All is fair in love and war… but not in divorce. If this is the direction your marriage is heading, you need to know what the rules are.
When a couple decides to dissolve their marriage, most states require an “equitable” or “fair” division of marital property. But what constitutes equitable or fair?
With divorce, equitable or fair does not necessarily mean equal. A 50-50 split is generally the starting point in the discussion, but rarely do the two parties end up with an exact amount. In fact, one party may end up with a far greater share of the total combined assets.
Surprisingly, this is not because one spouse assumes greater fault for the marriage’s demise and therefore must make the other whole for a wrongdoing (although this can happen, too). More often, it is because upon analyzing a couple’s financial affidavit, there are compelling reasons that an unequal division is more equitable over the long-term.
Considerations must be weighed such as how the division may affect other parties involved such as the children of the marriage, how the assets are likely to grow over time and the earning potential of one spouse over the other.
A common example: One spouse, typically the wife, desires to keep ownership of the primary residence. Compare this asset to another marital asset such as a 401(k). Homes carry substantial maintenance costs and may have a much lower return on investment versus a well-diversified 401(k) account, which enjoys tax-deferred growth.
A $500,000 home, therefore, may not hold the same value over the long-term as the $500,000 defined contribution plan. In this case, the spouse staying in the home would likely receive additional assets or support.
One spouse may have considerably less future earning potential than the other as a result of having been married. For example, one spouse may have stayed home to care for the children, or left his or her own job because the other spouse needed to move to another state for career reasons.
This jobless spouse may receive regular alimony as well as “rehabilitative maintenance,” which pays for the training necessary to support himself or herself. But if the projected net worth of the working spouse is still much greater, spousal support alone may not be enough to justify the difference. So a higher proportion of marital assets may be allocated to the stay-at-home spouse.
Sometimes, even separate property is brought into the decision if it means that one spouse would be at a considerable disadvantage after the marriage compared to the other.
Imagine a situation where both spouses are left with approximately $200,000 after an analysis of combined marital assets. But one spouse also has $4 million in separate property owned prior to the marriage. The couple may end up dividing the $4 million, even if it is not technically a joint or marital asset.
Only recently did states begin to adjust their guidelines around what constitutes a fair division of property. In the past, the guiding principle over such issues was the term, “enough was enough.” This phrase meant that a spouse only deserved enough to maintain his or her current lifestyle – and not a dollar more.
A landmark case in 1998 involving Gary Wendt, former chief executive of GE Capital and his wife Lorna changed all that. Lorna Wendt argued that she was entitled to her husband’s future pension benefits and stock options because her role as a wife and homemaker contributed substantially to his professional success and his potential future earnings. The result was that she was awarded $20 million, much more than her husband’s original offer of $8 million.
Not everyone agreed with that decision. But it did raise the question of fairness and the need to evaluate a host of factors beyond the present market value of the assets involved.
Pensions and other defined benefit plans can be especially tricky to divide because their actual value can be complex if the participant is still working and contributing to the plan. If this is an asset in question, make sure you review all aspects of the plan, such as whether it pays out in a lump sum, and whether the non-employee spouse can receive benefits before the employee spouse retires.
Before the divorce is finalized, carefully check the qualified domestic relations order (QDRO). That is the order from the court to the retirement plan administrator that details how the plan’s benefits will be assigned to each party, to make sure that it was written correctly. Without such due diligence, one spouse may be left without an asset that he or she was counting on, or with one has considerably less value than originally assumed.
Once a divorce is final, it’s final. There may be provisions allowing for some future adjustments, with regard to such items such as alimony payments or other spousal support. But the division of marital property is generally permanent – so be sure that any issues about how to divide property equitably or fairly are addressed from the get-go.
Tom Orecchio is a principal and wealth manager with Modera Wealth Management, LLC in Westwood, N.J. His website is www.ModeraWealth.com.
The discussion above is not intended as, and should not be interpreted as, legal or tax advice. Rather, it is intended to canvass how financial assets often are apportioned in a divorce. For legal or tax advice in a divorce situation, you should seek the advice of a qualified attorney or accountant.
Nothing contained in this article should be construed as personalized investment, financial planning, legal, tax, accounting or other advice, and there is no guarantee that the views and opinions expressed herein will come to pass. Investing involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be construed as a solicitation to buy or sell any security or engage in any particular investment strategy.