Outside of child custody, there’s no element of divorce that’s more sensitive than finances. And if you have significant investments in stocks, mutual funds, real estate, or business ventures, a split could be catastrophic to your net worth.
How to Protect Your Financial Assets in Divorce
While every jurisdiction is different, all states have very clear and specific rules regarding the division of financial assets during divorce. For the most part, this means investments are divided evenly or with a ratio.
There are nine community property states in the country. If you live in one of these jurisdictions, both you and your spouse have an equal interest in all assets acquired during the marriage – thus, the split is 50-50. But there are 41 equitable distribution states. In these states, the division is more complicated and subjective. The court will weigh the length of marriage, the contribution of financial assets, personal needs, etc. and a judge will make a decision. Assets can be split evenly, 55-45, 60-40, or anything else that’s deemed fair and appropriate.
It’s also important to understand the difference between separate assets and marital assets. For the most part, assets acquired prior to the marriage are considered separate and are immune to division in a divorce. (However, in some states, any increase in value of a premarital investment through earnings or interest can be considered marital property and may be subject to division.)
Assets acquired during the marriage – by either partner – are considered marital assets and can be divided. To make things even more complicated, it’s possible for a couple to comingle premarital assets during the relationship, thereby making separate assets marital assets.
In other words, not only is this a sensitive and emotional subject, but it’s also a highly complicated matter with lots of moving parts. If you let the situation “play out,” divorce proceedings could unravel and you could lose control – something that divorce attorneys strongly advise against.
Claim up to $26,000 per W2 Employee
- Billions of dollars in funding available
- Funds are available to U.S. Businesses NOW
- This is not a loan. These tax credits do not need to be repaid
“You need a plan for how assets will be divided, otherwise both parties will end up being negatively impacted by liquidation and redistribution,” Scott M. Brown & Associates explains. “It’s best if you and your spouse can get on the same page and work through a plan to protect the investments you’ve both worked so hard to accumulate.”
But even if you and your spouse can’t get on the same page – which is often true – there needs to be some purpose and intentionality behind the decisions you make. And in order to move with calculated effort, you must know how these things work.
How to Handle the 2 Major Financial Assets in Divorce
In some marriages, there are a dozen or more asset classes to sort through. However, for the most part, there are two categories that are more significant than the rest: retirement accounts and real estate. Here’s what you need to know:
- Retirement Accounts
For many couples, retirement accounts like 401(k)s and IRAs are the most valuable financial assets in the marriage. If you want to set yourself up well for the future, you must carefully consider these investments and how they’ll be treated in the divorce.
The best way to handle a 401(k) is to get a Qualified Domestic Relations Order (QDRO), which is a legal document that clearly outlines the way in which the plan is to be split. The biggest perk of a QDRO is that it allows you to avoid the taxes and penalties that may otherwise ravage your retirement plan.
For an IRA, there’s no need for a QDRO. The funds will be split according to the divorce agreement and a simple transfer will suffice. (Just make sure the funds are moved as a transfer and not a distribution; otherwise, taxes and penalties will ensue.)
- Real Estate
Whether it’s a home in which you and your spouse have lived, or an investment property that one or both of you own, real estate is another complicated split.
For the most part, the home in which you and your spouse lived during the marriage is considered an asset of both partners. If you can’t agree on who gets to keep the house after the divorce (or if neither wants the house), it’ll be liquidated and distributed according to the terms of the divorce.
Investment property gets a little stickier. It depends on when the property was purchased, how it was used, who managed it, etc. In many cases, investment real estate is liquidated and divided proportionally (according to ownership and personal investment).
Coming Up With a Plan
Clearly, this is a complicated matter. Even if the divorce is fairly amicable, there are piles of paperwork that must be managed, strings that have to be untangled, and muddied waters that must be cleared in order to decipher the best way forward.
Make sure you hire an attorney who will look out for your best interests and keep your finances safeguarded from undue harm.
