THE STRATEGIC DIVORCE PROCESS: STEP 5—DIVISION OF MARITAL ASSETS AND DEBTS

I believe knowledge of the divorce process provides strength and peace of mind to those facing an often complicated and difficult time. This goal of education inspired me to write The Strategic Divorce Process™.

My book breaks divorce into five distinct steps when children are involved and two distinct steps when no children are involved. These steps are: 1. Making Decisions for Your Children; 2. Visitation; 3. Child Support; 4. Maintenance; and 5. Division of Marital Assets and Debts.

In this month’s column, we examine the final component of the marital settlement agreement and the divorce itself—the division of marital assets and debts.

This process begins by collecting financial information through the discovery process. The parties exchange financial affidavits and supporting financial statements so that both sides have enough information to define the financial situation accurately. The next step is creating a spreadsheet that shows the value of each marital asset and debt so that the total value of the estate can be determined. The final step is an equitable division that allows each spouse to walk away with a combination that adds up to roughly the same value and tax consequence, regardless of what they each retain.

We start by determining what marital debt, if any, exists. The secured debt is paired with the asset that it secures and the net value of the asset is figured into the spreadsheet. For example, if one party keeps the house, that party will also be keeping any debt associated with it.

Next is credit card debt, unsecured personal loans, bank loans, debt consolidation loans, and student loans taken out for a child. The amount of marital debt present, regardless of whose name it is in, is added to the spreadsheet. However, whoever’s name the credit card is in will likely be the party responsible for paying that debt but they will either receive an asset of similar value or the other party will receive debt of a similar value to keep the ultimate division of assets equal.

Next, we make a list of the marital assets that were acquired during the marriage. We categorize these assets based on the tax consequences that would occur if the asset was converted to cash.

After all the assets and debts have been identified, the lawyers divide them. The assets that have no tax consequences (non-qualified), including checking accounts, savings accounts, cars, and the marital residence, often are offset with debts. Non-qualified assets and debts are the first group that gets divided.

Qualified assets are assets that do have tax consequences when converted to cash. This typically includes retirement accounts, such as a 401(k), 403(b), 457(b) or a traditional IRA.

Investment properties, stocks, and investment portfolios often have tax consequences as well, but what exactly those tax consequences are is often specific to each individual investment.

While these tax consequences can be avoided when dividing the marital estate because transfers between spouses do not trigger a taxable event, it’s important to know what the tax consequences would be if the asset were converted to cash, because it will affect its future value.

The next step is to determine which spouse will receive each asset and each debt. Generally speaking, the value of the assets and debts are divided evenly, unless the parties are negotiating with something else, like a larger maintenance payment, the length of maintenance, guilt from infidelity during the marriage, or guilt from choosing to end the marriage.

Dividing the marital estate can be very simple, or very complex depending on the circumstances surrounding it and the mindsets of each party. The Strategic Divorce Process aims to simplify the division as much as possible as we believe it lowers the emotional, mental, and financial burdens of divorce.

Michone Riewer is an attorney with Strategic Divorce in Lake Bluff, 847-234-4445, strategicdivorce.com.