). Again, this is not a perfect science, but you need to value the assets, in some way, before and after.
Home Contents
Have we distributed home contents 50/50? Otherwise, arguments will entail about how much each party kept. Do we value items at yard sale prices? But, you kept the majority of the items, and I had to buy new things at full price…how is that fair?
Usually, it is logical to most people that everything sells at market value. That is the reality because if you have a yard sale, the purchased price is market value. However, if one person takes the majority of the contents, then the other person will need to buy new things. So, the fairest thing to do is to split the contents 50/50 or to find a combination of yard sale pricing and replacement costs that makes the person “buying” as whole as possible. Also, take a look at our fun saver network for saving on new purchases. It’s free to join, or you can upgrade for bigger savings.
If one person is moving to a smaller place, you can still split the contents 50/50, and additional items could be sold at a garage sale, put on consignment, or have an estate sale representative take the items off your hands for a fee (most likely lower than market value). You could also consider selling them yourself.
Taxes
Have back taxes been included in the overall financial picture? What is being done with any tax refund or liability from the time before we separated?
If there are back taxes owed, the fairest thing to do is to split them 50/50. It does not matter who accrued them. There are many arguments around back taxes, because each party has justification for “who” should pay. In a situation where one person was the breadwinner, and the other person a homemaker, and the back taxes cannot be equalized with other assets (i.e. the breadwinner keeping more retirement in exchange for paying the taxes), then 50/50 is the way to go. Either way, make sure the taxes are paid off by one person immediately or split by both parties. The government is going to hold you both responsible, and there is no way around this one.
What if your separation date did not come until the half-year mark, but your divorce is final and you will be filing individually on your taxes? The months you were together should be considered, and any tax refund or liability accounted for in some way. You can account for this in the agreement by saying that any tax refund or liability of either party will be split 50/50 after the total liability or refund is divided by 12 and then multiplied by the months before separation (i.e. $5,000 liability/12 months x 3 months together in the year = $1250 liability to split 50/50).
If you are going to be divorced by the end of the year, have you considered changing your exemptions on your W-4? You will most likely end up with fewer exemptions, so you need to re-look at the exemptions you are claiming for payroll.
Liabilities
How much debt do we have, and how are we going to split it? Can we offset debt with any assets so the lower breadwinner does not run into cash flow issues?
As with taxes, if debt was accrued, it’s a 50/50 split. You can talk with a lawyer or accountant about an innocent spouse clause if the debt is extreme, and you didn’t know about it. But if you are trying to keep this low conflict, you will likely move your situation out of a mediated settlement. It’s still better to try to mediate a better outcome. Debt is typically 50/50 whether you knew about it or not.
Businesses
Are there businesses, and how are we going to get them valued?
Businesses come in all sizes and types. Some are worth getting valued, some are not. Many times, such as in consulting businesses, the income produced is going to be used to calculate support. In these cases, one has to be careful to not double-dip. I have seen many business owners threaten to walk away and close down their business rather than pay out an amount for a business and then still have to pay support. If the business is easy to close down, and start backup, this may be an indicator of its worth. If the business has products and/or inventory, it is going to be hard to avoid a business valuation.
Use good common sense and logic. Determine if a business valuation makes sense. A valuation could cost more than the business is worth. Look at the facts, and then determine the best course of action.
Valuing Items
As emphasized earlier, the best practice for valuing items is to identify all the items and agree on their values before you ever discuss who gets what. Many items, but not all, should be valued at time of separation. Use common sense to agree on items that shouldn’t be valued at time of separation.
For example, has a particular liability been paid by one party after separation (this person should get credit for those payments against the value set)? Has there been enough of an increase or decrease in a retirement account that the value would now be valued negatively if split in two?
Regardless of how it’s done, it’s important to agree on the value first.
Dividing Assets and Liabilities
Once the values are agreed to, then and only then should the parties determine who will take what. Once the values are set, you should not go back to revalue items.
At this point, a spreadsheet can be used to place items under each party. A total of assets minus liabilities should be tallied all the way down each column for each party. If there is a difference on one party’s side, additional assets and liabilities need to be moved, and/or one person will pay out an equalization payment to get the balance sheet to 50/50.
Since a good divorce addresses financials systematically, this is obviously a very important section. But not only for that reason. Without a division of financials, divorces usually cannot take place. Even if everything is agreed to, the judge will want the financial division all spelled out in an agreement to grant the divorce. There are more sections beyond this critical one, so take a look at the other Good Divorce areas.