Divorce: Cover Your Assets

If you think breaking up is hard to do, just wait until you try separating your finances. There are numerous legal and technical considerations involved in dividing assets and debts. Ignoring them could imperil your future financial security.

Think you’re ready? Try this quick quiz. Which of these proposed arrangements is potentially a lopsided division of assets?

A) You keep your $5,000 SEP IRA and your husband keeps his $5,000 Roth IRA.  
B) You get the brokerage account that has grown from $50,000 to $200,000 and your husband gets his pension currently valued at $200,000.  
C) You retain the house with $75,000 in equity and your husband walks away with his $75,000 401(k) account.  

The correct answer is… all of them! On the surface, what may seem like a fair and reasonable financial split may be far from equitable. Your lawyer likely won’t debate any of these proposed financial arrangements since the current values are identical. However, the missing key dimension is a financial analysis that projects future values and accounts for taxes and other considerations. In other words, what may look fine now could look flawed in five years.

Unfortunately, many women in the midst of a divorce sacrifice their future security for the value of present assets, generally a house. The most important consideration is to think beyond the short term and instead anticipate the long-term effect of dividing assets and debts.  

Ask yourself, will this asset appreciate or depreciate? For example, a properly invested retirement account will probably appreciate more in ten, twenty, or thirty years than the family home. An automobile will depreciate very quickly.

Additionally, will the asset produce income? Examples of income-producing assets include stocks, bonds, mutual funds, rental real estate, annuities, and retirement accounts. Some of these assets will produce more income than others. Any income will incur tax costs. Ask for an analysis before you commit to any arrangement.

Next question: Will it require capital to maintain? Obviously, homes, autos, and boats will all need cash for regular maintenance and upkeep. Other items such as art or jewelry typically require insurance.

Finally, how much will you be taxed if you sell an asset? Every asset must be considered in light of taxes. If you sell stock that was held longer than a year, for example, you will be taxed at the capital gains rate, which is quite a bit less than current income tax rates. Similarly, taking money from a Roth IRA in retirement will be income tax free, whereas taking a distribution from a SEP IRA will create a taxable transaction. Homeowners may be able to take advantage of the $250,000 or $500,000 joint tax exemption if certain qualifications, such as holding periods, have been met.

What can you do?