Identify Assets and Liabilities
Gather the latest statements for your assets (investments, property, business interests) and liabilities (mortgages, credit card debt, auto loans, etc.). Divorce Planning of Austin uses these statements to prepare an initial list of property to be divided.
Collect tax documents for at least the past three years. Reviewing tax returns helps uncover hidden or otherwise unidentified assets and liabilities.
Only your attorney can request full disclosure of financial documents from your spouse. Be sure your attorney is aware of any additional assets that may exist. Mediated agreements and settlement decrees are final, so uncovering additional assets will require a trip back to court. So, make sure all assets/liabilities are listed BEFORE you sign.
Determine Separate vs. Marital Property
Generally separate property includes assets or income acquired before marriage and through inheritance. Marital assets include assets, debt and income acquired during the marriage. Martial assets are the ones that will be divided.
And what about credit card debt or your mortgage? Credit card debt is typically, but not always, the responsibility of both parties. While the responsibility of the mortgage can fall to whichever spouse is awarded the home, both parties are still listed on the mortgage as responsible for this debt despite what the decree says — until the mortgage is refinanced or the home is sold.
The decree may require that the mortgage is refinanced by the spouse awarded the home within a certain period of time. If that is not possible, an attorney may be able to structure solutions that give the non-owner spouse right to sell the home or foreclose if the owner spouse fails to make payments on the mortgage.
Examine Non-Retirement Asset Division and Tax Implications
Cash in bank accounts can be the simplest to divide because the value of the cash is not reduced by taxes. The sale of a home, if required, becomes cash in the bank after customary expenses and needed repairs. The gain on the sale of a primary home (meaning the net sales price less the purchase price) are exempt from taxes, up to $250,000 for individuals and $500,000 for couples so long as certain use and ownership test are met. Gains on rental properties are taxed under a more complicated format. The tax impact of the sale of a home or rental property must be carefully analyzed.
Standard brokerage and investment accounts can be divided “in kind” incident to divorce with no tax consequence. Typically the attorney will indicate in the divorce decree the percentage of the account to be allocated to each spouse. Clients then move their percentage share of each investment into their own individual accounts.
Investment accounts require further analysis as each investment inside the account (stocks, bonds etc.) has its own tax basis. Divorce Planning of Austin works with our clients to determine to most efficient way to divide these accounts after considering the client’s tax status and financial goals.
Guidelines and Special Requirements for Retirement Assets
It is important to know the specific type of retirement plan to be divided (401k, 403b, IRA, Roth IRA etc.) as each type of plan may be treated differently.
Most employer provided retirement account, such as 401k accounts, will require a Qualified Domestic Relations Order or QDRO in order to divide them. A QDRO (pronounced “quadro”) is a judgment, decree or order that creates or recognizes the existence of an alternate payee’s right to receive, or assigns to an alternate payee the right to receive, all or a portion of the benefits payable to a participant in a retirement plan. In fact a lien may be placed on the assets that remain with your spouse in order to secure payment of post-divorce financial obligations like child support. QDROs should be completed by your attorney before the decree is made final.
However, an IRA (or Roth IRA) is not under the same rules as 401ks. Depending on the custodian of these accounts (where the account is held like Chase, Fidelity, or Charles Schwab, for example) these accounts may be divided with a signature guarantee from the owner spouse and an original copy of the decree. Divorce Planning of Austin will help you determine what you’ll need.
When properly done, these transfers should not create immediate tax liability so long as the awarded amount is moved to a retirement account into the recipient spouse’s name.
Dealing With Hard to Value Assets – Stock Options and Business Interests
Divorce Planning of Austin has resources to help you to determine a range of values for stock options and businesses. And we help our clients to identify a business appraisal expert who can place a value on your business assets.
Many of our clients want to stay involved with family business. However, staying involved financially with an ex-spouse may not be right for everyone. If a value can be agreed upon, we can help you to exchange businesses for other assets, royalties, a note receivable or other sources of income.
The process of dividing stock options in divorce is complicated. Divorce Planning of Austin will help walk you through the types of stock options you or your spouse have and how divorce may impact their value over time.
Protecting Ongoing Support to Secure Payment
Job loss, disability or death jeopardizes support payments such as alimony or child support. Life insurance, disability insurance as well as other financial instruments like trusts or asset liens can be used to protect this cash flow. Divorce Planning of Austin, in concert with your attorney, helps our clients to determine which financial or legal instrument is best to achieve each client’s goals.
Summary
Developing an exact inventory of assets, understanding your financial goals and the tax implications for dividing those assets, and valuing the hard to value assets are vital first steps. Once the implications are fully understood, both parties will have an avenue toward various solutions to achieve settlement. As part of any settlement, each party should understand how assets are to be transferred and what protections need to be put in place to protect their interests going forward.
Divorce Planning of Austin will work with your attorney and tax professional to help you make better financial decisions during your divorce.
Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. This material is for general informational purposes only and is not tailored to the needs of any specific individual. Any discussion of U.S. tax matters should not be construed as tax-related advice. Please consult your personal tax advisor for more information. © 2020 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.