On behalf of The Marks Law Firm, L.L.C. posted in Divorce and Property Division on Friday, May 2, 2014
We have often found that many people in the midst of divorce focus too much on trying to assure an equal division of the present value of marital assets, and too little attention on the financial consequences of dividing these assets.
To begin, any person going through divorce should conduct a thorough inventory of all assets held individually or jointly. Collect current statements, trace ownership history and determine if a spouse has attempted to hide any assets.
Once you have your inventory, you need to consider the nature of each asset. For instance, if one party will retain the marital residence, the transfer will require nothing more than a quitclaim deed. However, the financial consequences could be much more significant. The spouse who gets the house also will get the mortgage, which may require a refinance, which in turn could result in a higher interest rate. If the parties consider selling the marital residence, the sale will result in either a capital loss or capital gain, which has significant tax consequences. If the house is sold as a joint asset, the parties must share the tax burden of capital gains or split the benefits of a capital loss. Depending on the value of the home, the tax consequences could be a large sum of money not initially considered in asset allocation.
Investment accounts present their own issues. First, transferring ownership of shares of stock or a mutual fund likely will have no immediate tax consequence. But if the parties decide to liquidate certain stocks, the capital gain or loss realized has tax consequences. Often parties will seek to liquidate stocks to pay off debt but not account for the capital gains tax, resulting in a surprise imbalance in the asset allocation. Second, while holding on to your IRA is simple enough, to transfer interest of your spouse’s IRA or employment pension plan to your account will require the use of a qualified domestic relations order (QDRO), and plan administrators each have unique forms and wording that must be followed, as well as timelines. Certain transfers may need to be completed within a certain timeframe to avoid taxation.
Insurance will also become an issue. As assets transfer between parties, securing these assets will be necessary through insurance. Adding riders to existing policies for these assets add costs, as will new policies. You should investigate these costs in advance to understand the true value of an asset award.
For parties who have placed their assets in a marital trust, you will have to unravel the trust. In doing so, you likely will encounter a variety of tax scenarios which should be discussed with a financial planner before reaching a particular agreement. Also, you will want to make sure that you have removed your former spouse as a trustee or beneficiary unless the court requires the spouse remain a trustee or beneficiary.
As you can see, even in modest estates, asset division has a wide variety of collateral consequences that could result in significant depletion of an asset award. An attorney with experience in these matters should include an evaluation of alternative distributions prior to a settlement agreement or trial to minimize the cost of these collateral consequences.
If you have questions about asset division and divorce, contact our St. Louis divorce attorneys – we can help.