If you and your spouse can't agree on how to divide your property and debts during the divorce process, then a court will have to decide for you. But how does a judge make a fair division? One of the most important things to know when it comes to dividing marital assets and debts is whether you live in a community property or an equitable distribution state.
In either scheme, there are a number of factors that affect property division, depending on the laws of the state that has jurisdiction over the divorce. If you're involved in a divorce, it's critical that you understand your local laws or consult with an experienced divorce attorney.
Community Property States
Generally, in community property states, all marital or "community" property is divide equally (or 50/50) in a divorce. Separate property, defined below, stays with the spouse who owns it.
Community property is all property that's jointly owned by a married couple or property that was acquired during marriage, through either spouse's labor, efforts, or skill.
Separate property is property that's owned separately by one spouse. Separate property isn't usually divided in a divorce. Absent some unusual circumstances, like commingling (see below), it's awarded to the owner spouse.
Separate property includes:
- property that was acquired before the marriage, for example, a savings account that you opened and funded before you were married or a car that you purchased and paid off before the marriage
- property that was inherited or was a gift to one spouse, even if the inheritance or gift happened during the marriage
- businesses owned prior to the marriage (but if both spouses added to the value of the business during the marriage, through work or investments, there may be a community value to a separate business as well)
- either spouse's pension proceeds that vested prior to marriage
- personal gifts acquired by either spouse or given to one spouse by the other (depending on state law), and
- property or income acquired after the date of separation or the date of the divorce (depending on state law).
Despite these fairly universal rules, there are always exceptions. For example, personal gifts are assumed to be the property of the spouse who received the gift, unless a spouse can show that the item was never intended to be a gift. For example, if one spouse purchases and gives the other a very expensive necklace during the marriage, but the couple treats it as a jointly-owned investment, rather than part of the recipient spouse's personal wardrobe, the necklace might be considered community property.
Conduct that could show the necklace was treated as an investment rather than a gift includes the following:
- having the necklace appraised
- keeping the necklace in a safe or in a safe-deposit box at a bank, and
- a history of the couple purchasing fine jewelry (including the necklace) as part of a bigger collection.
To avoid confusion, you should document the circumstances under which all valuables are acquired at any point in time, including after a separation and up to the date that the divorce is final. Even though some states, including California, use the date of separation as the cut-off date for determining if certain property is community or separate, it's always best to have a record. Memories fade, and during a divorce, spouses tend to "forget" about oral agreements they may have made in better times.
Sometimes, separate property can become community property through commingling, which is when separate property is mixed together with community property in such a way that you can't tell the difference. For example, commingling might occur when one spouse deposits a separate inheritance into a joint bank account the couple uses to deposit their paychecks, cover monthly expenses, and buy community property.
The basic principle in community property states is that both spouses should receive an equal share of the community property and debts. Although each spouse is entitled to half of the assets, the form may differ. For example, there's no way for you to literally split your home in half. You may be required to sell your home and split the proceeds, or the spouse that wishes to stay in the home may have to buy out the other.
What this means is that when couples can't agree on how to divide their property, a judge will look at the entire marital estate, determine the total net value of the community assets (usually based on appraisal reports and other evidence submitted by the spouses) and order that each spouse receive the same value of property and/or liquid assets (cash, bank accounts, and investments).
Let's say, by way of example, one spouse receives the new family minivan (valued at $30,000), and the other spouse receives the 2010 Subaru, valued at $15,000. To even out the distribution, a judge may award the spouse who got the Subaru all of the points the couple acquired on the family credit cards (also valued at $15,000). Even though the physical property wasn't divided or sold, both spouses in this example received an equal value ($30,000 each or a 50/50 split) of assets.
Divorcing spouses and judges can get creative with property division to ensure that each spouse receives an equal amount. Sometimes, however, there may be a legitimate reason to create an unequal split, including where one spouse owes some amount of reimbursement for unauthorized post-separation purchases or wasting marital assets.
Equitable Distribution States
All of the non-community property states follow the common law model, also called equitable distribution. With equitable distribution, assets aren't necessarily divided evenly. Instead, a court will divide the assets and debts in a manner that is equitable (fair) to both spouses.
In deciding what's equitable, courts will commonly consider the following factors:
- the length of the marriage
- both spouses' work histories, individual earning capacities, and job prospects
- both spouses' physical and mental health
- the source of particular assets, and
- the children's expenses and needs.
The exact method of property division can be complicated and will depend on your state's laws and the facts of your case. You should consult with a local family law attorney before entering into any complex property settlement agreements.
Taking A Property Inventory
Regardless of your state's laws, it's always important to keep good records and document everything. As soon as possible, send your attorney a list of all assets and any supporting documentation regarding ownership and values, including copies of title documents, written agreements, and current appraisals.
It's very important that you make a complete list of all property. Many lawyers have property checklists designed to jog your memory regarding property. Assets which people sometimes forget to list include:
- pension and retirement accounts
- stocks and bonds
- money market accounts (MMAs) and certificates of deposit (CDs), and
- safety deposit box contents.
When you and your spouse can't agree on the value of a particular piece of property, it may be necessary to have a professional appraiser—such as a real estate broker—put a value on the property for you. You'll want to provide your lawyer with any information you have regarding property values, including prior appraisals and assessments from tax collectors.
Divorces that involve property disputes can be incredibly expensive. Many divorcing couples make the mistake of fixating on one piece of personal property—such as a piece of art or something else with sentimental value—and spending many times the value of the item to have their attorneys' fight over who will own it. It's almost always better to compromise between the two of you, unless your lawyer has a compelling reason to get involved.
Generally, there is no gain or loss for federal income tax purposes on the transfer of property between spouses when the transfer is "incident to the divorce," which means that the transfer:
- occurs within one year after the date on which the marriage ceases, or
- is related to the end or cessation of the marriage.
A transfer is ''related to the cessation of the marriage'' if:
- it's made pursuant to the divorce or separation instrument, including any modification of or amendment to such an instrument, and
- it occurs not more than six years after the date on which the marriage ceases.
Any transfer that is not pursuant to a divorce or separation instrument, or any transfer that occurs more than six years after the cessation of the marriage, is presumed not to be related to the cessation of the marriage and might be taxable.
Nonetheless, you'll want to consult with a tax lawyer or certified public accountant regarding any possible tax consequences of holding, transferring, or selling property as part of the divorce process.
Property Settlement Agreements
If you and your spouse can agree on how to divide your assets, whether it follows your state's guidelines or not, your lawyers will write up a formal agreement called a property settlement agreement, a marital settlement agreement, or a separation agreement. Your attorney should include detailed lists of who gets what.
Read the property settlement agreement carefully, and ask your lawyer about anything you don't understand. Once you've signed the agreement, and it's been approved by the court, it will be difficult and expensive to change it.
Following Through After the Divorce
As soon as the property settlement is approved, you'll want to take care of the property transfer details:
- Get your ex-spouse's signature on any deeds, stock transfers, or bank account forms that will be necessary to transfer property into your name.
- Make any payments necessary to fulfill your end of the property division arrangement.
- Start the process of refinancing property, if that is a part of your agreement.
- Make sure you release your name on the title to any property your ex-spouse is receiving.
While it may be the last thing you want to do, taking care of these details will help avoid future trouble and make it easier to gain closure on this chapter of your life.
Questions for Your Attorney
Here are some important questions to ask as you interview divorce lawyers:
- Are we in a community property state?
- If we were married in, lived in, and divorced in this state, but we have property in another state, which state's property division laws apply to the out-of-state property?
- What can I do if my ex-spouse refuses to sign over the deed to a house that the court awarded to me?
- What are the tax consequences of our division of assets?
- Just before we got married, my wife's father gave her some money, which we used as part of our down-payment for our house. I provided the other part of the down-payment, which was much larger. How will the house be divided when we get divorced?
- What kind of records do I need to prove that some property my spouse claims is community property is really my separate property?