Not All Dollars Are Equal: Which Assets Are Most Valuable in Divorce?

AvatarErik Arena, Principal

One thing is usually certain in the aftermath of a divorce: You’ll experience a reduction in net worth and in standard of living. This is unavoidable as one household becomes two.

But just because it will happen doesn’t mean you can’t take steps to lessen the blow. By choosing wisely and unemotionally when dividing the marital assets with your spouse, you can minimize the reduction in your net worth post-divorce.

Not all Dollars Should be Valued Equally in Divorce

Although all asset transfers between spouses (incident to divorce) are tax-free events, some of those assets may later be subject to sizeable income and/or capital gains taxes that must be paid entirely by the receiving spouse, significantly diminishing their net value. It is imperative that these consequences be known and understood by you and your attorney so that you don’t end up with less than your fair share of the net assets.

Which Assets and/or Dollars are Most Valuable?

Value means many different things to many different people. When dividing assets between spouses, it is important to keep in mind the classes of assets identified below, which vary in net present value. If you and your spouse are trading assets from different classes, adjustments may need to be made to ensure you are not losing fair value.

  1. Cash is king! It is both liquid and not subject to any further taxes. It doesn’t get any better than that!
  • Cash, funds in checking and savings accounts, and the money market portion of any investment accounts.
  • Home sale proceeds. If the family home is sold as part of the divorce, those proceeds are also liquid and not subject to further tax (as any capital gains due will be paid at the time of sale, after application of your combined spousal $500,000 capital gains exclusion).

2. Other assets not subject to any further tax. Generally speaking, the replacement cost for these items exceed their private re-sale value. Retaining those items as part of your divorce will mean less dollars spent by you post-divorce to get yourself situated.

  • Furniture and home furnishings.
  • Automobiles.

3. Assets subject to capital gain but not income taxes. These assets will fluctuate in value and will be subject to capital gain taxes if you need to sell them to generate cash. The order of priority in each case will vary depending upon the tax basis of each asset or holding:

  • Stock and/or mutual fund holdings in investment accounts. These may also throw off interest and/or dividends, which, in some cases, is taxable income to you.
  • The family home. Depending upon the home’s tax basis, you may face a hefty capital gains bill if you assume ownership and then sell it later. Further, at the time of that sale, you’ll only be able to use your own $250,000 capital gains exclusion, as opposed to the combined $500,000 exclusion for spouses.
  • Other real property not used as primary residence. Any capital gains problem is compounded with these properties because there is no applicable capital gains exclusion.
  • Stock options
  • Vested restricted stock
  • Some artwork

4. Assets subject to income tax at the time of exercise or withdrawal. These assets will also fluctuate in value. However, when it comes time to withdraw from them, you’ll be taxed on those withdrawals and/or distributions at your ordinary income tax rate in the year in which you take the distributions. Accordingly, the present value of retirement assets, when compared to cash assets, must be adjusted for both present value (as cash is available to you now, whereas retirement, if drawn early, is subject to an additional 10% penalty tax) and after-tax value.

  • Most employer sponsored retirement plans (note: IMF and World Bank pensions are not taxable)
  • IRAs
  • Certain pension plans
  • Retirement annuities

Each divorce is different and there can be legitimate reasons why assets are divided a certain way. The information above is intended to inform and educate you, so you can use that knowledge to move forward in a strategic fashion.

Survival 101: Co-parenting and Remote Learning

AvatarHeather Collier, Principal

Out with new backpacks and lunch boxes, and in with Chromebooks and iPads: Fall is here but this year, back to school does not mean back to normal.

As the COVID-19 pandemic continues, many public and private schools have chosen a remote learning environment for students. For children with divorced parents, the struggle of living between two houses is more real than ever.

Whether you are new to sharing custody or have a have long-standing difficult co-parenting relationship, the challenges of remote learning present an excellent opportunity to find common ground and set your kids up for success this school year. Consider these topics and questions with your co-parent to avoid problems and miscommunications, and to develop agreed upon rules and practices in both households.

Sharing Information

  • Confirm that you and your co-parent are identified on enrollment forms, with correct and current email and cellular telephone numbers, to ensure you both receive all school provided information via any school listservs, email, text messages, or direct correspondence from your child’s teachers.
  • Create shared digital storage (Google share drive, Dropbox, etc.) for critical log-in details, class and assignment schedules, and other notes or documents related to your child’s schooling to provide you and your co-parent with immediate and easy access to all the same information. Doing so will better enable each of you to problem solve quickly if an issue arises during the remote school day or after hours. When in doubt, if you receive information from the school that impacts your child’s remote education, forward it to your co-parent and save it to the shared storage space.
  • Freely share information with your co-parent about what is working in your house and what is not – e.g., does a break at the end of the school session before homework begins work best?

Schedule

Pre-pandemic, going to school provided structure, stability, and consistency during the day for many children, particularly kids who live in two places during the week. To recreate that structure and develop a consistent routine, despite remote learning, work with your co-parent to establish a “school-day” schedule that applies in both houses.

Details might include the start and end to the day, defined periods for studying and homework, and breaks. Consider how the school-day schedule compliments the other schedules in your house, including your work-from-home schedule if one applies.

The same school day schedule in both houses will provide your kids with the routine they crave and take any guess work out of their day.

Devices

Is your child taking one device back and forth or do they have a device in both houses? The easiest solution for your child is likely having a device in each house and the same device/set-up in each house. Less to transport between houses, the same remote learning set-up in both houses, and no set-up time, means getting down to learning quickly with less stress.

If this is not an option for you and your co-parent, discuss what the set-up is in your respective houses and understand if anything has to travel back and forth. If equipment has to travel, confirm that your child has it with them before they go to the other parent’s house.

Tutors

Some parents are hiring tutors for a combination of in-person and/or remote tutoring to provide one-on-one help for their kids in the remote learning environment. If you and your co-parent believe your child will benefit from tutoring, talk with each other about whether the tutoring will be in-person, remote, or both, and how often it will take place and where.

Screen Time

Unplugging is more important than ever. If the whole school day is online, what are the rules going to be for non-school screen time? Will you and your co-parent have an agreed upon rule about your child’s access to their cell phone during the school day? Discuss whether you can agree upon certain parental control settings on your child’s devices to dictate what they have access to and when, regardless of location. Share parental control log-in details for each device.

There is a lot to consider now that your home is doubling as a school. With a few brief conversations with your co-parent, you can make a huge difference in your child’s experience this school year — regardless of whether their classroom is in their room or your living room. Bonus — it will make your new dual role as parent and teacher less stressful too!

Are You a Millennial Thinking about Marriage? Here’s What You Should Know about Divorce

Liz EstephanLiz Estephan, Attorney

Millennials are causing a 24% rate in decline in the divorce rate, according to Business Insider.

There are a few reasons for this statistic like waiting longer to get married, establishing careers, and paying off student loan debt. But if you are a millennial and have decided to get married or are thinking about marriage, here’s what you should know about divorce.

Accounts and Assets

If you and your soon-to-be spouse decide not to have any joint accounts, this does not mean that you do not have an interest in his or her account.

Once you are married, at least in the District of Columbia and Maryland, typically any income to either you or your soon-to-be-spouse is considered marital property. You and your spouse should have frank conversations about your financials and disclose any and all accounts to each other.

Upon divorce, marital assets and accounts are equitably divided.  If you do not know your spouse’s accounts and assets and your spouse is not forthright when you are navigating a divorce, you may have to spend more money in discovery to determine all of your spouse’s accounts and assets.

Real Property

Are you and your soon-to-be spouse thinking about buying property in Maryland or the District of Columbia? Perhaps you had better wait until you are married.

When you are married and buy property in either of these two jurisdictions, there is a presumption that you and your soon-to-be spouse will be tenants by the entirety rather than joint tenants or tenants in common. Tenants by the entirety means that each spouse has an undivided interest in the real property and there is a right of survivorship (if one of you were to pass, the survivor would assume ownership of your home). Maryland has a presumption that real property owned by a married couple is held as tenants by entirety.

If you purchase property before you are married, you could either be tenants in common or joint tenants.

Tenants in common means that you and your soon-to-be spouse have an undivided interest in the property, you are joint owner, but you each own a specific share of the property, your shares do not necessarily have to be equal. Tenants in common do not have a right of survivorship. This could become an issue if your soon-to-be spouse has children from a previous relationship or marriage as the children could inherit your soon-to-be spouse’s interest in the property, not you.

Joint tenants means that you and your soon-to-be spouse have an undivided interest in the real property with rights of survivorship. You and your spouse must intend to create a joint tenancy and the deed should reflect a joint tenancy. Maryland has a presumption against joint tenancy.

Non-marital Property

Do you have a trust, inheritance or real property that you received prior to marriage? This type of property is typically considered non-marital property. For example, if you thinking about using an inheritance to put towards a down payment on a home with your soon-to-be spouse, do not lose track of any of the documentation showing where the money originated.

If you divorce, you want to prove to your spouse and potentially a court, that you have a greater interest in the property because of your non-marital contribution. If you have significant premarital assets, you should consider a prenuptial agreement.

Getting Divorced? Get off Social Media!

Erin KopelmanErin Kopelman, Principal

“Privacy is dead, and social media holds the smoking gun.” – Pete Cashmore, CEO of Mashable

Eighty-one percent of lawyers find social media networking evidence worth presenting in court, and 66% of divorce cases use Facebook as a principal source of evidence, according to a recent law review article. These are striking numbers worth paying attention to if you’re considering divorce.

A Real World Issue

Your social media posts can and will be used against you.

Just imagine you are on a dating website before you separated from your spouse. Or, in a moment of anger or frustration you post about your divorce and/or your spouse. How might this affect what a judge decides about the custody of your children or your finances?

Now imagine that you claim because of a back injury you cannot work and need alimony, but there are pictures up on the internet of you dancing on a bar, horseback riding, or doing a cartwheel. What might that do to your alimony claim?

Obtaining Social Media Evidence is Easier Than You Think

A person can usually download the profile and postings of others with whom they are “friends” on the site. If your spouse has “un-friended” you, you can ask someone else to secure your spouse’s social media.

Some people going through divorce “un-friend” their spouse and their spouse’s friends and family on their social media, feeling a false sense of security that their spouse is not going to see their profile and posts. Not only does this hurt their relationship with these people, but if someone sees something on your profile that they find interesting, you’d be surprised how quickly it makes its way back to your spouse.

Be aware you can also ask for enforceable discovery requests for the other side to download and produce their social media account profiles and postings. And, your spouse can also subpoena your social media profiles, accounts and postings directly from the provider. 

If you’re posting on social media, you must assume that whatever you post will be seen by your spouse, and if you don’t settle, a judge. If you are considering a divorce, immediately consult a lawyer and stop posting social media. There are rules about the destruction of evidence, which may include social media. When meeting with a lawyer provide them full disclosure about what there is online about you. 

And, going forward, the best way to protect yourself is to not post.