Strategy in Asset Divisions - Do's and Don'ts

One asset does not always equal another asset, even if the values are identical. One reason for this may be based on the personal situation of each spouse.  For example, one spouse may have a greater need for cash in the short run, where the other spouse may place higher need on retirement assets. Personal preference or short-term and long-term financial needs may be only part of the equation. Tax consequences of a property division can impact the long-term financial future of divorcing spouses. 

Deborah Nason with CNBC pointed out the not-so-obvious effects of a divorce property division in her article Not always a rose: Avoiding thorny asset-liquidation issues in divorce. For example, she points out, “if the wife keeps a house with $500,000 equity, this asset generally has a gain exclusion; if the husband keeps a 401(k) worth $500,000, he will sustain an unavoidable tax liability—one-third of it could go to taxes.”  However, a judge will view these assets equally based solely on valuation at the time of the divorce. 

But, keep in mind, liquidation is not the best answer either because liquidation creates a taxable event.  Dividing assets between spouses during a divorce is generally not a taxable event. Nason’s article points out, “…because transferring assets between spouses is a nontaxable event, it becomes a great motivator to trade assets back and forth”. 

Nason suggests the following Do’s and Don’ts in considering asset liquidation as part of a divorce: 

Asset liquidation dos and dont's 

Do:

—Understand the cost basis of investable assets.

—Make sure you know the purchase price of a real estate asset and quantify all improvements made.

—Understand what the capital gain will look like for the sale of a home.

—Make sure to obtain good business valuation (on equipment, buildings/real estate, goodwill, customer lists, customer base, etc.).

—Get an appraisal for collectibles.

 Don't:

—Liquidate a 401(k) if at all possible.

—Sell something that will result in the biggest capital gain.

—Forget to be aware of the change in capital gain exclusion from $500,000 to $250,000 when the proceeds of a house sale are split.

—Sell an asset without getting a fair price.

 

Real estate in a Texas divorce - What do you need to know?

I read with interest Jeff Landers’ (@bedrock_divorce) Personal Finance Column on Forbes.com about real estate in divorce. He had seven points that he believes divorcing women need to know about real estate and real estate appraisals. I actually think that his point is relevant whether you are a man or a woman – anyone going through divorce that has real estate needs to be aware of how real estate is handled, especially in Texas since the rules in Texas are a little different than most other states.

In Texas any asset purchased during the marriage is considered community property and is divisible in the final divorce. (Any property purchased before marriage or received through gift or inheritance is separate property. For a discussion on Texas characterization and division in divorce, click How to Divide Marital Property in a Dallas, Texas Divorce.) In reaching a fair division of the marital estate, first the values of the assets must be determines. For real estate, it is always best to get an appraiser to give an opinion of value under the current market conditions.

Landers’ points are:

  • Most real estate appraisals are based on comparable sales.

A real estate appraiser evaluates a property based on the recent sales of comparable properties in the area, considering whether the features of the real estate in question make it more valuable or less valuable than the other properties considered. Some people try to use the tax appraisal value in divorce, but that value may or may not be related to the actual fair market value of a house.

  • Unique features may be evaluated differently by different appraisers.

How the unique features of a property are valued is a subjective standard that can differ from one appraiser to another. Appraisers won’t consider the extravagant window treatments or fancy paint on the walls. Features that effect value include a swimming pool or a 4-car garage. If one side of the divorce gets an appraisal and the other side disagrees, then a second appraiser can be hired. If there is a substantial difference in the two opinions, then a third appraiser can be appointed by a judge to “break the tie”.

  • One woman’s peaceful Zen garden may be another woman’s backyard eyesore.

Like appraisers view things differently, so may buyers. The seller may be really into fruit trees and think the orchard is of great value to the property. A buyer, on the other hand, may find the falling rotting fruit to be an annoyance that attracts critters to the yard. So, a seller’s viewpoint of the value of costly improvements they performed on the house may not be indicative of the value that an appraiser or a buyer may find.

  • Make sure you use an appraiser who’s knowledgable in the local market.

Realtors like to say, “all real estate is local” – that holds true in valuing real estate in a divorce. The local market conditions drive the prices of real estate. An appraiser in Dallas may not be familiar with the under currents of the housing market in Houston to give a fair assessment of value.

  • Real estate values change over time.

Over the past few years we have seen with great emphasis how the real estate market can change over time. Economic factors – like the availability of mortgages, how high or low mortgage interest rates are, or whether the job market is shrinking or growing – affect housing prices. Just because a house was worth something when it was purchased does not necessarily carry over to the present value. Likewise, some cases need to have a historical value to show what the property was worth in the past.

  • Fair market value is only part of the story.

In considering a division of property in a divorce in Texas , finding the fair market value of the property only provides part of the information needed. The mortgage balance is also important to know, which then provides the equity position in the property.

  • Equity in the property is not the same as money in the bank.

Obviously, you can’t spend home equity at the grocery store or use it to pay the electric bill. So, different spouses may have different priorities in achieving a fair division of property. One spouse may have more interest in spendable cash; where another spouse may be more interested in the long-term equity of the real property. But, even if the house gets sold for more than was paid on it, there are tax considerations to take into account. If the house appreciated in value since it was purchased, there may be capital gains taxes to pay. This will decrease the cash available to spend.

Photo Credit: © Remygerega | Stock Free Images & Dreamstime Stock Photos

How is My Retirement Divided After a Divorce in Dallas, Texas?

 

When going through a divorce in Dallas, Texas, it is important to gather all the information you can regarding your retirement accounts such as the start date, the most recent statement and the plan administrator’s contact information. Any retirement acquired during the marriage is community property and is thus divisible by the Court.

When it comes to dividing a retirement account such as a 401K or a pension, extra steps are required in addition to the final divorce decree dividing such accounts. In order to divide a 401k or Pension, an additional order called a Qualified Domestic Relations Order needs to be signed by the Court. The Qualified Domestic Relations Order is referred to as a QDRO.

Once the QDRO has been signed by the Judge, it is then sent to the retirement plan administrator for processing. Many plan administrators are not located within Texas and most have their own QDRO that they prefer for participants to use. Some QDROs can be rather complicated and it is recommended that the proposed QDRO be submitted to the plan administrator for approval prior to having the Judge sign the QDRO. 

The QDRO essentially divides a retirement account into two separate accounts. The QDRO will state the division of the retirement account shall occur upon a date certain. This means that the retirement account will be divided as of the date of divorce or another date as stated in the QDRO. The QDRO will also assign either a percentage or dollar amount for each spouse being awarded an interest in the retirement as of the date certain stated in the QDRO. If a spouse has taken a loan from their retirement account, the spouse that is to assume responsibility of that loan will need to be specifically stated in the QDRO.

 

Are My Earnings My Own Once I File For Divorce in Dallas, Texas

 

Texas is a community property state which means that all assets and debts acquired during the marriage are presumed to be community property and thus divisible by the Court. There is no legal separation in Texas. This means that even after a person files for divorce in Texas, the assets and debts acquired after filing for divorce are community property and divisible by the Court at the time of a final trial.

Dallas, Texas has what is called a Standing Order. The Standing Order is in effect on all parties who file for divorce in Dallas, Texas. The Standing Order contains injunctions that remain in place on each spouse during the pendency of the divorce action. These injunctions regulate how you are to spend money during the pendency of the divorce. Specifically, the Dallas Standing Order enjoins a person from spending funds unless it is for reasonable and necessary expenses and attorney’s fees. The Standing Order becomes effective on the person filing for divorce once the divorce petition is filed with the Court and effective on the other spouse once that person is served with the divorce petition. The purpose of the Standing Order is to maintain the financial status quo during the pendency of the divorce.

Just because you have filed for divorce and/or are in the middle of the divorce process, your income is still community property. This means that your spouse’s income during the divorce is also community property. Any contributions to a spouse’s retirement accounts during the divorce process are community property. Any debts incurred during the divorce process are community property as well. However, the Standing Order is in place to minimize any debts incurred during the divorce process in order to protect the community estate.

 

Texas divorce FAQ: Can I buy a house during the divorce?

It is not wise to create new assets or financial obligations when you are trying to divide the current assets/debts. In some circumstances, such as by agreement or when the parties have significant financial abilities, the parties may agree to allow such a purchase.

Texas divorce FAQ: How do I prove that my spouse is hiding money?

 

Allegations of hidden assets occur often in divorce proceedings. It is standard procedure in a contested Texas divorce for spouses to each be required to file a sworn disclosure of the assets and debts, including financial accounts, of the marriage. Additionally, bank statements and other written documentation can be requested from the spouse or obtained from the bank or other company, that may shed light on the existence of the assets. A forensic CPA can be hired to analyze the financial transactions to search for irregularities that would indicate hidden assets.

 

Divorce Over 50: 3 Mistakes to Avoid

Posted by Michelle May O'Neil on June 6, 2011

While the overall divorce rate has decreased slightly over the past two decades, for those over 50 it has doubled.  Paradoxically, experts chalk the increase up to baby boomers' affinity for marriage in the first place. More older people are on their second and third marriages by the time they hit 50 and those are marriages that are less likely to last.

Regardless of first, second or eighth, the stakes are higher for couples in their 50s, 60s and 70s. By the time most people are 50, they have a long work history, own some real estate, have a retirement account, life insurance and more – in which case, it's critical to get the best settlement possible.

Here are some mistakes particularly common to the over-50 set, all of which can lead to a lower-than-deserved settlement or make you pay your ex more than you should.
 

Mistake 1: Ignoring taxes on retirement funds

For those over 50, 401(k)s and other pre-tax retirement accounts may be the most significant asset other than the family home. That makes it essential that both sides understand their true value, which is actually considerably less than the balance. Because the money's taxed upon withdrawal, the real value of the account is only about 65% of what the statement says. This miscalculation can hurt, especially in community property states like California, Texas, Arizona and Nevada, where divorcing couples often split assets evenly: One spouse takes the house, the other takes the retirement fund and savings accounts, which may look equivalent on paper. Lawyers suggest negotiating for a larger portion of other shared savings to make the trade more equitable.


Mistake 2: Overvaluing alimony, undervaluing Social Security

Whether a couple is retired or still working, monthly income may actually be more important than the division of hard assets. Alimony, which may be awarded to the spouse who earns less or has been out of the workforce for some time, is one of the most common ways divorce settlements compensate for discrepancies in a couple's income. But banking on monthly payments from an ex-spouse gets riskier every year after 50, as the chance of them dying increases.  One way to protect yourself, is to get a life insurance policy on your ex. It's not enough to be the beneficiary on your former spouses' life insurance plan -- he or she can change that at any time. You want to own the policy outright.

On the other hand, Social Security is often undervalued in divorce negotiations. If the couple was married for at least 10 years, one spouse is entitled to the benefits of the other at age 62 – as long she/he remains unmarried. A person who makes less than his or her spouse will want to claim the higher-earning spouses' Social Security, as it will be worth more. If your spouse has a claim to your benefits, remember to figure that amount into negotiations for alimony or other payments.

Mistake 3: Forgetting about the kids

Older couples have older children – teenagers, college students, or even independent adults – which means custody battles may not be as pitched, if they exist at all. That doesn't mean there aren't issues. To prevent conflagrations down the road, make a plan to ensure that the assets being passed along to the children are set up appropriately so that your children, rather than, say, your ex's future spouse or your kids' new wife, get the money. For starters, create a "lifetime asset protection trust" for your kids to protect the assets in case they, too, get divorced. The trust will keep your kid's ex-spouse - or anyone else - from receiving any of the money you leave behind for them.

One expert suggests, if you have children under age 18, "it's really important to have the guardian of the children … be separate and distinct from the guardian of the money." That may seem counter-intuitive, and in reality, each spouse will control some money, but both money and children can be manipulated in messy divorces. Splitting those responsibilities and obligations can create a system of checks and balances.

Hat tip to Catey Hill for her March 23, 2011 article on Smartmoney.com
 

Am I still entitled to my ex's social security benefits after our divorce?

I recently came across an excellent article on the Wall Street Journal's website entitled, How Divorce Affects Your Social Security (Or Not).  As a Dallas divorce lawyer, I am frequently asked about post-divorce entitlement to social security benefits.  From the outset, it should be noted that unlike most other areas of martial property law, benefits arising from the Social Security Act are preempted by Federal Law from being characterized as community property.  Because of this preemption, we have to look to federal law to determine what affect divorce plays on social security benefits.

In general, in order to be permitted to collect benefits under your ex-spouse's earnings all five of the following must be true:

  1. You marriage was at least ten years in length;
  2. You cannot have remarried since your divorce;
  3. You are at least 62 years old;
  4. Your ex-spouse is entitled to social security benefits; and
  5. The benefits you would be entitled to based on your own work history are less than the benefits you would receive based on your ex-spouse's work history.

So, if you meet all five of these requirements, then you'll likely be entitled to up to 50% of your ex's social security benefits.  Note that the amount your ex is entitled to as the divorced spouse does not have any impact on the benefit amount the other spouse receives.  For an "official" explanation of the above, check out the Social Security Administration's website

Hat tip to Kelly Greene at the Wall Street Journal for the idea behind this post.