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.

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.

My soon-to-be Ex and I are Friendly: Do I Really Need a Divorce Lawyer?

AvatarCasey Florance, Principal

With the proliferation of online resources, and the ongoing pandemic, it is both more tempting and more possible than ever to craft your own Settlement Agreement from the comfort of your living room.

Online “forms” abound, and services like Legal Zoom can help you feel like the “do-it-yourself” (DIY) agreement is tailored to your particular situation. As a result, divorce lawyers frequently get asked: Do I really need a lawyer?

Although it is hard to advise people how to avoid needing my services, I typically tell potential clients that the answer really depends on the circumstances of their case and level of complexity of their custody and/or financial situation, as well as the dynamic between them and their soon-to-be Ex. There are a lot of resources and dispute resolution processes available to the self-represented person (read: divorcing person who does not have an attorney), but there are also many pitfalls.

Regardless of the chosen path and circumstances of the case, however, one thing I always tell anyone who will listen is this: you absolutely must meet with an attorney to review any Settlement Agreement BEFORE you sign it. Here’s why.

  1. It is important to be certain that the language of your Agreement actually sets forth the terms you have agreed upon.

    Just because you and your spouse/co-parent are comfortable negotiating directly and coming to agreed-upon resolutions for the issues arising out of your relationship, does not mean you are comfortable translating those agreed-upon concepts into written agreement terms.

    If your goal is to avoid Court and costly litigation while making your own decisions about your family, then your DIY Settlement Agreement will not serve its intended purpose if you have to spend money later litigating over what your agreement was supposed to say, or worse, seeking the Court’s interpretation of your agreement because you two have a dispute about what your agreement means. It is also important for you to understand your agreement so you know what you need to do once it is signed in order to comply with it moving forward.

  2. You don’t know what you don’t know.

    Many online tools for drafting DIY Settlement Agreements contain a series of options you self-select based on the categories listed. But more often than not, there are details about your custodial situation — or your finances, assets or debts — that are not represented in these pre-drafted menus. Or the options do not adequately capture your specific situation.

    The danger here is that once you sign an Agreement, you may have waived rights you didn’t even realize you had. Furthermore, by neglecting to include entire topic areas in your Agreement, you may have accidentally waived your ability to later address those topics.

  3. There is very likely “boiler plate” language embedded in the form agreement that makes certain provisions unable to be modified for any reason.

    In Maryland, there are often sections of a Settlement Agreement that are unable to be modified by a Court once the agreement is signed by both parties. For example, it is typical for agreements to state that the division of assets cannot be modified by the Court at any point in the future.

    It is also not unusual for time-bound alimony payments to be non-modifiable. As a result, it is extremely important to understand which provisions of your Settlement Agreement are able to be modified in the future, and which ones are not. Failure to understand your agreement – when you had the opportunity to review and understand it before signing it – is an unlikely basis for undoing your Agreement later if you are unhappy with it. And signing an Agreement which says that certain provisions are not able to be changed by the Court may leave you with little recourse.

  4. Ensure that the Agreement meets your goals.

    If you have attended mediation with a third-party neutral and the mediator drafted your Agreement, it remains important to have it reviewed by your own attorney before you sign it. You will want to ensure that the agreement meets your individual goals. Just as important, you want to make sure you actually understand each and every provision of your agreement. Many people don’t realize that a mediator does not represent either party’s interests and cannot provide legal advice; rather the mediator’s goal is to facilitate a resolution.

I recommend anyone going through a divorce to have an attorney guiding them through the process, explaining rights and obligations, strategizing to reach goals, and advocating for their interests. For many people, this option is not feasible for a variety of reasons. When that’s the case, it is nevertheless imperative to meet with an attorney to review your draft Settlement Agreement before you sign it.

Welcome to Your Source for Divorce Law

The Divorce/Family Law Group at Lerch, Early & Brewer is proud to present our new Divorce Law Source blog.

In an age where Google searches and web browsing are the go-to for most people to find information about everything, we are thrilled to provide an easily accessible one-stop shop for all things family law and divorce.

Featuring content authored by each of our accomplished and skilled family law attorneys, we encourage you to use this forum to find the answers to commonly asked legal and practical questions our clients confront pre- and post-divorce, review explanations and analyses of pertinent legal concepts and principles, and receive updates on new practices, rules, laws, and the family court system in Maryland and D.C. We will be featuring new posts and content each week. We look forward to welcoming many regular followers and invite you to recommend desired topics for future posts. Please subscribe to the blog on the right-hand side of this page.

Lerch Early’s family law attorneys represent clients in every facet of family law including divorce, custody, child support, alimony, property division, modifications of custody, child support, and alimony, prenuptial and postnuptial agreements, litigation, divorce and custody settlement agreements and alternative dispute resolution, guardianship, and adoption. For more information, please check out our website.

We hope to see you soon on our blog!

In Health,

Heather Collier and Erik Arena
Co-chairs, Divorce/Family Law Group