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Yours and Mine: Dividing the Community Pie

Aside from child custody and child support issues, dividing assets (and debts) in a divorce can be one of the most controversial elements of a case. What is considered marital[1] or separate property? What will become of your house, your savings account, or your 401(k) once the divorce is final?

If you haven’t been handling the finances, this part of your case may feel intimidating. You may be struggling to conceptualize how you’ll divide everything — after all, you can’t split a house down the middle! This article will walk you through the process that I use when guiding clients through dividing their estate. Once you’ve finished this short read, you’ll see that the process is simple and completely doable.

1. Determine Your Assets: Make a List

Like most big projects you’ll face in your life, this one starts with a list — in this case, it’s called an Inventory. Your attorney will have a form to fill out that should help you with this part of the process.

What goes on your Inventory list? All the stuff you own and all the money you owe. At the beginning, just focus on listing all of the assets and debts.[2] Here are some examples:

  • Your home
  • Real estate investment properties or vacation homes
  • Business interests
  • Bank accounts
  • Investment accounts
  • Retirement plans
  • Vehicles
  • Mortgages
  • Car loans
  • Credit card balances

Some clients choose to include everything they own in their inventory, including household goods like furniture, appliances, electronics, etc. This is fine, though these items are often a tiny part of the estate and can be time-consuming to list and value.

It’s ok to leave household goods out of your Inventory if you and your soon-to-be-ex-spouse are happy to let each person keep the items currently in their possession. The exception to this is when you own highly valuable pieces like art or collectibles; those should be included in your Inventory.

2. Fill in the Blanks — Value, Ownership, and Marital vs. Separate Property

Now that you’ve made a list, it’s time to fill in some details to create a more complete picture. Here’s the information you’ll need to include for each item on your list:

What Is It Worth?

Sometimes this is easy to figure out because you have an account statement showing a balance. Other items like homes, cars, businesses, or collectibles are more difficult to value. Below are some suggestions. Lean on your attorney when assessing value for the less common types of assets. Luckily, few estates are this complex — you can usually value each item without much outside assistance.

  • Homes can be valued using a Comparative Market Analysis[3] or statement from your local tax authority. In some cases you may choose to obtain a formal appraisal, but this is often unnecessary.
  • Kelly Blue Book[4] is a great (and free) source for valuing most vehicles. You’ll need to know the make, model, year, trim level, mileage, and overall condition to get the most accurate estimate of value.
  • If you and/or your soon-to-be-ex-spouse own a business or interest in a business, the best practice is to use a qualified business valuation specialist to establish its value.
  • For art or collectibles, obtaining a formal appraisal could be crucial.
  • If your estate includes a pension benefit, it is helpful to have a Summary Plan Description so you can assess the options for dividing this asset and determine how to value it on your Inventory.

Whose Name Is on It?

Once you know the items in your estate and what they’re worth, you need to know whose name is on each item. The formal word for this is “titling.” A given item will be titled either jointly or in an individual’s name.[5]

Why is this important? First, it will guide some of the decisions about who should be awarded which assets. Second, if you will be awarded an asset that isn’t in your individual name, you need to know so your attorney can draft the language of your divorce decree appropriately.

You can figure out how an asset (or liability) is titled most easily by looking at an account statement. In the case of a home or vehicle, look at the deed or title document, respectively.

Community or Separate Property?

Texas, along with a handful of other states, is a Community Property state. In general, that means any assets (or liabilities) acquired during the marriage are owned equally by the spouses and subject to division in a divorce settlement.

In some cases, you may have Separate Property, which can be property you acquired before your marriage or by inheritance. Consult your attorney about what, if any, items on your Inventory could be marked as Separate.[6]

By this point, you’ve listed each asset (or liability), assessed its value, understood whose name is on it, and clarified whether it’s Community Property or Separate Property. Now, we are ready to divide the pie.

3. Divide the Pie: Determining Equitable Distribution With a 50/50 Split

Let’s pause here to clarify that it isn’t necessary to divide each and every item down the middle. Think of your estate as a whole pie cut up in slices that represent each item on your Inventory. Some slices are large (your home, savings account, etc.) and some are smaller.

When you are done dividing, the total of all slices allocated to each of you should be equal. One party may have one very large pie slice, while the other has lots of little slices — but the total size of the slices allocated to each party will be roughly equal. Here’s how to start assigning the slices.

Are You Determined to Keep It?

Start by making two columns on your inventory list: one for you, and one for your soon-to-be-ex-spouse. If there are assets one party is determined to keep that can’t be divided, put those in the appropriate column. (This is typically done with the house, or items of sentimental value.) 

Is Your Name on It?

Next, put items titled individually into that person’s column. When you’re finished, each of you will have been allocated the items that have your own name on them. Next, you’ll divide items owned jointly.

Balance the Equation

Now is a good time to check the balance of your pie distribution. If one party has much more than another, start assigning joint assets to the party that has less pie.

At some point, you’ll find that you are closing in on a balanced division. This is when you’ll identify one of the joint assets that will be divided between you to achieve a 50/50 split — often a financial asset like a savings, investment, or retirement account.

Divorce Finances — Things to Keep in Mind

When dividing the pie, you’ll want to keep a few things in mind:

What Are the Mechanics of Division?

Employer retirement plans[7] are divided using a Qualified Domestic Relations Order (QDRO). This is a legal document separate from your divorce decree that you’ll pay to have your attorney or a QDRO specialist draft.

That means more time and more expenses. If you can avoid dividing an asset that requires a QDRO, you may save yourself some time and expense in getting your case closed out.

Is It Liquid, and Does That Matter?

Some assets are more liquid than others, meaning they can more easily be converted into spendable cash with little cost. The most liquid asset is cash in a bank account, and the least liquid would be things like real estate or a retirement plan (unless you’ve already reached age 59 ½).

If you are non-working or are the lower-earning party, you may want to ask for assets that are more liquid in case you need to use a portion of your settlement to support yourself. If you don’t need ready cash or you earn enough on your own, this may not be an issue for you.

Can I Afford to Maintain the Asset?

This is typically a key question when deciding who gets the house and sometimes a specific vehicle. If the asset has a loan associated with it, can you afford the payments? In the case of a home, can you afford the mortgage, taxes, HOA dues, and maintenance expenses? Do you need liquid assets more urgently? Consider this carefully when deciding if you want to keep a house or other asset with ongoing maintenance costs.

Do I Know How to Maintain the Asset?

This issue is less common, but worth mentioning. If you own investment accounts that include exotic investment vehicles, you may wish to have the more financially savvy party be awarded those assets.

Simply dividing an account down the middle could mean the less financially savvy party ends up with an asset they don’t understand —which could lead to adverse consequences. This can include unintended tax bills if they decide to sell the asset later, or unexpected losses provoking a sale under adverse conditions. Bottom line: if you don’t understand it and it can’t be easily explained to you, think hard before agreeing to take it in a settlement.

As you can see, dividing an estate may not be intuitive, but it isn’t difficult. Simply make a list, fill in the blanks, and then divide the pie according to the strategies above. If you find yourself struggling to get through this process or if your estate is complex, it may make sense to hire a financial professional to assist. Consider a CERTIFIED FINANCIAL PLANNER™ Professional (CFP®) or Certified Divorce Financial Analyst™ (CDFA®). Your attorney should be able to refer you to a trusted professional.

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The author, Sarah Cuddy, is a Financial Advisor at Robert W. Baird & Co. Incorporated. While Baird does not offer legal or tax advice, our Financial Advisors regularly work with clients’ attorneys and tax professionals to help ensure that all phases of wealth management are addressed.

[1] Marital Property and Community Property are interchangeable terms

[2] It is possible that you will be unaware of or lack information about some assets (or liabilities) in your estate. Don’t worry; your attorney will guide you through a process called Discovery where the parties exchange information. You’ll give information regarding the items you know about, and your soon-to-be-ex-spouse will do the same.

[3] Available from any qualified Real Estate Agent, or on websites like Zillow.com.

[5] In some cases, we see financial accounts that are held in trust or in custody by a parent for the benefit of a minor child. Typically these are Uniform Gifts to Minors (UGMA) accounts or Section 529 accounts. Technically these assets are the property of the minor child and should not be included in tabulating the marital estate subject to division.

[6] Separate Property claims are subject to a burden of proof — if you wish to claim Separate Property, your attorney will instruct you on the type of evidence you should be prepared to provide.

[7] Typically, these include 401(k) accounts and pension benefits.