You and your spouse were partners. And during your marriage, worked hard to achieve your financial goals and enjoy a comfortable lifestyle. But now that you're facing the end of your marriage, you need to understand more about how are assets divided in a divorce and how who gets what is determined.
For many couples getting a divorce, splitting assets (and debt) is one of the most difficult issues to resolve because the general rule is to ensure everything is divided fairly. But what does that even mean?
To help you understand what you can do to protect your assets and make sure they don't wind up wasted on a contested divorce in court or outrageous attorney fees, in this post we'll cover:
The differences between separate property and marital property, and how property can change from one form to another and sometimes be both
How dividing assets in divorce depends on the state which you live in
How the method you use to end your marriage can also significantly impact how the division of your marital estate will take place
And how to maintain control over your divorce asset split
Oh, and before we begin, you need to know that this post is for informational purposes only and should not be construed as legal advice, financial advice, or counsel.
Assets divided in a divorce are typically marital property, not separate property
Generally speaking, assets are either marital property or separate property. Typically, marital property includes any assets acquired by either spouse during the marriage, regardless of who made the purchase, or whose name is on the title.
Whereas separate property is usually any asset owned by either spouse prior to the marriage, an inheritance either spouse received prior to or during the marriage, personal property or gifts given from one spouse to the other spouse, or received from others, and proceeds received for pain and suffering in a personal injury lawsuit.
When it comes to dividing assets in a divorce, marital property are considered divorce assets, whereas non marital assets are considered a spouse's separate property.
In my experience, the longer a couple is married, the less of a chance they have both separate and marital property as over time, everything becomes commingled. But like everything, there can be exceptions as you'll soon learn.
Separate property can be converted into marital property
Let's say you owned real property such as a home prior to the marriage and after you got married, you added your spouse to the title so you could be co-owners. And used joint funds to make the mortgage payments moving forward. In this example, you converted separate property into marital property.
Or you each had individual checking accounts before you got married, then combined them into one joint account. That commingled property is now also considered marital property. And both the house and the checking accounts would be subject to negotiation between you during your divorce.
Incidentally the opposite is also true - you can convert marital property to separate property if you and your spouse both agree in writing. But that's another post for another day.
Some divorce assets can be both marital and separate property
Let's say when you and your spouse first started your current jobs you were both single. You each enrolled in your company's 401(k) plan, and for the next 6 years you and your spouse contributed to your respective accounts. And, after you got married, you still continued to contribute to those very same accounts.
Flash forward 15 years - and you and your spouse are divorcing. In this example, your retirement plans - the 401(k)s - are both separate property and marital property. So in theory, a portion of each of your respective retirement plans would be retained by only one spouse, and a portion would be subject to distribution between you, with the other spouse possibly receiving a share of your investment account, or vice versa.
- Dividing property that is both separate and marital is a complex topic outside the scope of this post.
Separate assets that appreciate during the marriage
What happens if you or your spouse owned a rental property prior to marriage that was completely self-sustaining - meaning, no marital funds were used for its management or upkeep. Then, at the time of your divorce, it had doubled in value?
If the appreciation in the value of the house was due to market forces outside your control (passive), then that appreciation is most likely considered non marital property. But if the rental property increased in value because you both spent your free time renovating and improving it, then possibly yes, that growth could be considered marital.
How marital assets and marital debts are divided is different in a community property state versus an equitable distribution state
Here in the United States, dividing assets and debts in a divorce follows one of two different methodologies: either Equitable Distribution or Community Property Division.
In Community Property states like California and Washington state, both spouses are generally considered equal owners of all marital property and debts. So the going in supposition is generally a 50-50 split. Unless the parties otherwise mutually agree in writing.
Whereas in Equitable Distribution states like New Jersey, New York, Illinois, and Pennsylvania, there should be a "fair division" of a couple's marital property and debt - but not necessarily equally.
So as you can see, state law where you live is one of the factors that can play a role in how the financial aspects of your divorce are handled. But there's more to it than that.
The method you use to end your marriage will also significantly impact your property agreements
Regardless of whether you live in a community property state or an equitable distribution state, you and your spouse actually have a lot of flexibility to come to a divorce agreement you both find fair. Provided you pursue an uncontested divorce.
If you can work together during your divorce proceedings, and engage in direct negotiations, you can maintain control over the terms of your property settlement.
But if you can't (or refuse to) work together, it will be very difficult, if not impossible, to predict the outcome of how your marital property (and debt) will be divided. Because you'll each need to hire your own divorce attorney to argue on your behalf.
If they can't help you and your spouse come to agreement, you'll have no choice but to battle it out in family law court. Where judges divide marital property for you. And unfortunately, there's a good chance neither of you will wind up with a property settlement you find fair or that meets your needs or interests.
That's why it's better to work with your spouse to negotiate an equitable property division - out of court.
Doing so allows you and your spouse to remain in complete control of how any marital assets obtained, or joint debts acquired, are divided. Even if it's not 50-50.
What if you and your spouse want to maintain control of the division of your assets and debts, but you don't understand the complexities of your situation?
Especially because not all assets and liabilities are the same. Some may be pre-tax like retirement benefits, while others are post-tax like checking accounts. Some may change in value frequently (such as retirement accounts,) while others are quite static.
In other words, what may appear as a fair property division on the surface doesn't necessarily mean it is. And even if it was, each of you will have a different definition of what's fair depending on your wants, needs, and interests.
In situations like these you can involve a financial advisor to help you understand the intricacies of your situation, or work with a divorce mediator with a financial background.
What if you're willing to work together to determine your asset split, but don't communicate effectively or get along?
This is all very normal (and common,) given the circumstances. And as you've learned, there are many complexities surrounding divorce and asset division - so it's often way too difficult for a divorcing couple to try to resolve on their own.
Or you don't understand the how the actual tactical division works?
Some joint property such as furniture or bank accounts are easier to divide. You each take what you want (and have agreed to,) and that's that. While other property is far more difficult to divide.
Take for example, a 401(k) or corporate pension plan. Did you know they require a document known as a Qualified Domestic Relations Order (QDRO for short) to be drafted by an attorney, signed off by a judge, and executed by a plan administrator, before each of you can receive your share? And if you fail to do this properly, there are significant tax consequences and penalties you'll incur?
As you can see by this example (and there are many more like it) there is far more& to the distribution of assets in divorce than just taking what you've each agreed to take, and walking away. How and when each asset is divided differs from couples to couple, and item to item.
That's why mediation is an ideal solution for dividing assets in a divorce
With the help of a skilled mediator with a financial acumen like me, you can retain control of your property settlement and at the same time, avoid making costly and significant mistakes in this complicated part of the divorce process.
And you and your spouse can successfully reach an agreement you both agree is a fair and equitable division - instead of letting your future be decided by lawyers or a judge in court.
Key takeaways
During a divorce, assets are generally classified as either marital property (acquired during marriage) or separate property (owned before marriage or received as inheritance/gifts). This difference plays a crucial role in determining how assets are divided.
Separate property can transform into marital property through actions like combining accounts or adding a spouse's name to a title. This process, known as commingling, becomes more common the longer a couple is married.
Some assets, like retirement accounts started before marriage but continued during marriage, can be both separate and marital property at the same time. This creates a more complex situation that requires careful consideration.
The state you live in significantly impacts how assets are divided. Community property states typically split marital assets 50-50, while equitable distribution states aim for a "fair" division that may not be equal.
Working together through mediation or collaborative divorce gives couples more control over their property division compared to letting a judge decide.
Some assets are more complicated to divide than others. For example, retirement accounts require special legal documents (QDROs) and professional assistance to split properly, while bank accounts can be divided more simply.
The fairness of asset division isn't just about splitting things equally – it's important to consider whether assets are pre-tax or post-tax, and whether their values might change over time.
