Belongings, stuff, possessions. Houses, credit cards, checking and savings. Pensions, IRAs, 401Ks, 529s. How many more things can you think of that would be up for grabs if you were to find yourself in divorce proceedings? How do you go about splitting up your stuff when you are splitting up your life? What is yours and what is theirs and what do you do with the things you’ve acquired while you were married?
First off, we’ll assume an amicable divorce for the purposes of brevity. A nasty, contested divorce can be far more involved, will take longer to settle and absolutely will cost you more. There is more to file with the courts, more paperwork for your attorney to draw up and every single thing could be up for grabs.
So, you and your spouse are OK with splitting up and have agreed to handle things amicably for the sake of sanity and to keep the legal bills to a minimum. Best to figure out who gets the car with some civility, without buying your lawyer a new one in the process. So, let’s categorize things in a way that defines what your assets are.
The first group would be tax-free items. Tax-free or non-taxable items are things purchased with after-tax money. If you bought a car, you’ve already paid taxes on the income you earned to make those payments. Your house is another non-tax item. Things like simple bank accounts (checking, savings, money markets, CDs, etc) that you have funded with money that has already been taxed, falls into this category. This group is easy for the most part. List everything you can think of and divide by two. There is also some wiggle room in this group that can be used in later negotiations. For example, if you own two cars, you and your spouse probably don’t want to have to liquidate them in order to divide the cash evenly, only to go buy another car. If you give your spouse the ‘nicer’ car in the split, you might be able to ask for a little extra, somewhere else.
Next up, the taxable assets. These are things that have been funded with pre-tax money like your pension, your 401K, their IRA. If you were to withdraw against any of these, you’d have to pay taxes (and penalties as assessed by your financial institution, so don’t forget these in your calculations!) because you didn’t pay tax on that income when you put it away years ago. The split works the same way as the Non-Tax group. Add all the accounts up and divide by two. The difference here is that the total you come up with is not the total you’ll be dividing between you and your spouse. You’ll need to figure out the tax and penalties and subtract that from the total. Many divorcing couples will simply keep their 401K plans separate and avoid the headache of cashing out and splitting the proceeds, but if the balances are very different, you may have to divide them.
One MAJOR consideration is the 529 plan I mentioned earlier. A 529 Plan is a tax-advantaged plan that is set up to fund higher education for a depositor’s child or children. While you might consider such a plan to be the child’s money, it’s not. That money belongs to the person who is paying into the plan and thus, is fair game in a divorce. This is where the amicable part comes in. Listen to your attorney and enlist the assistance of a financial planner. I will assume that you’d want to keep that money intact for its original purpose, but you need to specify this in your divorce decree.
The last category we’ll cover is personal property. There are a couple ways to split this category up. One is to simply total it all up, assign values and divide it to get an idea of what sort of money you’re talking about. You can then pick and choose what you want as if you were picking teams for a game at recess in grammar school. Make some trades here and there, give a little cash from the Non-Tax group in exchange for something you really want.
Another method is making two lists of items that either person could end up with. Think of it like the Showcase on The Price Is Right. One has a group of items that might be worth more in a monetary sense. Another might have items with more sentimental value, if you aren’t as concerned with the bottom line. Each person picks the list they want and negotiate from that point.
SURPRISE!!! There is one more category, an unpleasant bonus round…the debts. Debts get divided by the value and by whose name is on what credit card/loan/etc. Now here is the tricky part. Creditors aren’t bound by the decree. If you owe $40,000 on a credit card and the court orders it split 50/50, the credit card issuer isn’t bound to follow this. If your spouse skips out on their $20,000 portion of the bill, you still owe it and the creditor can send you to collections and pursue a judgment against you. Remember that bit of negotiating room I mentioned earlier? This is often where it comes in. Sure you might want to keep your bass guitar and amp, but you can always buy a new guitar. It might be worth it to liquidate it in exchange for absolving yourself of debt that might come back to bite you later, or maybe you get to keep more of your retirement accounts.
The Cliff’s Notes version here is that you need to divide things evenly and accurately categorize them. Attorney’s understand that most of these lists can’t be divided perfectly and this is where the horse trading begins. If you can keep things civil, you’ll likely come out in decent shape without losing everything you own to your ex and their attorney. The biggest obstacles as a general rule, are the taxes and keeping debts with the person whose name is on the card. It is possible as long as you’re willing to do some creative accounting, and be open and honest with what things really matter to you. If your ex knows they can hold you up over a particular item, they might do it. If it’s something you can actually live without, you might find it to your advantage to let it go, rather than pay the interest on a credit card that isn’t even in your name and never lived in your wallet.