Financial Answer Center
Dividing the property can be a difficult task, especially if assets and debts existed before marriage, if you and your spouse received gifts or inheritances while married and mixed them in with other assets, or if one spouse wants support payments (alimony) into the foreseeable (or unforeseeable) future.
Compiling a complete list of marital assets and debts is very important in developing a fair divorce settlement. The courts view a marriage like a partnership and ask for an accounting of the assets and debts acquired during this union.
In some states, regardless of how property was brought into the marriage (i.e., separate versus marital property) or who has title, all property of both spouses is subject to division at divorce. However, most states distinguish between separate and marital property. In general, separate property is property that was brought into the marriage, inherited during the marriage, or received as a gift during the marriage.
When assets that are separate are mixed together with marital assets, they are considered commingled assets and become marital property unless you can prove to the contrary.
Always keep detailed records of your separate and joint property. If you commingle assets, you may be able (with a lawyer or an accountant's help) to prove that you are entitled to view a portion of those assets as your separate property.
Property settlements are not the only way to divide the marital wealth between divorcing spouses. Both parties may agree that it is appropriate for one spouse to receive regular support payments from the other for a period of time, or for as long as the recipient spouse remains unmarried. This payment is known as alimony, spousal support, or maintenance.
Before no fault divorces and the advancement of women into higher paying careers, alimony was a major component of a divorce settlement. The courts have recognized recent changes in the status of women to varying degrees in different states.
Under most current alimony settlements, a spouse who is able to earn income on his or her own is expected to do so. The courts will generally allow temporary alimony to help someone reenter the work force or get training to become employable (this arrangement is known as rehabilitative maintenance). These payments are usually made for a period of a few months or years.
If a prenuptial agreement waiving a spouse's right to alimony was signed before the marriage, it may now be difficult (but not impossible) to claim alimony.
If you file a divorce agreement without alimony and it becomes final, it is nearly impossible to try to seek alimony later. Additionally, in some states, in order to modify the amount of alimony in the future, you have to reserve that right in the divorce agreement. If your spouse makes substantially more income than you, state in the agreement that you do not waive your right to alimony or your rights to later modify the amounts. Even if you are making substantially more than your spouse, you may want to reserve the right to alimony in the future in the event that your collective circumstances change.
How Much Alimony?
Many courts will start by examining your and your spouse's monthly cash flow before separation and comparing it to the costs each of you face on your own. Prepare these cash flow statements and estimate how much it will cost to live separately. Remember to include such factors as child support payments, and insurance (medical, property, life & disability), child care, incidentals, and revolving debt payments.
For many couples, a house is a very difficult asset to divide. Years of memories, as well as most of a family's personal wealth, may be invested in a house. If you have a child, deciding on who keeps the house can get tangled in the custody decision. Consider the following arrangement if a child is involved: The custodial parent keeps the house until the child moves out or becomes an adult. The non-custodial parent continues to help with the mortgage during this time. When it is time to sell, the spouse who is not living in the house receives his or her share of principal paid since the divorce (plus any agreed upon interest). Any remaining sales proceeds are split evenly.
Your house may have an appraised value of several hundred thousand dollars, but what is your equity? The equity in your home is the current market value less the outstanding mortgage balance. You must look at home equity, not just the appraised value of the home.
The equity in your home does not represent the amount of money you would have after a sale. To determine this amount, deduct closing costs (real estate commissions, taxes, legal fees, etc.) from your equity. You can assume that closing costs average at least 6–8% of the sale price on the home.
Other than a house, retirement assets represent the major asset for most families. Retirement assets include individual retirement accounts (IRAs), 401(k), 403(b) or other tax-deferred employer plans, annuities, company pension plans, and plans for the self-employed (Keoghs, SEPs, and SIMPLEs).
As is the case with any other item of marital property, you have to count it first, then agree on how to divide it.
Valuing retirement assets can be easy or difficult. Accounts that are valued based on the amount contributed and investment gains and or losses (IRAs, 401(k)'s, 403(b)'s, defined contribution pension plans, and most SEPs, Keoghs, and SIMPLEs) are fairly straightforward. You can look at a current account statement or contact the company's benefits department for an estimate.
Annuity contracts and defined benefit plans are much harder to value. Their value is based on such things as future investment rates, anticipated retirement age, projected life expectancy, the method elected to receive benefits and years of company service. You will probably require the assistance of an actuary or other financial expert to help you value these assets.
IRAs and Annuities
You can split or transfer ownership of an IRA or an annuity as part of your divorce or separation agreement without incurring any tax or penalties provided you do not take a distribution from the account. If you take a distribution, you will incur income tax and a 10% penalty (if you're under age 59½—with a few exceptions).
Qualified Retirement Plans as an Employee
Qualified retirement plans, such as 401(k), 403(b) and pension plans are subject to strict rules regarding withdrawals. Except for hardship withdrawals (as defined by the IRS), loans, or leaving the company, it is very difficult to gain access to these funds prior to reaching retirement age. However, there is an exception in the case of a divorce.
If the spouse (called the alternate payee spouse) is to receive a partial or total interest in the qualified employer retirement account, a special document called a Qualified Domestic Relations Order (QDRO) must be executed.
A QDRO can instruct the company to set up separate pension benefits for the alternate payee spouse with benefits to be paid out when the participant spouse retires (or is eligible for retirement, if he or she decides to work longer).
A QDRO can also be used to pay an alternate payee spouse a lump-sum distribution equal to the calculated value of the separate pension benefit. However, the QDRO cannot require a form of payment which the plan does not permit. When taking a lump-sum distribution from the company plan, the 10% early withdrawal penalty is waived. The spouse can roll over the amount received into an IRA or a qualified retirement plan, 403(b) plan, or 457 plan, or use the money for other purposes. If the money is not placed into an IRA, or qualified retirement plan, 403(b) plan, or 457 plan, the taxable portion of the money received will be subject to income tax. Once the money is transferred to an IRA, you cannot take the distributions without paying the 10% penalty, unless you meet certain exceptions (e.g., your age is 59½ or older).
If you are the alternate payee spouse electing a lump-sum distribution from the company, and intend to transfer it to your own retirement plan, be certain to ask for a trustee-to-trustee transfer. This ensures that the company will transfer the distribution directly to your IRA trustee (the bank or credit union where you opened your IRA) or to the retirement plan you have designated to receive the distribution.
If you are considering a divorce and you have been married for ten years or longer, be aware of the rules relating to Social Security. For married couples, Social Security spousal benefits are generally the greater of the benefit the spouse is entitled to, based upon his or her own work record or half the benefit of the other spouse.
If you divorce, Social Security rules state that if you are at least age 62 and you were married for ten years or longer, you are generally entitled to half the benefit of your spouse (if that is greater than the benefit based upon your own work record) if you are not remarried. Social Security cannot be influenced by a state court order as part of a divorce.
If you have been married for almost ten years, you might want to consider postponing the divorce until you reach the ten-year milestone, if one of you will benefit from this rule.