The Anatomy of a Divorce,
In reaching a divorce property settlement, the parties should
try to agree that each spouse will receive certain community assets, with each
receiving equivalent net value.
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The Anatomy of a Divorce, Part 1:
The Anatomy of a Divorce, Part 3:
The Anatomy of a Divorce, Part 4:
Child Custody and Access
The Anatomy of a Divorce, Part 5:
The Anatomy of a Divorce, Part 6:
The Anatomy of a Divorce, Part 7:
Awards of Attorney's Fees
More Articles on Divorce-Related
In Part 1 of this series (The
Divorce Plan), we identified five fundamental issues generally involved in
most divorce actions.
The first of these fundamental issues is asset
distribution, which this article discusses in some detail.
In preparing your divorce plan, you will identify your
assets and gather information and documentation pertaining to them. Your
inventory may include both separate assets and community assets.
Separate assets include:
assets owned by each party prior to marriage,
personal gifts, and
the growth value and/or income from those assets during
It is important to trace any change in such assets in
order for them to retain their nature as separate property. For example, if the
list of separate assets includes real property (such as a residence owned by one
party prior to marriage), a conveyance of title after marriage into both
parties’ names will generally raise a legal presumption that the property was
gifted into the marital community. However, that presumption does not
necessarily apply to personal property conveyances, such as placing a separate
bank account into the names of both parties as joint tenants.
Community property includes:
property that was acquired during marriage (including any
property or assets that were gifted to the spouses as a couple),
any increase in the value of separate property that was
achieved through the efforts of either spouse, and
basically any asset that is not clearly separate property.
In contrast to separate property, which generally remains
with its owner, community property will be distributed “equitably” (or more or
less equally, under typical circumstances). Where it makes sense to do so, the
parties should try to agree that each spouse will receive certain community
assets, preferably in such a way that the value of the assets that go to one
spouse will be comparable to the value of the assets that go to the other. This
leads to a cleaner transfer and eliminates the need to sell assets – often at a
huge discount – in order to generate cash that will be divided equally.
It is usually in both parties’ interest to negotiate the
division of community assets; if they fail to agree on the disposition of an
asset, the Court may order that it be sold and then equally divide the
discounted proceeds between the parties.
One critical consideration in attributing an asset to one
spouse or the other is the tax status of the asset. You do not want to accept
pre-tax or untaxed assets while your spouse receives assets of the same face
value for which taxes have already been paid. Related to this issue is whether
any such assets have been depreciated for tax purposes or have enjoyed an
appreciation in value since purchased or obtained.
The value of some major assets – such as securities,
jewelry, art or a business – can be a moving target (subject to market
fluctuations) or may need to be professionally appraised in order to achieve an
equitable distribution of community property. In those cases, disagreements
sometimes occur regarding the effective date of the valuation. Should it be the
date on which the Petition for Dissolution was served on the other party? The
date on which the appraisal was completed? Some other date (invariably, one that
favors one party over the other)? As a practical matter, unless the parties
agree to a value, or to a method of determining value, the real value may well
be the price realized after a court-ordered sale.
Further complications can arise regarding such issues as
evaluating ownership and operation of a closely-held business, determining
actual income from a cash-intensive sole proprietorship, and ascertaining each
party’s interest in the value of retirement accounts that extend beyond the
marriage time frame. Although a determination of these issues will be
fact-based, the overriding focus of the court will be, again, to achieve an
equitable, or as close to equal, distribution of marital assets as practicable.
Reducing the Pain and Expense of Divorce
Property settlement and the division of assets and debts
underscore the importance of becoming as knowledgeable concerning your financial
status (both assets and income) as reasonably possible. Once a comfort level is
achieved with your knowledge of community assets and income, a fair distribution
is much more likely.
In the absence of shared knowledge of the couple’s
finances, the resulting secrecy and hard feelings may lead to independent
examination of their financial and property records. The burgeoning use of
financial investigation, including forensic imaging of computer hard drives and
other investigative measures, in an effort to unearth hidden assets and further
learn of each party’s affairs and financial maneuverings, results in protracted
and more expensive proceedings en route to the issuance of the divorce decree.