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Dividing the marital estate: part one

If you're thinking of filing for divorce and dislike (or perhaps even dread) doing your annual taxes, here's some bad news: Taking a financial inventory of your marital estate could be even worse. Unless, of course, you enlist an attorney's help.

The process starts with identifying all assets that were acquired during the marriage. Property that was separately owned before the marriage is generally excluded from that inventory, as are inheritances, with some exceptions. For example, a separate asset whose value increased as a result of the marriage might be apportioned.

An attorney can utilize civil discovery techniques to gather information from your spouse, as well as third parties. Subpoenas to banks, 401(k) plan administrators, employers and other entities may yield relevant financial information. Depositions can also commit a spouse to testimony, under oath, about his or her real property, cash, and other assets.

Keep in mind that the marital estate may include not only current, but future interests like start-up stock options or pensions. Income earned before the divorce filing but not yet paid should also be included, such as retirement contributions or bonuses.

Finally, the inventory should also include any debts of the marital estate. If only one spouse incurred a sizable debt, such as a student loan or gambling debt, an attorney may be able to insulate that obligation from the other spouse. At the same time, we caution against rushing to repay any individual debts during a pending divorce. Talk with an attorney first. Although it may be tempting to dip into other assets to repay a debt, there could be consequences, such as penalties for collecting early IRA payments and/or resulting ineligibility for tax deductions.

Once the inventory is complete, assets must be valued. Do you need to understand tax terms, like an asset’s basis, to navigate through your divorce property settlement? We’ll answer this question in our next post.

Source: CNBC, “Breaking up is hard to do: Protecting assets in divorce,” Kelli B. Grant, Jan. 17, 2016

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