Behind child custody and alimony, another hotly contested part of divorce is deciding who gets what; dividing the property brought into the marriage as well as what you purchased jointly. Property covers both real property, such as your home, and personal property, such as household items or cars. Courts use many factors in deciding property division issues and final orders.
Community Property Division
In community property states, each spouse is generally entitled to half the property acquired during the marriage. This is the community property.
Not all property is community property. Spouses may have and keep their separate property. ''Separate property'' typically includes:
- Property or businesses you owned before marriage
- Gifts and inheritances received by you
- Pension proceeds that vested before marriage
Ten states have community property laws. Alaska law allows couples to enter into community property agreements or a community property trust.
In most other states, courts divide a couple's assets in an ''equitable'' (fair) manner, called equitable distribution. Equitable is what is fair to both spouses, and fair may not mean equal.
State laws give the factors courts use in deciding what is "equitable." Generally, factors include:
- Marriage length
- The work history and job prospects of each spouse
- The physical and mental health of each spouse
- The source of particular assets
- The type of assets, and liquidity of the assets
- Whether or not one spouse should keep the family home, or the right to live there for a time
- Tax considerations
Property Settlement Agreements
If you and your spouse can agree on how to divide your assets, whether it follows your state's guidelines or not, your lawyers will write up a formal agreement called a ''property settlement agreement" or a "marital settlement agreement" (MSA), depending on your state's laws. Detailed lists of who gets what are included in this agreement.
Many states' laws spell out that a voluntary property settlement is preferred to having the court decide those issues. There's no way to predict or guarantee how a court will decide property division issues, so many couples prefer to work out a property settlement on their own.
Do read the property settlement agreement carefully, and ask your lawyer about anything you don't understand. Once an agreement is signed and approved by the court, it's likely be difficult and expensive to change.
Breaking Down Property Division Issues
Whether you and your spouse agree on a property settlement, or have the court decide the issues, a lot of work and planning goes into this part of your divorce. The basic step of completing a property inventory and planning for tax impacts are important.
Taking a Property Inventory
Before you can nail down a property settlement, you need a big picture of what your assets are. One of your first tasks, even if you're thinking about a divorce, is to make a property inventory. It's vital to list all property you and your spouse own. Don't try to hide assets as it will only complicate dividing your property.
Many lawyers have property checklists to help clients complete their inventories. You may be surprised about assets you may have forgotten about.
Generally, the property division in your divorce doesn't create tax consequences to worry about on your next tax return. The reason is that usually there's no federal tax gain or loss when a property transfer of is "incident to the divorce." This means that the transfer:
- Happens within a year of the date the marriage ends, or
- Is related to the end of your marriage
Further, for a transfer to be related to the end of a marriage, your divorce or separation decree must also provide for it, and it has to be done within six years of the end of the marriage.
Review possible tax impacts of your property division with your lawyer or accountant as you work towards the final terms.
Property Transfer After the Divorce
As soon as the property settlement is approved or the court finalizes the divorce, you'll want to take care of the details of the property transfer. This includes preparing and signing the documents needed to transfer ownership.
While it may be the last thing you want to do, taking care of these details will save future trouble and make it easier to gain closure on this chapter of your life.
Questions for Your Attorney
- My spouse and I have moved a lot. Does that affect whether community property or equitable division methods are used to divide our assets?
- Does my separate property lose its character if I use it to benefit my family? What if it's a major asset, such as the family home?
- My spouse and I agreed to put much of the income we save into my spouse's 401(k) account. How will that factor into our property settlement agreement?