Property Division Laws
Dividing property can be much more complicated than it sounds. If both spouses are on the deed of the house, for example, then the process of dividing who gets what is greatly influenced by where you live and what agreements you have made during your marriage.
Community Property States
In some states, property that is acquired during the marriage is considered community property, and as such, both spouses have an equal right to it. Depending on the details of the divorce, the family home may be equally split between the two parties. The other spouse may buy out the other’s half, or the house may be sold and the profits split evenly between them.
On the other hand, if one spouse is able to successfully show that property was actually a gift or inheritance made to only them, they may be able to keep it even if it was purchased during the marriage. This happens when one spouse is able to prove that it was specifically excluded in the terms of the trust or will, or if the couple has a pre-nuptial agreement that outlines how property should be split .
Equitable Distribution States
In states that are not community property states, all property is considered marital property that is owned by both spouses. However, unlike community property states, the law will not consider it to be a 50/50 split. A court will decide what amount of the marital property each person receives based on what is considered fair or equitable to both parties. Some factors considered for this determination include whether a spouse gave up a higher education or career to support the other spouse and children during the marriage. It will also take into account both spouse’s economic circumstances after the divorce, and how long the couple was married.
If one party owned an item before the marriage, that party may be able to keep that item, even if it was acquired during the marriage. Also, any inheritances and gifts to just one party are also considered non-marital assets and kept by that person when the couple separates.
Divorcing Property Division
Understanding that there are methods available for the division of property other than a divorce court trial on contested issues. Methods include:
- Agreements between the Parties
- Mediation
- Special Masters
- Collaborative Law
- Expert Evaluations
- Court Trial
Generally, the least expensive and time-consuming approach will be for the parties to reach an agreement on the division of the property pursuant to provisions in the Poth marriage settlement agreement or mediation agreement. However, if there is a stalemate in the negotiations concerning the split of various assets, then it is often necessary to obtain an appraisal of the contested property from a neutral party or to get the advice of special masters in calculating the value of a business or of complex financial issues.
Where the business does not have any significant value for the parties other than perhaps its goodwill or reputation. For instance, where each spouse estimates their respective contribution is $X to the business and that the business should be split equally between them, then it may be appropriate for them to obtain an independent valuation of the business. This will "kick the can down the road" and postpone determining how the business is going to be divided and whether and to what extent there will be a buyout. However, if the parties cannot agree, then there will need to be either litigation to determine the value or the appointment of a special master.
The appointment of a special master is appropriate only where the parties agree and there is sufficient complexity to the business that the court cannot come to some reasonable determination. The special master is paid by the parties and his/her fee is set out at the appointment. There are no limits on the number of hours that can be billed and no budget. Typically, parties have to submit their files to the special master and the special master will have to review and analyze all the files, schedule and conduct meetings with the parties and their experts, manage a process and produce, share, compile and finalize a report. All of this takes considerable time and hence money. In situations where there is a great disparity between the parties incomes, the husband and wife may want to agree to split the cost of the special master. In other situations, the parties may have enough income that they split the fee.
All expert fees are subject to negotiation and agreement. It is rare that a special master is appointed by the court. Many times issues can be resolved and determinations made by agreements between experts. For instance, where one spouse’s income has been derived from a business, it may be necessary to get the services of a forensic accountant who can look at tax returns, consider IRS guidelines, calculate imputed income and approximate real world personal expenses.
Often in contested divorces, courts are asked to "try cases" concerning the distribution of the property and other monetary claims. Out-of-Court litigation of disputes between spouses can be costly and frustrating. In those circumstances, questions arise as to the division of certain items, such as pension or profit-sharing plans, interest in a partnership, or the true value of real estate holdings. No two cases are identical, and for each client the process of litigation will depend on the value of the assets, the contentions of the parties, and the willingness of both sides to settle their disputes.
Legal Documentation When Dividing Property
When dividing property, whether it is marital property or property which was brought into the marriage as a separate gift or inheritance, certain legal documents will be integral to the process. The first essential document in a property division is the title. Title is traditionally defined as "the legal right to ownership of property." This applies to all types of property from real estate to vehicles to stocks and bonds. In some cases, property owned jointly will require both parties to sign documentation acknowledging the termination of that joint ownership. In other cases, the change in title can be made unilaterally. However, even in these latter situations, it can often be helpful to have both parties sign off on the transfer. The next most important document to review and file during the division of property is the deed. The deed will outline how title is held and will note whether the property is held in joint title, separate title or in some sort of a joint partnership. Deeds can also note whether there are liens or mortgages attached to the property. The deed will provide guidance on how to divide the property during the divorce or separation process. It may not however provide specific guidance on what to do with property attached to a lien or mortgage as that property division judgment must typically be filed through the courts. This leads the way to the third important document for the division of property: the court judgment. A court judgment will be the instrument of separation or divorce that divides property, custody and parental rights. In filing this court judgment, you can transfer property in any way you deem appropriate as long as that transfer is not illegal, immoral or unconscionable. Once filed, this court judgment becomes binding on both parties and can only be altered by a new court judgment, a new deed or amended title change.
How to Properly Value Property
When considering "how to break up properly," it is critical to assess the value of the real estate accurately. Generally, the value of real estate is established through a professional market appraisal. While the court will often order one side to pay for the appraisal, the credit for the appraisal can be offset against the marital property estate, the result being that the parties are ultimately equally responsible for the costs of the appraisal. In rare cases, a court may even order the parties to hire a joint appraiser. That however is very unlikely, and usually only done where the value of the property in question is a disputed point and the parties have no idea who should pay for the appraisal. Most often, the current owner of the property in question is ordered to pay for the appraisal out of his or her share of the marital property. The court cannot decline to order an appraisal because neither party wants one. A court may not base its decision on what either would be willing to pay for an appraisal.
In our experience, the majority of valuation disputes involve marital residences where there is both an equity to be divided and a dispute as to whether the market supports such an equity. In situations where a home is in the process of sale at the time of trial or close to being sold, has a price predetermined under a contract for sale or is sold prior to trial for a price which both parties accept, the market value of the residence can be determined with relative ease. Difficulties arise, however, where the parties are unable to agree on what the house is worth. Where the real estate is not marketed or sold before trial, the court should consider utilizing the expertise of real estate appraisers. Based on the issues and position of the parties, the court may appoint its own appraiser to perform a valuation or allow one or both of the parties to retain their own appraisers, subject to the court’s review and acceptance. If the parties agree, the appraisers may also act jointly to see if they can reach a consensus on value.
In most cases, the court will order the parties to obtain appraisals from real estate appraisers of their respective choosing, with the costs to be split. In some cases, the court may require both parties to pay an equal amount up front to fund the appraisal, with the costs to be offset from the marital estate against the appraiser who is hired. In most cases, a single appraisal, once done, will cost approximately 75% of a full appraisal. Full appraisals cost upwards of $400-$500 on average.
It is possible that in low or volatile markets parties may wish to have separate appraisals and then to meet and see if the two appraisers’ reports can be salted to reach an acceptable balance. The court may sometimes find it desirable to allow the parties to engage in such a salt process before it selects whatever appraiser it wishes. At the very least, in order to avoid discovery disputes down the road, the parties should be asked to provide copies of the proposed and supporting materials from which an appraisal is based.
If necessary, the court should direct the parties to produce copies of their appraisers’ work files or give the appraisers permission to speak with one another. The methods used by any given appraiser vary, and it is important to know how an appraiser arrived at his or her conclusion about your property and whether that process was reasonable under the circumstances and to determine if any adjustments were made to the comparables, since such adjustments can substantially impact the final value of the property.
Challenges to Dividing Property
The process of dividing marital assets and debts can be fraught with challenges and disputes. Even when spouses agree that they want to divide everything fairly, there may be disagreements about what constitutes a fair division. Some common issues include: In some cases, there may also be hidden or secreted assets that exist for which one spouse may seek to provide their spouse with a "fair" share. One spouse may argue that an asset is non-marital property, and therefore should not be divided at all. Spouses may dispute the value of certain items, particularly in the case of complex assets such as retirement funds, tax shelter or employee stock ownership plans, closely-held businesses, and professional degrees and licenses . While challenging, these disputes are not insurmountable. With the assistance of experienced counsel, it is possible to reach an agreement that addresses each spouse’s concerns in a way that they can live with. If necessary, a forensic accountant or similarly-skilled professional can be utilized to provide information on hidden assets or business valuation issues. In all cases, the goal should be to reach a resolution that will allow you and your spouse to go on to successfully complete the divorce process, and will see that any resulting post-divorce legal relationships function as smoothly as possible.
Tax Implications in Property Division
An often overlooked factor when dividing the property are the tax implications of doing so. As noted below, drafting an agreement that considers these factors can significantly reduce the parties’ tax burdens.
Income Tax Consequences of Allocating Assets Between the Parties
The most significant tax impact of property division usually involves income taxes on pension or retirement assets. In dividing pension or retirement assets, there are three options. However, differing tax implications exist for each of the options:
The QDRO requires the account owner to transfer his interest in the qualified plan to the non-account owner spouse. Requiring the account owner spouse to take a distribution from the plan will impose immediate tax consequences on that spouse, however, the non-account owner spouse will owe no tax until the amount is withdrawn from the plan, unless he’s under 59 ½ years old. The simplest option, and usually the most tax favorable, is the transfer of the asset to other property. In this regard, the parties should first consider whether they can agree on a trade, i.e., transfer the retirement asset to the other spouse in exchange for other property. If the parties are unable to agree on such a trade, the court may value its marital interest in the account on the basis of the present value of the qualified account. The account owner can then satisfy that value by transferring assets with equivalent value to the other spouse, or deduct the value of the non-marital spouse’s share from the community account, leaving the non-account owner spouse with his share of the account.
Capital Gains or Transfer Tax Liability
In addition to the income tax implications of the property division, transfers involving real estate could also incur liability for capital gains tax or transfer taxes, depending on the county of recording and the transfer amount. If the closing statement will indicate that the transfer is due to a transfer of property pursuant to a divorce proceeding, the parties may be able to avoid the payment of deed tax on the transfer (not applicable to state transfer taxes). Any capital gains liability is derived from the basis of the real estate, so a careful calculation of capital gains liability should be made before any division is made. Moreover, if there is no cash real property, the court can order the real property to be sold and the net proceeds to be divided, in order to avoid capital gains liability on the real estate.
Acquiring Legal Guidance and when to do so
A professional does not always have to be sought, but it is almost always in your best interest to consult with one. A legal mediator would be a good candidate for a third party. They can notify you of all the legal ramifications involved. A little knowledge about property division is not enough to avoid the big picture items. Whether properties are going to be sold or kept, if they are still mortgaged and how to handle it and if there is recourse against the other party for a mortgage they are both responsible for are just a few things to consider. When money is involved, it is often wise to have a third party involved. The cost of representation and mediation is small compared to how much you could lose. The courts are very diligent about dividing property fairly, but they do have a lot of people to see. Lawyers and mediators can often help expedite this processes, helping you get on with your life and your income sharing. If the situation seems like it is going to be difficult, such as in a divorce where one party has little knowledge of the marital assets, a lawyer is probably needed. These situations can be the most damaging, because they are the most emotional for most people. Agreed, the whole process is emotional, but it should be as fair and clear as possible. A professional involved in the manner can not only calm you down but keep you focused on what the matter at hand is – dividing the property as equally as possible in the eyes of the courts.
Creative Solutions and Considerations
To understand the full scope of the innovative tools and agreements that are available, it is essential to recognize what they cannot do: They are not a substitute for the formalities of law. Enforceable in court, these tools often lead to distinctly different standards being applied, and can therefore change the outcomes of some property divisions. These arrangements are a subset of a broader movement in the property world, with developers and landowners using them to assign legal obligations to buyers.
A modern and innovative solution to dividing property and assets is a bargaining arrangement that takes the form of a post-nuptial agreement. Often called a pNA or a post-nup , this agreement attempts to make explicit what is currently implicit in an ownership arrangement, recognizing that implicit and explicit bargain arrangements are, in fact, the same. All such agreements will lead to fundamentally different standards and rules being applied to the property and assets they concern: that is the nature of legal property ownership. In addition, their enforcement and the rules that apply to them are bound by the terms of the contract itself, often leaving those who have contributed to the assets or property disempowered in the resulting outcome.