The division of your property is one of the major financial decisions you’ll have to make as part of the divorce process. There is a lot of confusion and frustration on how the divorce property division process works. In this guide we want to help educate you on how to organize your finances so that you can put together a divorce property division plan and then we’ll even show you how to evaluate your property division options.
There is a lot of scattered information on this subject but we’ve noticed that there isn’t a comprehensive guide… until now. Let’s get started.
Divorce Property Division Basics
A property division should be looked at in two parts. The micro details that go into a organizing all of your information and then the macro big picture things that will help you understand how a divorce property division is constructed and how to evaluate a property division. This article is going to focus on the micro details because this is the foundation of the property division.
Before we get into a lot of details, I want to do a quick summary of how the property division fits into the divorce process. Overall, there are two main financial elements that you have to make decisions on in the divorce process:
- Property Division – This is the division of your assets and liabilities.
- Cash Flow – This deals with the income and expense side of things and include things like child support, spousal maintenance/alimony, and handling children’s expenses.
It’s our experience that over 90% of financial issues fit into these two categories.
What Is Marital Property?
Marital property is all of the assets and liabilities that have accumulated during your marriage. A property division is simply the division of all of the marital property (assets and liabilities) in a divorce proceeding. It’s important to note that it does not matter whose name the asset or liability is in. If the property accumulated during the marriage it’s most likely marital.
This includes accounts in your name only, your spouse’s name only, and joint accounts.
It’s important to note that there are subtleties from state-to-state on what constitutes marital property so you’ll want to get information specific to your state on the exact definition or consult with an attorney.
What is Non-Marital Property?
The flip side to marital property is non-marital property, aka separate property. Non-marital property can generally be boiled down to 3 areas:
- Property brought into the marriage
- Gifts received during the marriage
- Inheritances received during the marriage.
The key to non-marital property is that it still exists. If you have property in one of the 3 main areas listed above, is the money still around? If it is, then you may have a non-marital claim. We’re not going to get into a lot of detail in this guide on how to trace non-marital property but let’s look at a few quick examples.
Let’s assume you brought a bank account with $10k into the marriage and you didn’t take any money out or add any other funds since you’ve been married. This is a pretty cut and dry non-marital situation where the money would likely be identified as non-marital because:
- The money was brought into the marriage (owned prior to marriage)
- The money still exists and is traceable
*Note that this example is a lot different if there has been commingling of funds which may make it almost impossible to determine the amount, if any, of non-marital value.
The flip side to this example is that you instead spent the $10k you brought into the marriage on day-to-day living expenses. The money would now be gone and the non-marital property would no longer exist.
Here’s a little more complex example. Let’s say the $10k was simply moved from the bank account you brought into the marriage to another asset. Identifying that the money still exists somewhere is the key to establishing the non-marital claim.
Remember, can you trace the money? If you used the $10k on a home remodel that increased the value of your home, you may still have a traceable non-marital claim that is now in your house. If you transferred the money from the bank account into a retirement account, you may still have a traceable non-marital claim that is now in your retirement account.
These are just a few examples to get you thinking about property that may be considered non-marital in your situation.
If non-marital property is established, it’s treated separately, meaning, it will go 100% to the person who has the claim and will not be divided maritally with your spouse.
Establishing non-marital claims is not always cut and dry. The burden to prove the non-marital claim is on the person who has the claim. If you’re unable to provide sufficient documentation that you have non-marital property, you may not get recognition for the claim.
We’ve seen situations where sheer recollection of having a non-marital claim was enough to count non-marital property in the divorce. On the flip side, we’ve seen massive amounts of documentation needed to prove the claim. It all depends on your situation and how much detail you or your spouse would like to see. If you and your spouse are very amicable, you may not need much documentation. On the other hand, if you and your spouse are very contentious, you may need complete documentation.
In general, the burden to prove a non-marital claim is the person who may have a non-marital interest.
The main point is for you to understand what’s marital and what may be non-marital.
It’s also important to note that there are subtleties from state-to-state on what constitutes non-marital property so you’ll want to check your specific state on the exact definition or seek legal advice.
Gathering Information on Your Assets and Liabilites
Gathering information on all of your assets and liabilities is the starting point to constructing your balance sheet or property division. Before a divorce property division can be completed, you need a complete list of all of the property that exists.
This includes all marital and non-marital property. It’s important that all property regardless of how it’s classified is disclosed in the divorce process and in your final agreement.
Here are the main asset and liability categories of a property division that you want to collect information on:
- Real Estate
- Cash Value Life Insurance
- Credit Cards
- Bank Accounts
- Investment Accounts
- Retirement Accounts
- Business Interests
- Personal Use Assets
- Children’s Accounts
Let’s get into more detail on on each of these categories.
Real Estate
You want to collect all of the information on your real estate assets and associated liabilities.
This includes all Information on the value of your real estate. This includes primary residences, rental properties, vacation homes, timeshares, etc. The starting point is to simply gather the county tax statement. This will give you the county assessor’s value of the home. The county tax statement value may not be the value you end up agreeing on but it’s starting point.
Information on outstanding loans. This includes primary mortgages, home equity lines of credit (HELOC’s), home equity loans (HEL’s), and community reinvestment loans. You’re looking for any debt associated with the your real estate.
Cash Value Life Insurance
You want to collect all information on life insurance that has a cash value only. This is not to be confused with term insurance. Term insurance is typically what you have through your employer and policies that specify that they are in place for a specific term (i.e. 10 year term, 20 year term, etc). Term insurance does not have a “value” today but only if there is a death. We are only looking for assets that have a “value” today.
Here are common cash value life insurance policies:
- Whole life policies – these are also referred to as straight life and ordinary life policies.
- Universal life policies – these are also referred to as flexible premium life policies.
- Variable life policies – these are also referred to as variable universal life policies.
Credit Cards
It’s important to collect information on all credit cards that have an outstanding balance that you don’t pay off monthly. You don’t have to necessarily collect information on credit cards that don’t have a balance because most people have a lot of department store cards, etc. that haven’t been used in a while or are used infrequently and are paid off monthly when they are used.
Bank Accounts and Cash Equivalents
You’re mainly looking for checking and savings accounts. Here is a list of all accounts that fit into this section:
- Checking accounts
- Savings accounts including money market savings
- Treasury bills
- Certificate of Deposit (CD’s)
- Coins
- Money that is owed to you. This could be a loan to a friend, family member, child, etc. The key here is that you expect the money to be paid back.
Investment Accounts
These are non-retirement accounts that you invest in things like stocks, bonds, mutual funds, exchange traded funds (ETF’s), etc. A lot of people get these accounts confused with retirement accounts but they are very different from a tax and liquidity perspective.
The accounts that fit into this category are often labeled as:
- Investment account
- Individual account
- Brokerage account
- Employee stock purchase plans (ESPP’s) – these accounts are set up by employers to give employees the chance to purchase company stock at a discount.
- Stock options – these can sometimes be included in compensation packages through employers and include non-qualified stock options, restricted stock awards or restricted stock units. These are complicated investments because they may not be vested at the time of divorce. The most important thing is to identify if they exist.
Retirement Accounts
Retirement accounts are one of the main assets people own and usually fit into two categories. Accounts held through an employer and accounts held outside of an employer. Here is a list of retirement accounts that you will want to include on your property division:
- Individual Retirement Accounts (IRA’s). Other names are:
- Traditional IRA
- Rollover IRA
- Roth IRA
- Beneficiary IRA
- SEP IRA
- SIMPLE IRA
- Employer Retirement Plans
- 401k’s
- 403b’s
- 457 Plans
- Tax Sheltered Annuities (TSA’s)
- Profit Sharing Plans
- ESOP Plans
- Thrift Savings Plans (TSP Plans)
- Pension plans – also called defined benefit plans.
- All other accounts that say “retirement plan” on them.
It’s not always easy to determine what the type of retirement account you may have. Sometimes an account will be listed as a “retirement plan” even though it’s actually a 403b plan.
Business Interests
This is probably the most difficult category to establish value. If you’re in a situation where there is a business that may have value, there’s not an easy way to determine what the value is. Many times business appraisals are completed but they can be very expensive – ranging from a few hundred dollars to upwards of $20k. It all depends on the type of business you’re dealing with and the level of detail that goes into valuing the business.
One quick way to understand if a business has value is to ask yourself, can I sell the business? If the answer is a clear no, then there’s probably not a value. An example of a business that may not have value are businesses where they are the sole employee of the company. If they stop working in the business, the business would simply go away. This includes solo consultants, photographers, etc.
If you have determined that the business probably doesn’t have value, there may still be some value in other areas. Here are some things to consider:
- Business accounts that have a balance.
- Credit cards that have a balance
- Inventory from the business
- Equipment from the business
If you feel the business may have value, you will want to speak to an attorney or financial expert to get an opinion.
Personal Use Assets
Personal use assets are assets that you use but also have value. These include the following:
- Vehicles and vehicle loans
- ATV’s
- Boats
- Motorcycles
- Paintings
- Collectibles
Technically, personal property fits into this category as well. Personal property is really most of the stuff in your house or can be looked at as everything else you own. You probably don’t want to itemize out every single thing you own in your house so it’s best to handle this separately.
What Documentation Should You Gather?
Now that you understand all of the information you will be looking for. Start the data gathering process by simply making a list or brain dump of all of the property or accounts that fit into these categories.
After you’ve brainstormed all of the assets and liabilities that are owned by you and your spouse, the next step is to get statements or screen shots of all of the accounts you listed. This is where you document the assets and liabilities with hard information. The more documentation the better here.
Getting actual statements and screenshots (hard copy or electronic copies) will help you to document the 5 important elements of the property division.
- The name of the financial institution (i.e. Wells Fargo, Capital One, Fidelity, etc.). This is an important way to identify all of the accounts that exist.
- The last 4 digits of the account number. This takes the identification process a little further. If you have multiple accounts with a banking institution, identifying the last 4 digits of the account numbers will help you to differentiate between the accounts.
- Who’s name is on the account. The official titling of the accounts is what you’re looking for here. Is the account an individual account (in your name only or your spouse’s name only) or a joint account (both names on the account)? As part of your divorce cleanup you will want to close down joint accounts so this helps to start flagging those accounts.
- Quick note on credit card accounts. You also want to find out if you have authorized user accounts. These accounts are established when one spouse is the primary owner of a credit card and the other spouse is added after the account has already been set up. These accounts technically are treated as joint accounts because they show up on both credit reports but they are easier to separate than a “true” joint account in the divorce process. Typically, joint credit cards have to be closed down entirely but authorized users can simply be removed from the primary account holder. This is important to understand because closing down credit cards can have a negative impact on your credit so you want to limit the credit that are closed. In general, it’s better to close down a joint credit card than it is to leave them open for purposes of your credit. IMPORTANT NOTE: A credit report is a great way to get a comprehensive list of all of the debt accounts you have and to identify if it’s an individual account, joint account, or if you’re an authorized user on an account.
- The account balance. You want to make sure that you have the exact account balance that is listed on the statement or screenshot. You want to avoid using estimates and have all of your numbers on your balance sheet backed up by documentation. This will help to establish an objective balance sheet based on actual numbers.
- The date of the account balance. This is very important information that you will want to document on your balance sheet. None of the above information matters if the dates aren’t consistent. You want to make sure all of your information is roughly within the same timeframe. You want to avoid having information from last month and then some from last year. This helps to construct a balance sheet that is apples-to-apples.
Getting Organized and Building a Plan
If you’ve made it this far than you probably feel a little overwhelmed. Don’t worry, that’s completely normal. Remember, it’s best to start by brainstorming all of your assets and liabilities and write them down or put them in a spreadsheet. Then after you have the foundation laid out, you can start collecting all of the documentation. The key is to break it down into smaller chunks.
This guide is the foundation to completing your property division. Check out the part two guide that helps you take all of the information you’ve collected and complete property division options on your own.
Note that the information discussed in the article are from a financial perspective only. You should seek legal advice in your state to fully understand the legal impact in your state.