What Happens with Your Assets in a Divorce?
By Dalia Rodriguez
Divorce can be an emotionally draining experience, but it can also take a toll on your finances. It’s important to consider financial implications, such as changes in income and expenses, and adjust financial plans accordingly.
The division of assets in a divorce varies depending on the state or where the divorce occurs. Understanding the legal process and state laws on assets in your state can help you mitigate other potential implications in your life.
So, How Do Assets Get Divided in a Divorce?
The assets are usually classified into separate property and marital property.
- Marital property generally includes everything that either spouse acquired during the marriage. It can be until the divorce or until separation.
- Separate property belongs to one spouse only. It varies by state and usually includes property acquired before the marriage through inheritance, gifts, or property previously agreed to keep separate through a prenuptial or postnuptial agreement. However, in some cases, separate property can become marital property.
After classifying the assets, the marital property assets will be distributed through community property rules or equitable distribution.
- In community property states, spouses generally retain ownership of anything before marriage, and marital property and debt will be distributed equally.
- In equitable distribution states, factors such as the length of the marriage, the contribution of each spouse to the marriage, including non-monetary contributions such as homemaking, income and earning potential of each spouse, and the needs of any children involved are considered to determine a fair and reasonable division. It is worth noting that fair is different from 50-50.
Common Assets and Some Additional Factors to Consider
The most common assets that are often divided between the two parties as part of the settlement include:
Real estate
Dividing the marital home can be a complex and emotional process. There are a few different ways to approach this and additional factors to consider, like the property’s value, the outstanding mortgage, each spouse’s financial situation, and the needs of any children involved.
Taxable Accounts
Investment, brokerage, and savings accounts are subject to capital gains taxes when sold or transferred during a divorce. It can be a good idea to seek professional advice to understand the tax implications of dividing these assets and develop a strategy for minimizing your tax liability.
Retirement Accounts
Depending on the account type, they receive a different tax treatment and must meet specific requirements. Employer-sponsored retirement accounts like 401k and 403b require a qualified domestic relations order (QDRO). Other accounts, such as HSAs and IRAs, require a transfer incident to divorce form. You should update your beneficiary designations promptly.
Kids Accounts
A 529 college savings plan is the property of the parent account owner and can be treated as marital property and divisible in divorce. Custodial accounts belong to the minor, and the custodian should make decisions that benefit the child. However, addressing and outlining specific instructions in the divorce decree is essential to protect the children’s future.
There’s nothing simple about a divorce. Thus, it’s essential to approach the situation with a clear head and a plan. Seek the advice of a family law attorney or a divorce professional who can guide you through the process and help you understand your rights and obligations if needed.