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.

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.

I’ve Had It! How Soon Can I File for Absolute Divorce in Maryland?

AvatarHeather Collier, Principal

This is one of the most common questions I get from clients. In order to decide how soon you can file for divorce, we have to determine if you are eligible to seek a divorce in Maryland and, if so, on what basis. The basis for the divorce is called the “ground” for divorce. The timing for filing a divorce in Maryland depends on the answers to both questions.

To be eligible to file for divorce in Maryland, one party must live there at the time of filing. If the basis for the divorce, or the “grounds” for divorce occurred outside Maryland, then one party has to have resided in Maryland for at least 6 months before filing for divorce. 

Before the court can enter a Judgment of Absolute Divorce dissolving a couple’s marriage, the residency requirement must be met, one of the parties has to have a viable ground for absolute divorce; and all issues arising out of the parties’ marriage have to be resolved either by agreement of the parties or court order.   

Absolute Divorce Grounds

Maryland recognizes “no-fault” and “fault” grounds for absolute divorce.  Because some grounds for divorce have a waiting period, the ground (or grounds) for divorce you allege may impact when you can file.

No-fault grounds for absolute divorce are:

  • 12-month separation – the parties must live separate and apart, without cohabitation for a period of 12 months prior to filing for divorce, and continuing without interruption through the date the divorce is granted. 

    Translation:  you cannot spend the night under the same roof or have sex with your spouse for 12 months before you file for divorce and it has to stay that way after you file through the divorce.  Spending the night together under the same roof or having sex before the divorce is granted re-starts the separation clock on your 12-month separation period and will delay your ability to file under this ground.
  • Mutual Consent – this ground does not require a period of separation.  If you and your spouse have not yet separated or separated only recently, this ground may be the fastest means of filing for and obtaining a divorce.  In order to file for divorce based on Mutual Consent, you must meet the following requirements:
    • Have a signed, written agreement resolving all issues, including, alimony, property division, and the care, custody and support of any minor child or children;
    • Court approval of any agreement as to custody and support of a minor child as being in that child or children’s best interests; and
    • Neither party has filed to set aside the settlement agreement prior to the divorce hearing.

Fault grounds for divorce, with applicable waiting periods, include:

  • Adultery
  • Desertion, if desertion has continued for 12 continuous months.
  • Conviction of a felony or misdemeanor where the party has been sentenced to serve at least 3 years and has served 12 months of the sentence
  • Insanity if the spouse has been institutionalized for at least 3 years and the insanity is incurable
  • Cruelty of treatment
  • Excessively vicious conduct

Filing starts the divorce process, but the length of time for obtaining the actual Judgment of Absolute Divorce will depend on whether you settle some or all of the issues during the divorce litigation, or if you have a contested trial at the end where a judge will decide the outcome.