With or without the vow “til death do us part”, most couples head into marriage with the highest of hopes for their happily ever after. Even with divorce rates on a slow decline, according to the CDC, a little less than half of all marriages will end in divorce. One milestone in the transition from one home to two is the redistribution of property and assets.
In my experience as a Certified Divorce Financial Analyst, this can be one of the most stressful and contentious parts of divorce. If you go into negotiations prepared, you may be better prepared to handle this part of the process.
Do You Have a Prenup?
Before we begin, some of you may find the “jump ahead” button right here in the form of a prenuptial agreement, aka: The Prenup. The prenup is a legally binding written document – as opposed to a verbal agreement – that specifically outlines the distribution of premarital assets in the likelihood of a divorce. This document tends to focus on “separate property”, a term we’ll discuss in great detail below, but may also include an agreement about rights to future income as well.
All assets covered in the prenup will be distributed as directed. Items not covered, if any, will follow the procedures discussed below. While prenups in movies and TV shows tend to focus on protecting family wealth from a scheming outsider, in reality, they can range in scope to cover a full portfolio of physical or financial assets or very specific things like heirlooms, collections, cars, and pets.
What type of property will be divided in a divorce?
Before we start sorting your valuables into piles, we should keep in mind exactly what types of assets can be divided. Assets are more than tangible, physical possessions in your house or storage unit.
- Physical assets – furniture, artwork, photographs, music and movies, electronics and appliances, cars and bikes – are essentially every “thing” that could be moved out of the house and won’t be sold with the house (like major appliances). Clothing tends to be assumed, but any physical item can be legally contested.
- Heirlooms and collections are a subcategory of physical assets, such as jewelry, art, an antique collection, etc.
- Living assets include pets, horses, etc. While custody of children will be arranged as part of a family parenting plan, custody of all other mouths to feed can be negotiated.
- Financial assets include bank accounts, stock market investments, retirement accounts, crypto holdings, etc.
- Real estate portfolios may include a primary residence, plus rental properties, business properties, timeshares, etc. These properties often include current resale value, plus equity, mortgages and liens, and planned major repairs.
- Additional debts may include car payments, credit card balances, student loans, etc.
- Business interests – if one partner worked to put another through school, or raised the children while the other invented a product or started a company, that partner may have a financial stake in the other’s business, including a share of future income.
Prepare to place each asset into one of two lists: Separate Property and Marital Property.
What is separate property?
Separate (or nonmarital) property has uncontested ownership. Wardrobes, primary vehicles, and possessions purchased before the marriage are typically included, as are possessions tied to one partner’s unique hobbies or interests, such as sporting gear or art supplies. These assets are not typically divided in a divorce. The spouse who owns it can typically keep it.
A partner’s individual 401k, if started before the marriage, may be considered separate property – but not always, especially if the other partner stopped working to raise the children. I’ll show an example of this calculation below. Similar logic could also apply to individual or joint accounts.
What is marital property?
This typically includes items purchased or acquired during the marriage. This can include new furniture, artwork, and vehicles, plus bigger items like a speedboat and lake house or a ski lodge timeshare. Commingled assets become tricky – especially when it comes to household items (the BBQ grill, the electric toothbrush charger) to all the fancy plates, silver, crystal, and gravy boats you may have received as wedding gifts. You may be struggling to remember, “did my boss give us these champagne flutes, or did they come from your parents?”
If a partner gifted the other a family heirloom – such as a wedding ring or necklace – they may want to get it back. In terms of negotiation strategy, make two lists: what you’re willing to let go of and what you’re ready to advocate for. In addition to all the things you own – you must also properly divide the things you owe – mortgages, car loans, student loans, credit card balances, etc.
How to Divide Marital Assets
Dividing property is challenging enough, but the rollercoaster of emotions that often come with divorce can be legally, financially, and emotionally taxing. These decisions will have lasting impact, so you must be fully aware of your options before you begin. Once the agreement has been signed, there is typically no turning back.
The State of Your Former Union
Depending on where you live, the legal landscape will help guide which assets are up for negotiation during a divorce. Most states, including Illinois, are common law property states, meaning that if your name is on it (a title, deed or receipt), or you can prove ownership (simple possession or proof it was a gift), then the item is yours to keep. In community property states (AZ, CA, ID, LA, NV, TX, WA, WI), joint ownership is assumed.
Beyond the law, some nuances of each divorce may dictate negotiation strategy. What were your roles before, during, and now after the marriage? Past, current, and potential income of each spouse will factor into who gets what property, in addition to the terms of spousal and child support.
What instigated the divorce? Partners who mutually agree to move on after irreconcilable differences may be more inclined to split property 50/50. If one partner cheated on the other, the offended partner may choose to advocate for a greater percentage of divisible assets.
Wondering Who Gets What? Hire a Professional.
Depending on how amicable or acrimonious the divorce is, you can divvy up the assets with your partner by writing down and notarizing what’s yours or theirs. We recommend talking with a professional in advance so that you fully understand your rights to these assets and the immediate and long-term implications of major decisions.
A Certified Divorce Financial Analyst specializes in the division of marital property; they can look at all assets and submit a detailed report and analysis to divorcing spouses and their attorneys and/or professional mediators. In many cases, this takes the guesswork out of the equation, making it easier for parties to negotiate and make sound decisions. This upfront investment may reduce legal or mediation fees that come with a drawn out dispute.
Depending on the state of residence, the CDFA can determine what property is up for division, and then calculate reasonable shares factoring in what each partner brought into the marriage, contributed during the marriage, and the long-term tax and income-generating implications after the marriage. 401ks are a great example of this. If someone started their job in 2000, married in 2010, and divorced in 2020, there is a separate property calculation to determine the amount of the 401k that would be determined as non-marital property.
Another example is dividing the house. If one partner purchased it before the marriage, but the other used proceeds from the sale of their home to pay down the mortgage or pay for repairs, a calculation can be made for the buy-out value of the property.
For spouses who gave up careers to raise children, the CDFA report can help determine how much spousal and child support is due, and for how long, to set up a reasonable household budget for that spouse.
Moving On
Once the lines have been drawn and the lists have been made, it’s time to sign the divorce papers with confidence and move forward with your life. If you are co-parenting, you’ll likely end the romantic relationship with your ex and begin a new relationship as de facto “business partners” – the “company” being your children, the “product” being their success, happiness, and overall well being.
If you have no children or your children have grown, ex partners may wish to continue as friends or never see each other again – success here includes letting go of any attachment to the possessions your ex is taking with them, everything that’s in their moving truck or at their bank.
Opinions expressed are those of the author and are not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
