Property Division in Lieu of Alimony

[Ed: Originally published on Facebook.]

Yesterday we talked about the interplay of alimony and property division. Often it can make sense to pay more alimony in exchange for a more favorable property division. Note the reverse can be true, in a sense – the court can adjust its property division to make up for the fact it may not be able to award alimony.

Alimony is typically not available to a spouse who is guilty of a fault issue – for example, adultery. In other words, if a spouse has an extramarital affair, and that is the cause of the divorce, then that spouse cannot be awarded alimony in most cases.

Notwithstanding what the parties could get at trial, keep in mind that divorcing spouses could almost always agree to do whatever they want. So even where a spouse cannot get alimony at trial, the other spouse may be better off agreeing to pay alimony anyway. Every case is different, but the moral of the story is this – when considering property issues, don’t forget about alimony as an option, and think about making alimony and property division work together to achieve a good outcome for both parties.

Alimony in Lieu of Property Division

[Ed: Originally published on Facebook.]

Alimony and property division often intersect. One is an award from the CURRENT estate, and the other is an award from the FUTURE estate. Sometimes, the current estate is relatively modest, but one spouse has a substantial amount of “separate” property, not subject to being divided or awarded to the other spouse. Alimony can help offset that to some degree.

In fact, alimony should often be part of any final settlement negotiations. Even if the other spouse “doesn’t deserve” (or even can’t legally get – more on that tomorrow) alimony, the high-income earner may want to seriously consider paying alimony anyway in exchange for a more favorable property division. There are several reasons for this, but often-overlooked is the fact that paying alimony can provide a significant tax savings, as it is a “page 1” deduction, meaning the alimony paid is deducted dollar-for-dollar from the payor’s adjusted gross income.

To take a simple example, suppose the couple only has the husband’s 401(k) to split, and there is $90,000 in it at the time of the divorce. Typically the 401(k) would be split so that the wife would receive $45,000 in 401(k) money, but in many cases, the wife would rather have – or may actually need – the cash. If she cashed in that 401(k), after taxes and penalties she might have $25,000-$30,000. But, if the husband was to agree to pay $2,000/month for 2 years in exchange for being able to keep his 401(k) intact, that might provide some much-needed cash flow for the wife, which she may value more.

Mechanics of Property Division

[Ed: Originally published on Facebook.]

This week we’ve been looking at examples of property division. I want to shift a little bit and talk about the mechanics of property division. As a starting point, assume every division of property – that is, every instance of one spouse transferring any property to the other spouse – carries a “transaction cost” that must be paid by one or both parties. Sometimes, that transaction cost is negligible (e.g., transferring money out of a bank account is a simple as writing a check). Often, it can be substantial, however. For instance, to divide a 401(k) or some other “qualified” retirement account, a special instrument known as a “qualified domestic relations order” (or “QDRO”) must be drawn up, typically by an attorney, and then it will have to be signed by the judge and approved by the retirement plan – all of which costs time and money.

My golden rule is to minimize transaction costs by minimizing the number of transactions. As a simple example, let’s say one spouse has changed jobs four times during the marriage, but the other spouse has held the same job throughout the marriage. The one spouse has four different retirement accounts, with balances of $10,000, $15,000, $8,000, and $24,000, and the other spouse has a retirement account with a balance of $174,000. The total of all five accounts is $231,000, half of which is $115,500. These parties COULD do five transfers – one spouse could transfer $5,000, $7,500, $4,000, and $12,000 to the other, and the other spouse could transfer $87,000, and the result would be that both sides would have five accounts each, worth a total of $115,500. But it would be much easier for the spouse with the one large account to do a single transfer of $58,500 to the other spouse – leaving one spouse with five accounts worth a total of $115,500, and the other with one account worth $115,500. Same result, but achieved in one transaction instead of five, which is much easier.

By the way, if you’re the one with multiple retirement accounts out there, you should probably consider trying to consolidate them all. A financial planner can help you with this. If you’re following the “Your Post-Divorce Compass” plan, Days 11, 13, and 23 touch on retirement accounts and financial planning.

Property Division: “Equitable” Does Not Always Mean “Equal”

[Ed: Originally published on Facebook.]

Yesterday we looked at a fact pattern that shows how a court can make “equitable” awards of property that are not necessarily “equal”. Yesterday’s example was based on each party’s current ability to pay. Today we will look at a common fact pattern which involves different time horizons.

Let’s say the husband has worked as a C-level executive for 20 years for a big company, long enough to qualify for a pension, which figures to pay him handsomely at retirement – but let’s also assume he is at least 15 years away from retirement. The husband has also received stock and stock options on an annual basis as part of his compensation, which have fully vested and which the parties have kept in a brokerage account. The wife has not worked in more than a decade, and her job prospects are poor due to a lack of experience and formal education. In addition, the parties have a special needs child who requires substantially more attention from a caregiver, who has most often been the wife. In a case like that, it may make sense for the court to award a substantial portion of (or all of) the stock account – which, if carefully managed, can provide immediate and sustained cash flow – to the wife, so that she will have an asset she can use to help support herself (and the child). Division of the pension is less important to the wife in the near term, and probably more important to the husband in the long term, because the husband’s ability to rebuild the stock account is greater, and the benefit to the husband from growing the pension will be much more important to him later than it is now.

No matter how your property is divided, you will want to spend some time planning for how you’re going to manage it all on your own. This is where the “Your Post-Divorce Compass” plan can really help you.

Equitable Division of Property

[Ed: Originally published on Facebook.]

Yesterday we looked at “community property”. Today we will look at the property division scheme in effect in most jurisdictions: “equitable distribution” (or “equitable division”). The key word, of course, is “equitable” – which does NOT necessarily mean “equal”. For many judges, they will start out presuming an equal division is fair, but they have discretion to award whatever division they want, and so both sides will be given a chance to argue why certain property should be divided differently.

A common argument for a non-equal division of property being “equitable” is that the parties will have different needs and abilities after the divorce is over. For instance, suppose the husband has been the sole breadwinner, the wife has just recently returned to work after several years of staying home with the children, and the parties own a house. The husband has the ability to maintain the mortgage payments and other costs associated with owning the house, but the wife does not – although she can afford a smaller house, if only she can make the down payment. The court might award the wife a larger share of a savings account of the parties, so that the wife would have the ability to put that money toward a down payment for her new house, and the court might also award the house to the husband, since he has the ability to maintain the payments for the time being. On paper that might not be an equal division (maybe there is no equity in the former marital house, for instance), but the court will still have the authority to make these awards as an “equitable” distribution.

No matter how your property is divided, you will want to spend some time planning for how you’re going to manage it all on your own. This is where the “Your Post-Divorce Compass” plan can really help you.

Division of Community Property

[Ed: Originally published on Facebook.]

This week we’re going to take a closer look at property division laws. There are basically two types of property division schemes – “community property” (“CP”) and “equitable distribution”. Knowing these rules is important because you need to be able to make reasonable assumptions about what the judge can or might do if your case goes to trial. You can almost always get around any set of rules via a negotiated settlement agreement, but for maximum leverage at the negotiating table, you should be familiar with the rules that will apply to your case. Your lawyer can walk you through the particulars.

CP is the rule in only a handful of states (although, that handful does include Texas and California) and is pretty simply stated – basically, property of a married person is either “separate” (typically, this means it was either owned prior to the marriage or else was a gift specifically to that person during the marriage, usually by inheritance) or “community”. CP is generally divided equally. While this “bright line” rule has the advantage of simplicity, it can lead to results that might appear unfair, and the courts in these jurisdictions generally have limited (if any) ability to “correct” such unfairness by awarding one party a larger share of the CP. Still, it can save the parties a lot of time and expense if they recognize early on that the result in their case is highly predictable.

No matter how your property is divided, you will want to spend some time planning for how you’re going to manage it all on your own. This is where the “Your Post-Divorce Compass” plan can really help you.