Getting divorced is like breaking up a business partnership – the assets and debts acquired during the marriage have to be divided between the parties. In this episode Kevin and Pat talk about what is marital property and how it is valued and divided in divorce.

Episode 9 Transcript:

Kevin: I’m Kevin Handy.

Pat: And I’m Pat Cooley.

Kevin: And this is Episode 9 of the Divorce Rulebook podcast – How marital assets and debts are divided in divorce. So there’s really three main aspects of divorce. Number one, if there’s children, child custody. Number two, support and talking about alimony, child support, spouses, those sorts of things. And number three, dividing marital property. And I really think dividing marital property is really the crux of divorce. On TV, TV shows, movies, I like to focus on the salacious aspects of divorce, really all that stuff in terms of the legal effects of it, it’s really not relevant to divorce. It may be relevant to why your marriage ended, but it’s really not relevant. There’s separate property and there’s marital property and in divorce you break up the marital property. So the three aspects of dividing a marital property are number one, identifying the marital property. As I just mentioned, there’s marital property and there’s separate property. So the first step is figuring out what is separate and what is marital. Number two is going to be valuing the property and then number three is going to be dividing the property. In summary, that is how it works. So what we’re going to cover in this podcast are number one, what is marital property? Number two, how is marital property valued? And finally, number three, how is marital property divided? So let’s start with the identifying marital property. Pat, you want to start with that?

Pat: Sure. So to identify marital property, you’ve got to be looking at what property you acquired during your marriage. And by during your marriage we mean from the date of marriage to the date you separate. And that can include all property regardless of title. So one of the first things you need to be aware of is it doesn’t matter whose name it’s in, if it was acquired during the marriage, for the most part it’s a marital asset with very few exceptions. Those exceptions are things like inheritances or gifts from third parties to one of the spouses. But for the most part, any property that you acquired regardless of title, between that data, marriage and date of separation is marital.

Kevin: So let me just jump in here because I always think it’s interesting when couples come in to get divorced, one comes in for a consultation and they have lived what I’m going to call what I like to call the roommate marriage, where they really maintain separate accounts, each have their own retirement accounts, each have their own bank accounts. And then for the marriage, they’ve sat around and divided the bills like their roommates and then thinking that, oh, this is my stuff and that’s her stuff. And then they come in for the divorce and essentially like, oh, you guys just completely wasted all your time doing that because her stuff is your stuff and your stuff is her stuff and it’s all in the pot. So I think that’s an interesting thing for people to consider it. Anything you got during the marriage is marital, pretty much like you said, accept inheritances or gifts to one party. Marital property can also include gains on separate property too, correct?

Pat: That’s right. So if you haven’t done a prenup and your own property when you come into the marriage, that increases in value during the marriage, that increase is considered marital property and the increase alone then is divided in the divorce.

Kevin: Yeah. So can you give an example of something that might have an increase in value that would be marital? I think kind of like giving an example, actually, like a financial example might help the listeners understand that.

Pat: Sure. I mean, I think of two examples. One is a house. If you come in with real estate, keep in mind that in divorce we’re looking at net equity. So when you come into the marriage, it has a value and it has a loan. And when you separate, it’s going to probably have increased in value, particularly if you have had a long marriage. And it’s kind of a double effect. It will increase from market experience and then at equity, increases in loan reduction. So as the mortgage is paid, you’re contributing to the marital equity. So that’s one example. Another example typically is a retirement account.

Kevin: Let me just start with the real estate. So it’s not uncommon that you see this one person comes in to the marriage and they already own a house and the parties move into the house and they’re living in the house. And so let’s say at the date of marriage, maybe there’s $100,000 of equity in the house. If the house is maybe worth $200,000, there’s a mortgage $100,000. There’s $100,000 in equity. Now, during the marriage, the house, like you said, goes up just because of the market. Maybe it goes up $50,000 and you’ve also paid down the mortgage $25,000. So now there’s $175,000 of equity in the house. $100,000 is separate property and 75,000 is down marital property. And the 75,000 would be divided in the divorce and the person who owned the house at the start would get the $100,000 back.

Pat: And remember, Kevin, that presumes that the house has remained in the name of the original owner and has not been deeded over. We’ll talk about that a little bit later when you change the ownership in a separate asset.

Kevin: Sure. I think you’re going to mention so another typical premarital asset that ends up having a marital component to it is a retirement account, right?

Pat: That’s right, that’s right. It would have a value when you come into the marriage and again, if you’ve contributed and the market experience has caused increases in value that increases marital.

Kevin: Yeah. So again, like Pat said, retirement accounts are typically if you came into the marriage with one, it will typically have both a marital component and a separate component to it. Now, what about postmarital property?

Pat: So again, by definition, property acquired after the marriage is separate with probably only one exception. If you use marital property, as we mentioned in another podcast, if you use marital property to acquire an asset after the separation, at the very least you have kind of a blend of mixture and you could be risking that asset or remaining marital.

Kevin: Sure. Now you touched on this before. Now there can be really pretty messy issues in determining what is marital and what is not what is marital and what is separate. And commingling was the one that you had mentioned.

Pat: Yes. Commingling is when you take an asset that would be considered separate and you transfer it into joint names either by putting it into a joint account or, for example, real estate deeding it over to joint names. That’s what we call commingling and that commingling can be considered a contribution to the marriage.

Kevin: Sure. I think that the typical situation you see with commingling or contribution to marriage would be someone comes in with money, premarital money or an inheritance, something like that. Anyway, they’ve got a large chunk of money and they put it into a down payment on the house and then the house is in joint names. Technically, at least in our jurisdiction, that then is marital property. Now, the law provides for consideration in terms of equitable distribution and our state for contributions to the marriage. So you can argue to get that back, but once you’ve commingled it, you’ve really turned that into marital property.

Pat: That’s right, that’s right. The law says that if you contributed to the marriage, then if you commingle, it’s considered contributed to the marriage.

Kevin: Another one is what I’m going to call conversion where you have a pre marital asset and it kind of converts into a marital asset. The one I’m thinking about was you had a client that had a business and he used kind of that business to launch another business during the marriage. And his argument was, well, they’re both kind of the same thing. They’re both continuation of one or the other side. I said, no, you started the second business during the marriage. That’s a marital asset. And that got pretty messy.

Pat: It did. In addition to all of that, they had a prenuptial agreement. But in the end the court found that that new company, although it was a kind of a derivative from the old company, was actually a new business started during the marriage and therefore marital asset.

Kevin: So identifying what is a marital asset and what is not a marital asset can at times be difficult. The easiest cases are where the parties come in to the marriage with basically nothing and everything they’ve built was during the marriage. The difficult cases are where people come into the marriage with property and assets and then they live their lives and they sell things and they commingle assets and then sort of separating all that out can be pretty difficult. But that is really the first step in dividing marital properties, identifying what is marital property and what is not marital property. Do you have anything to add to that?

Pat: Just something to keep in mind if you are bringing substantial property into the marriage or contributing maybe during the marriage. Substantial property like an inheritance. There’s always the idea of contract like a prenuptial agreement or even during the marriage you can do a post nuptial agreement. So depending upon the extent of what you’re contributing, it’s something to consider if you want to protect that contract.

Kevin: Sure. Probably our listeners is probably too late for them at this point.

Pat: That’s right.

Kevin: But yes, usually someone’s bringing a lot of money into the marriage, there might be a prenuptial agreement. I can’t think of any cases I’ve had where there was an agreement, like a postnuptial agreement, like, oh, I’m getting inheritance and I’m going to agree to put into this house, but I want to get that back. I can’t think of any cases I’ve had because people you’re living the other seems really kind of an odd thing to request.

Pat: That’s right, that’s right.

Kevin: I have seen where the parents want to I don’t know what you call it, basically kind of give them their children like a pre inheritance or start transferring money to them and the parents insist on a postnuptial agreement.

Pat: I think we’ve had two cases like that. So, yeah, I agree. It is unusual, but something to consider.

Kevin: All right, so let’s take a break and when we get back, let’s talk about how marital property is valued.

Pat: Hey, podcast listeners, are you thinking about divorce but are worried about the cost and animosity associated with the traditional divorce process? Well, Snap Divorce has a better way for you to divorce. Through divorce mediation, snap Divorce eliminates everything bad about traditional divorce. With Snap Divorce, there is no court, no dueling lawyers, and no endless delays. Our experienced attorney mediators help you and your spouse resolve your divorce fairly easily and amicably. Best of all, Snap Divorce does it for a reasonable flat fee. Schedule your free consultation now@snapdivorese.com.

Kevin: Okay, we’re back. So we talked about what is and what is not marital property. That’s the first step in dividing marital properties, identifying marital and nonmarital property. The second step is going to be valuing it. So how do you go about valuing it? So the easiest situation is probably where the asset is clearly marital. 100% was acquired during the marriage and then it’s really just the full value of the asset. So if it’s a bank account, how much money is in the bank account? If it’s a defined contribution retirement account like a 401K or an IRA, how much is in the account? It can get a little bit more difficult when you start getting into assets like defined benefit retirement accounts. And that would be like a pension, real estate, businesses, do you want to talk about how do you value a defined benefit retirement account?

Pat: So yeah, evaluations are very tricky technically. Just as an aside, the value we’re looking at is a current value, meaning the value as of the date it’s being distributed.

Kevin: Let’s just take a minute. I don’t know if our listeners are really familiar with what we’re talking about. I briefly mentioned it. A defined benefit retirement account is typically a pension where someone is expecting to get a stream of monthly payments after they retire, for the rest of their life, that sort of thing. So the question is, all right, one of the spouses is expecting to get a pension maybe in ten years and for the rest of your life, and they’re expecting it to be twelve hundred dollars a month or whatever it is. The question is, how do you put a value on that? Now for purpose of property distribution, so.

Pat: This is where the use of experts come in. So if you want to set that asset to one party, you need a value. You need to put a value on it so that it can go on the ledger and other assets can be given to the other party to offset it. So in order to put a value on it, we hire an expert and typically Actuarycpa will take a look at this and they will kind of like an annuity, tell you what you need to invest today to fund that stream of payments. And that is the current value. It will be impacted by current interest rates and so it will be reduced to a current value. But they basically apply a formula and then they will render a report that says this is the current value. And so if that pension is being set aside to the person who is the recipient of the pension, then they keep it at that value.

Kevin: Yeah. So the idea is that in legal jargon it’s called an immediate offset. But the idea is that if one person is keeping it, you have to know how much is it worth? Sometimes pensions are just divided. Each party is going to get part of the income stream. So you say, okay, well we know the overall case is going to be a 60 40 division of assets. So one party is going to 60% of the income stream and one part gets a 40% of the income stream on the pension in the future. And then you don’t have to put a value on it. But if you’re going to be setting aside to one party or the other, you need to know how much it’s worth.

Pat: And typically a smaller pension would be subject to immediate offset and the larger pensions acquired over long periods of time are going to be a deferred distribution where you get a monthly piece of.

Kevin: The pension and that is done through something called a qualified domestic relations order. We’ll probably talk about that in a later podcast. Other assets that need valuing real estate typically I think most times the parties will kind of agree to a value. Maybe they talk to a realtor. You can get an expert evaluation on real estate. If one party is going to be keeping it, obviously you can sell it and if you’re going to sell it, the market will determine what that’s worth. Businesses can be pretty thorny issues. If one party owns a business, how do you put a value on that for purposes of equity distribution?

Pat: Well, and it is tricky like you said, because in order to put a value on it, it’s going to take an inspection of books and records. So it kind of gets to be a little hairy area if people are not having real clean books and records. So you get a little resistance. But look, you’re entitled to have an expert business evaluator. Again. Typically a CPA come in and they will look over the books and records and they will place a value in the business again render a report. Now sometimes people can’t afford to each hire their own experts because those business evaluations typically are a very high price in a divorce. So sometimes people use an agreed expert, sometimes they use their own CPA, maybe they share ownership of the business and sometimes they just try to put a value on it themselves. But one way or another that some value is put on the business.

Kevin: Yeah, I would say where each side gets their own business evaluator, I’d say typically you see pretty wildly different values of the business and it really sets up a difficult situation and it sets.

Pat: You’re up for litigation.

Kevin: So those are some of the typical assets that would be valued during the divorce. These are sort of the typical 100% marital assets that would be valued during divorce. And of course I’m presuming that the business was started during the marriage or the real estate was purchased during the marriage. Now you also have to go about valuing separate assets that increase in value during the marriage. And as Pat mentioned earlier, typically you’re going to be looking at a date of marriage to date of separation change in the value. We give an example of the real estate that went up in value or the went up in value. And then you can get even more complicated because once you’ve established a marital value on just a 401K, you can also extract from that, say, well now during the divorce process, post separation, the marital value on the 401K also went up in value. So you must keep the value until the date of distribution.

Pat: And on the counter side, it might have gone down in value. So we’re looking at the narrative value at the data separation for a separate asset. But it also can, I want to say, enjoy its gains and losses. So we ultimately will be looking at the current value of the marital value, if you follow me. The marital value is set at the date of separation and it might gain or lose money until it’s distributed.

Kevin: That’s right. Some of these evaluations can get pretty time consuming. And every time the divorce is delayed for some reason or you do a settlement proposal and then three months later the other side gets back to you, you have to keep recalculating all these changes in value on these different assets.

Pat: Yeah, and the only thing I would say as an example where you have a separate asset like a pension, fortunately those valuations parse out the nonmarital portions, both pre marital and post separation within that valuation. But when you’re talking about real estate or a business that was owned prior to the marriage, you have to get multiple values because initially you’re definitely going to need the data marriage value, you’re going to need the data separation value and potentially and likely need a current value. So now you have your expert performing basically three valuations of the asset.

Kevin: It can get costly, typically not infrequently a party will have numerous premarital separate assets. And what happens if some of those go up in value and some of those go down in value?

Pat: Well, interestingly, not too long ago our jurisdiction addressed that situation. It used to be the increase in value is marital. But now if you can show a decrease in marital asset value, that can be offset against the increase.

Kevin: Here’s a question. What? I was reading up my notes. I wanted to cover the topic you just talked about. But if during the marriage an asset goes up in value, it’s marital. Let’s just say there’s one asset, real estate, let’s say it goes up in value. The courts are going to consider that marital increase in value. What happens if just the real estate goes down in value? This is just an interesting point, but shouldn’t that be a marital relationship or shouldn’t that be subject to consideration of divorce? Hey, she is at 50,000.

Pat: Well, Kevin, in our jurisdiction the good news is you get to keep the asset. The bad news is you keep the debt unless there’s an increase to offset it against.

Kevin: Yeah, I’m not sure that’s fair. Why does the spouse get the upside but not the downside?

Pat: Well, that’s something for you to write your legislator about.

Kevin: We kind of covered how do you value assets that are required during the marriage? How do you value separate assets, premarital assets that had an increase or decrease in value? How do you parse out contributions and conversions?

Pat: Well, that can be a little tricky, too. If somebody has, for example, your scenario where somebody brings a house into the house into the marriage and then feeds it over to the other spouse.

Kevin: Yes.

Pat: Gets very tricky because you have a date of marriage value, and then it increases a little bit until you deed it over to the spouse. So then you have a date of contribution value. So we have to look at all of those to determine what the marital value of this is. Now, if you’ve made a significant contribution I’m sorry, the nonmarital portion of it.

Kevin: Let’s say you brought, I think a simple example is you come in the marriage and you’ve got $100,000 in a bank account when you married, and you plopped that into. Now you and your spouse buy a house, you put that as the down payment. Can you get that back? How is that valued?

Pat: Well, it’s considered a contribution to the marriage. And so under the law, so it’s a marital asset in some jurisdictions, at least in the initial phases of the divorce, they might look at kind of diminishing the credit back so you would want it all back. But they kind of look at a formula where maybe you lose 5% a year. After 20 years, it would be all marital. After one year, you get most of it back. And so they kind of do what they call a vanishing credit or diminishing credit. But that’s not black letter law. That’s just a kind of rule of thumb or way to try to take into consideration that contribution. But when you get to court, it’s just one of the factors that the court can consider in the division of property. So let me give you an example, might help you understand. I had a client whose husband, right before they separated and heard a sizable amount of money, and they immediately put it into a home and then six months later decided to divorce. And we went before a judge. And while the judge can’t give you that money back, they can consider the contribution. So in that case, the wife who is the recipient of the benefit of that was getting 60% of the assets because of the factors and the income differentials and so forth. But for that house, the court switched it and gave the husband 60% because of the significant contribution. But there’s not really any way of telling how a court is going to deal with it. You just have to make your argument that you made a significant contribution, and for some reason or other, you’re entitled to it back or at least a portion of it.

Kevin: Yeah. And of course we’re talking about what we’re familiar with in the jurisdictions we practice in. There may be other laws or specific statutes that cover this in different jurisdictions. So you really need you need to look at that, talk to an attorney or a mediator in your jurisdiction that’s familiar with that. But the point is it can get pretty complicated and pretty messy in terms of parsing these sorts of things out. What about debts? So debts are also considered and they’re going to be, I think, parsed out the same way. Was it the debt acquired during the marriage? And if so, it’s 100% marital debt that’s going to have to be divided. If it’s a premarital debt, maybe it’s a student loan. Typically the person incurred that’s going to have to keep that. Do you have any thoughts on debts?

Pat: Yeah, no, I agree with what you said. The only thing you’ll find is if the debt is connected to a particular asset, for example a car loan, the person who takes the car takes the loan. Basically the net equity is offset by the outstanding balance. There is some argument that can be made if close to separation. Say a credit card is being used for purposes outside of the marriage which could be to entertain a boyfriend or girlfriend or whatever. There are arguments that can be made. So it’s presumed that debt acquired during the marriage is marital debt. But there are some arguments that can be made under special circumstances.

Kevin: One of those arguments I’ll see often is a spouse is like maybe they got gambling problem or drinking problem. Someone can say, well, they should have all the debt because it’s their fault we ran up these deaths because he likes to gamble or she likes to drink. I find that the courts really just don’t take that into consideration.

Pat: Well, they’re definitely not going to kind of give you money back for that. It is like contributions. If you have dissipated or kind of deteriorated amount of asset, it is one of the factors. But you’re right, while I’ll say it in court, it doesn’t seem to have a huge impact on the outcome.

Kevin: Now, post separation dissipation of marital assets, that definitely comes into play.

Pat: It certainly does.

Kevin: And what that we’re talking about is once people separate, one party or the other may dissipate. A marital asset might be a business. The person stops working in the business or lets it kind of get run down. Or a house, someone’s like living in the house, they fail to maintain it and now the house needs significant repairs. I would say most times the person who has dissipated the asset will be assessed with that.

Pat: Yeah, I agree.

Kevin: The other one is obviously spending money out of a joint account.

Pat: Yeah. You even have to be careful if you have some money and you want to invest it. If you’ve made similar investments during the marriage, you’re usually okay, but if you suddenly decide you’re going to take a bunch of cash out of the bank and invest it in some risky stock, you may be suffering the risk. You may get obsessed with having received the initial value and if you lost the money, that would be on you. So you do have to be careful about dissipating assets post separation along the same lines.

Kevin: And I had noted here, it’s like, what about payment of marital debts for marital assets? So the idea here is that you use post separation, you use a marital asset to pay off a marital debt. For example, maybe there’s a high credit card bill and you take money out of an investment account and pay off the credit card bill.

Pat: Usually we talk about that in terms of strategy because here’s the problem. If you pay that credit card monthly post separation, you often don’t get credit for those post separation payments, at least not for the interest that you’re paying. So this is sometimes a very good strategy is to take a marital asset and pay off the marital debt so that you’re not paying interest post separation, for which you’re not going to get any credit. Also, it’s legitimate because marital debt reduces the value of the marital estate. So it does get offset.

Kevin: Yeah, I can’t even tell anyone has been assessed with having received an asset when they’ve paid off corresponding debt. And like Pat said, it can be a really good strategy. I’ll often use that where the people are financially stretched and I’ll say, look, hey, you’re separating. You don’t want to be stuck with, say, the credit card bill. Like take the money in this account and pay off the bill and now you don’t have to worry about it and the money you took from the account is not going to be assessed against you because you’ve paid off marital debt. I think it’s a really good strategy in certain cases. What about payment of marital expenses post separation? Can you get credit for those?

Pat: Well, that’s kind of touching on what I said. If you’re paying for real estate now if it’s the marital home and you’re paying either you’re out of the marital home and you’re still contributing to the mortgage, you don’t usually get credit for that. It’s kind of considered a form of support. If you have investment real estate, that’s where I find that you can get credit. If you’re maintaining investment real estate, then you will want to raise credit. If you’ve been paying a mortgage or taxes and so forth against the equity in that investment real estate.

Kevin: Yeah, when you mention a credit card, if you pay off a marital credit card debt with post separation income, you could get credit for that. Maybe not the interest, but if there’s a $20,000 credit card bill, you pay off the whole thing. You’ve used your separate. Post separation income. I think you could probably get credit for that, but not guaranteed. Nothing is ever guaranteed in divorce. You never know what the court is going to do.

Pat: That’s right. And what’s really risky on the credit card debt I’ll just reiterate this, is that if you, say, are separated for two or three years before the divorce and you’re paying a monthly credit card payment on a $20,000 credit card, most of that’s interest and all you’re going to get back is the principal. I mean, sometimes you got to decide which debts you’re going to pay and which debts you may just let go. I mean, look, I’ve had many talk with clients in divorces, and sometimes the best strategy sometimes is to not pay a debt even though it will have an impact on your credit. You have to consider, again, it’s a very complicated consideration to decide what debt you’ll pay and what you can afford.

Kevin: Another situation that comes up typically is the house. Parts are going to sell the marital residence, but the realtors recommending it needs to do paint job. You got to replace the toilet in the bathroom. You need to do renovations to get it ready for sale, and one party pays for it. Typically, I find that that party can seek and get a credit for that. Usually I try and get an agreement in advance that’ll come off the top. In other words, if someone puts it there’s, agreed repairs. And if one party pays for them when the house is sold, they get that money back off the top.

Pat: Yeah. Your safest thing is to have an agreement. If you don’t have an agreement and the repairs are what we would consider necessary, for example, the heater goes down. I mean, somebody’s got to fix the heater, those kinds of things. Yeah, but it gets a little bit sketchy when you’re talking about, I think the kitchen needs a new floor, while cosmetic repairs you may do at your own risk.

Kevin: Yeah. In this case, it’s unclear whether the money you put in resulted in more value from the house. So, yeah, be careful. Best case is getting an agreement in advance, like I had mentioned. So value marital property can get pretty complicated. You have all kinds of things that happen during divorce, commingling, conversion. You’ve got separate assets that increase in value. They might be offset with separate assets that decrease in value. Maybe you’ve got debts that were paid off with separate money. Maybe they were paid off with marital money. You really need to do a full accounting of that. All right, so we’ve covered the first two steps in dividing marital property. One, identifying it. Number two, evaluating it. And then finally, number three will be dividing it. So we’re going to take a break, and when we get back, we will talk about how the marital assets are divided.

Pat: Hey, podcast listeners, are you thinking about divorce? But are worried about the cost and animosity associated with the traditional divorce process. Well, Snap Divorce has a better way for you to divorce. Through divorce mediation. Snap Divorce eliminates everything bad about traditional divorce. With Snap Divorce, there is no court, no dueling lawyers, and no endless delays. Our experienced attorney mediators help you and your spouse resolve your divorce fairly easily and amicably. Best of all, Snap Divorce does it for a reasonable flat fee. Schedule your free consultation now@snapdivorce.com.

Kevin: Okay, we’re back from our break. Let’s talk about how marital assets are divided. So, Patrick, I think there’s really two overarching ways that marital assets are divided. One would be equitable distribution. The state we are in is an equitable distribution state, and the other one would be how they’re divided in a community property state. Do you want to start with equitable distribution?

Pat: Sure. Once you’ve done the first two steps of identifying and valuing the assets, we’re going to be dividing them in an equitable distribution state. Basically, I’m going to say, first off, is it’s not 50 50? So how do you decide how to distribute the assets? Well, you’re going to look at a list of factors, and those factors are things such as the respective ages of the parties earning abilities. Is there a separate property of any magnitude that either party has? Have you made contributions to an asset or dissipated an asset? Are you custodian of minor children? There’s a whole series of factors the court is going to look at. I’m going to say, for the most part, the first one they’re going to zero in on is disparity and income.

Kevin: Yeah, I’d say by far that’s the number one. There’s a whole list of factors, and I would say disparity in income is the number one factor. It probably is 90% of what affects how equitable distribution is decided.

Pat: Right. And if you look at a kind of traditional marriage situation where one party is the working spouse and the other party is primarily a homemaker or caretaker for the children, and it could be for the husband or the wife. It just depends in that situation if there’s a substantial differential in income and fairly modest marital estate. And when I say modest, I could be up to probably a couple of million. You’re going to look at a larger percentage distribution to the income inferior spouse. The one who makes less money gets more of the assets.

Kevin: Now, it sort of depends too, though, on how close they are to retirement.

Pat: Right. I’m going to say the typical complaint from the client immediately, especially the one who was the wage earner, is, wait a minute, the other spouse didn’t work. I earned everything. I paid for all this. Why aren’t I getting more of the assets? And that’s basically because the courts aren’t looking at who earned what or who did what to create the assets. They’re more looking forward to try to put the parties on equal footing moving forward. And so if you have someone earning a lot of money, they’re going to give the other spots a little more of the property because they’ll never catch up, they’ll never make up the difference in the income. And that’s the theory behind an equitable distribution state.

Kevin: Yeah, it’s really going to be whatever the court thinks is, quote, fair. I mean, that’s what equitable means. And so it’s like, what is the court? What does a judge thinks fair? The practitioners in your area kind of start to get a feeling for it. This is typically 60 40 case. I would say the typical cases where one party makes a decent amount more income than the other party and maybe they’re in their 40s, then you’re going to see sort of maybe a 60 40s split of assets. But I find that as they get closer to retirement and the spouse who’s earning more money has less years to earn more money, that will become closer and closer to a 50 50. If they’re at retirement age, it’s probably going to be a 50 50 distribution because now they’re going to be both on retirement and earning theoretically getting the same amount of money.

Pat: Right. And you don’t have that prospective acquisition of assets because you’re kind of at the end of your career and your acquiring of assets. And there are other variations where it might have been originally a typical 60 40 split, but the income inferior spouse just got an inheritance of $500,000. That can put you back to more of an equal split because there is another source. So there are factors that can sway that either way.

Kevin: Yeah, so we talked earlier about valuing marital assets, but you’re also, in doing that analysis, you’re also going to be valuing people’s separate assets and then that becomes a factor in equitable distribution. Like Patch just mentioned, if someone has a significant amount of separate assets, that is going to affect equitable distribution as well. Hey, Pat, what about fault? My spouse cheated on me. They were horrible to me. Shouldn’t I get everything?

Pat: Fault is not a factor in equitable distribution. And I could repeat that many, many times because people feel like they want vindication. The court is not going to do that. The court is not going to consider fault. Now, with that being said, fault is a factor among the other factors in alimony. So if you have alimony, you get to tell the court about the fault. And judges are people too, so it might influence it, although it’s not technically a factor that they can consider. If there’s an alimony case, then sometimes it sneaks in the back door, but everyone asks that question and everybody wants some kind of, I should get more remuneration for the fault that this person did to me. And the courts are in this to end a partnership and divide their assets, and they’re not in it to consider fault. Or to render any kind of judgment.

Kevin: Yeah, that’s right. And just what we said earlier, the lawyers in the court are looking at this as a business transaction. You’re breaking up basically a partnership. I don’t think people try and sneak in. Like you mentioned, there’s an almighty case. We’re going to try and sneak in. All this bad stuff about the other party. I really don’t think it has any effect on the case unless it’s a really terrible and sort of unusual situation. You’re normal, he cheated on me, or she drank too much and wasted money at the casino. It’s not going to have any effect whatsoever on equity distribution. They’re going to look at incomes of the parties, the ages of the parties, separate assets. In my experience, that’s pretty much it

Pat: That’s right. I’ll often say to people, courts don’t dictate morality.

Kevin: I don’t even know how many in our state was it like twelve or 14 factors or something like that? Some of them, it’s like the contributions of the parties to the I don’t even know which way it cuts. Do you mean like, some of them? You’re like, does this help my client or help hurt my client? I’m not even sure how you would even analyze this factor. The courts are not they don’t sit down and go through every factor. It’s just a general like, okay, I’m going to try and put these people on equal economic footing going forward.

Pat: One of the ones I always think is completely ineffective is expectancies or of inheritances. Like, your family has a lot of money, so you might inherit a lot, so that should somehow impact the division of your marital property. The problem with that, typically people aren’t.

Kevin: You may or may not get it.

Pat: Yeah, you might not get it. They could always write you out of the way. It’s crazy that they would consider something that you don’t even directly have.

Kevin: Distributing property in an equitable distribution state. Yeah, you’re going to pretty much look at just a couple of factors ages, the parties, income of the party, separate assets, and then sort of get a feeling of where it should be. And typically you’re going to see an uneven split. Both parties are basically they both work. They’re in the same amount of money. It’s going to be a 50 50 split. All right, so how about community property? How does community property work?

Pat: Community property works very well. Community property states after value, identifying the assets and value in the assets basically split everything 50 50. So I think you kind of save a little bit of money there in a community property state because a lot of money spent arguing over how much you get, what percentages you get in equitable distribution. We’re in community property. Once you’ve done the work of identifying the assets and valuing the assets, you’re going to divide the values equally. So in the end, you both walk away with comparable estates.

Kevin: Yeah, although I wouldn’t want to mislead anyone. And just in terms of like I think there is some arguing about what is the split can be in equitable distribution states, but I find it very not typically a big part of the case. You mean both sides might know it’s going to be a 60 40 split. So one person says, one person says, oh, it should be 65 35. Now it should be 55. And you’re going to settle pretty quickly on what the split is, don’t you think?

Pat: I do. And especially if you’re represented by an attorney who’s going to kind of know the process and kind of be guiding you to say like you can keep spending money in court, but this is what’s going to happen whether you do it by agreement or not. So yes, I do think most cases at least willing, that aspect of the.

Kevin: Case seems to settle pretty quickly and it’s more the arguing about like well, how much of the contribution does someone get back or what is the value of the business? That’s where in my experience, most of the fights come from. So then the next question is who gets what? Now you value, you’ve identified the property, you valued it, you’re getting ready to divide if it’s going to be 50 50 or 60 40 or whatever the case may be. How do you determine who gets what? Like who gets the house, who gets the retirement account? How’s that all that work? Do you split everything? Do you mean like no..

Pat: You’re certainly not going to though I’ve had that proposed in cases. You’re certainly not going to go down every asset and split everything. So I kind of look at it. I kind of like to separate out the retirement assets to see what we have in retirement. And then you have kind of liquid assets, investments and liquid cash assets like investments, bank accounts and things. And then you have real estate. So the first way to do it is make two columns, husband’s column and wife’s column. And you kind of see what they have that is already titled to them in retirement, in investments, what’s titled jointly. And then the next question is has anybody got a preference to retain the house or buy out the other person’s interests? Does nobody want the house? And so all of those things you kind of know as you’re coming into the division property. And so if one party says they want the house that’s going to go in their column. We’re going to kind of do a balancing at the end of the day and how much needs to be removed from one party to the other to effectuate.

Kevin: Yeah, you line up. So your husband, he has this retirement account with 100,000 in it and he’s got this bank account with 50,000. You add up the comms and say, okay, well, guess what wife is going to have to transfer $75,000 to husband or vice versa, something like that, to effectuate whatever it’s going to be, the 50 50 split of assets or the 60 40 split of assets. The other thing I would add would be I think you started to touch about this was that typically the courts and really the divorcing couple, it’s good to have, they like to give a balance of the asset. So in other words, if one person doesn’t walk away with all the retirement and the other person walks away with all the cash, typically the outcome is that the parties each have some retirement to each have some cash. Obviously the real estate typically is only one house, but one part will get that. But there’s a balancing to make sure no one gets stuck with one class of assets.

Pat: Right. And usually you have to keep in mind when you’re deciding whether you want an asset or not. That if there is a debt on the asset. For instance a mortgage on the house. And particularly a mortgage on a house. You’re going to probably be required to refinance that mortgage.

Kevin: And we didn’t mention this before with value. But you also have to take into consideration the tax consequences of any asset that is being distributed. So $1,000 in a retirement account is not worth $1,000 in a bank account because you’re going to be paying taxes on $1,000 in retirement admin account. So that might be worth $750.

Pat: Right.

Kevin: So you have to tax consequence, all the assets and real estate you can take into consideration the cost of sale, things like that.

Pat: I feel like if there’s numerous retirement accounts, retirement accounts to divide them sometimes require what we call a quadro. It’s a certain order that allows for the transfer of retirement money without any media tax consequence. And if you’ve got five or six retirement accounts, you don’t want to do five or six quadros because they cost money and it’s a lot of transferring. So sometimes you have to parse out which retirement account. If there’s a big one, are we going to transfer most of the money from that account rather than doing transfers from every single one of them?

Kevin: In the end, when you’re looking at how the assets are going to be devised, you want to kind of make it as simple as possible to effectuate a fair transfer, a fair distribution of assets in terms of both percentages and in terms of asset classes, retirement assets, cash, how can you accomplish all that as simply as possible, right?

Pat: One issue that comes up sometimes in cases is when you have investment accounts with stock and can we transfer those without tax consequence? Can we transfer the stock? And you can in a divorce you can transfer that stock. There are specific qualifications with regard to the gains and the basis you take it. And so you are well advised to possibly have a financial adviser that you can run things by as well in terms of what assets should I take, and after you get assets, how should I invest them, what should I do with the assets that I’ve received? So it’s kind of like a concluding type of thing. You’ve kind of deciding, what’s the best distribution for me, and then once I get assets, you may want to consult with a financial advisor to determine the best investment strategies.

Kevin: All right, I think that pretty much wraps it up. We talked about identifying marital assets, value marital assets, and distributing marital assets. So I don’t have anything else to add. Pat, do you have anything else?

Pat: No, I think that’s a good summary of what you’re in for.

Kevin: All right. Well, I’m Kevin.

Pat: And I’m Pat.

Kevin: Thank you for listening to this episode of the Divorce Rulebook podcast.