Dividing the Assets in an Amicable Divorce
Frequently Asked Questions About Marital Property
- What is Marital Property in a Divorce?
- Are Some Assets Both Marital Assets and Non-Marital Assets?
- How Are Marital Assets Divided in a Divorce?
- What Are the Considerations in Dividing Property in a Divorce?
- What Do We Need to Do to Divide the Assets Between a Divorcing Couple?
- What Property is Not Included in Dividing Assets in a Divorce?
- How Are Stock Options, Restricted Stock and Other Employment Perquisites Divided in a Divorce?
- What is a Stock Option For Consideration in a Divorce?
- What Does It Mean in a Divorce When a Stock Option is Unvested?
- What Happens With Stock Options in a Divorce?
- How Are Stock Options Divided in a Divorce?
- Are Stock Options Considered Income For Child Support Payments?
- Considerations When a Divorcing Spouse Owns a Business
- How Do We Divide the Business Between Divorcing Spouses?
- When You Need a Business Valuator in a Divorce
- How is the Business Valued in a Divorce??
- What Happens When a Business Owner Gets Divorced?
- What is the Business Worth in the Divorce?
- What is the Business Valuation in a Divorce?
- What Does the Business Valuator Do in a Divorce?
- Which Retirement Benefits Get Divided in a Divorce?
- Are All of the Retirement Benefits Divided in the Divorce?
- How are Retirement Benefits Transferred in a Divorce?
- How are Retirement Benefits Shared in a Divorce?
- Retirement Benefit Waivers at Divorce and Death
- Who is the Beneficiary on the Retirement Asset?
- Who Gets the Personal Property in a Divorce?
- How Do Divorcing Couples Divide Personal Property and Furniture in a Divorce?
- The Importance of the Family Home in a Divorce
- How Much is the House Worth in a Divorce?
- Do Buyers Know That the Sellers are Getting a Divorce?
- Who Should List the House For Sale in a Divorce?
- Can You Afford to Keep the House After the Divorce?
- What Real Estate Agent Should You Use to Buy a House?
The divorce process results in the division of many things acquired during the marriage up until the date of separation known as marital property (personal property, other assets, and debt). This is called “Equitable Distribution” and is the distribution of the marital assets and debt. Marital assets may be obtained in many ways. The most common way is that an asset is purchased the property during the marriage. Marital assets (and debt) may be titled individually or jointly. The items must be identified and valued. That includes deciding what date is appropriate for valuing the property. The values can be agreed upon, appraisers can be brought in, or an account statement can be used when available. ^TOP
There are marital portions of non-marital assets. For instance, a gift to one spouse from another family member is non-marital. However, the increase in value of that gift during the marriage, if any, is marital and would be considered in the division of assets. ^TOP
When dividing the marital property in Pennsylvania between the spouses, there is no presumption that the assets will be divided equally. The purpose of equitable distribution is to ensure that the division of the marital property is economically fair based upon the facts and circumstances of the matter. In other words, the assets are divided between the divorcing couple equitably. ^TOP
When determining the division of the assets, the Pennsylvania Divorce Code sets forth the following factors to be considered:
The length of the marriage.
Any prior marriages of either party.
The age, health, station, amount and sources of income, vocation skills. employability, estate, liabilities and needs of each of the parties.
The contributions by one party to the education, training, or increased earning power of the other party.
The opportunity of each party for future acquisitions of capital assets and income.
The sources of income of both parties, including, but not limited to, medical, retirement, insurance or other benefits.
The contribution or dissipation of each party in the acquisition, preservation, depreciation or appreciation of the marital property, including the contribution of a party as a homemaker.
The value of the property set apart to each party.
The standard of living of the parties established during the marriage.
The economic circumstances of each party at the time the division of property is to become effective. This includes the tax ramifications associated with each asset and the expense of the transfer of the asset.
Whether the party will be serving as the custodian of any dependant children.
In simpler terms, the details of the marriage, the people within the marriage, and the effects of distributing an asset will be considered when determining who will receive an asset. Also, the same percentage for the division of one asset is not necessarily applied to all of the assets, depending upon the factors.^TOP
The divorcing couple, with the assistance of their attorneys, and perhaps an accountant, need to identify and value all marital property. After the valuation of the assets and consideration of all of the factors that apply to the matter, the divorcing couple, either by agreement or by action of the court, decide who receives ownership of the asset. The Courts in Chester County, Delaware County, Montgomery County, and Philadelphia County Pennsylvania all have slightly different policies on the treatment and valuation of assets. The parties may want to address or ignore some of the factors in their negotiation process as they feel the equities of the circumstances dictates. Once ownership is established, the transfer of the marital assets takes place, and the other spouse gives up (waives) any right they had in that property.^TOP
Some property owned by spouses may not be included in the assets divided in the divorce. The Pennsylvania Divorce Code identifies those types of assets which are not marital or are not, for other reasons, to be divided:
+ Property that either party had before the marriage (pre-marital property) or property exchanged for premarital property.
+ Property that the parties excluded from marital property by a valid agreement before, during, or after the marriage. (typically a pre-nuptial or post nuptial agreement)
+ Gifts or inheritances received by either party or property exchanged for gifts or inheritances. (However, gifts between spouses are marital assets).
+ Property obtained by either spouse after the final separation of the couple. (Unless it was property exchanged for marital property.)
+ Property that was sold, given away, or used up before the couple separated. (Unless one of the spouses sold, gave away, or used it up in order to purposely keep the other spouse from getting a share of it through the divorce).
+ Some (but not all) Veteran Benefits.
+ The mortgage of property, before the final separation of the couple, by one or both of the parties (Unless it was mortgaged in order to purposely keep the other spouse from getting a share of the mortgaged property.)
+ Any award or settlement received by one of the spouses for any cause of action or claim (typically a personal injury or contract claim) which occurred either before the marriage or after final separation, no matter when the money was received.
It is important to note, however, that even if property is not considered to be marital, any growth in the value of the property during the marriage is likely to be considered marital property. For example, Wife receives an inheritance during the marriage worth $10,000.00 and invests it in her own name. On the date that the parties separate, the investment is worth $15,000.00. The original $10,000.00 is not marital and Wife should keep it. However, the $5,000.00 in growth will be considered a marital asset which may be divided between the spouses.^TOP
How Are Stock Options, Restricted Stock and Other Employment Perquisites Divided in a Divorce?
Sometimes in a divorce case, one of the parties works for a company that provides not only a salary, but also, numerous other forms of compensation that don’t readily appear on a pay stub or W-2. One of those benefits is a stock option. If one of the parties in the divorce has received stock options, then those options need to be addressed in both the distribution of property and possibly in the determination of support in order for it to be fair and equitable to both parties. ^TOP
A stock option is a right to purchase stock of a particular employer company at a set dollar amount which remains valid for some period of time, commonly a number of years. The stock option grant is also an incentive the employer provides to the employee in order to keep that employee with the company for a number of years. It is the hope of both the employer and the employee that the grant price or award price will be the lowest price the stock is at going forward and that when the employee goes to exercise or redeem the stock options, the price is much higher, thereby the employee receives a significant value, either in the form of greatly appreciated stock or if the stock is acquired and immediately sold, a significant financial amount. ^TOP
Often times, the option vests over a period of time, which therefore keeps the employee with that company. An example of how this works is as follows: Company provides employee, John, with an award of 5,000 stock options with a strike price at $50 per share. Presently, Company, at the time of the award, is trading at $48 per share. The option also has a vesting schedule of five years at 20% per year on the anniversary of the award. Therefore, at the first anniversary, only 1,000 of the total 5,000 becomes vested and can be acted upon by John. If at the end of the first year, the price of Company is only $50 per share, then the options would have no intrinsic value as the strike price is the same as the trading price. However, if the stock was worth $60 per share in a year, then there would be $10 of intrinsic value and John, the employee, could opt to sell the 1,000 shares at that time or could hold off and sell the shares anytime in the future, until they expire. Options also usually have an expiration date a number of years after the full vesting occurs. Therefore, John may decide that it would be a wise investment to hold onto his options until the stock increased in value and it does not cost him anything.^TOP
What Happens With Stock Options in a Divorce?
In a divorce situation, stock options that have been awarded are usually marital property as long as the award is for services of the employee and not geared towards some kind of future incentive. Most option awards are granted at times of bonuses or year-end reconciliations of companies and therefore, are usually determined to be marital property. ^TOP
If the parties obtained a divorce sometime in the middle of the years of vesting, one party may not want to take the risk or the gamble and to cash in the shares while the other party may wish to hold off hoping that the stock will continue to increase. Often, the way stock options are divided in divorce cases, is that the non-employee spouse is entitled to the appropriate percentage of the options and is given the ability to have their portion redeemed and sold, based upon their preference, not being locked into the preference of the employee spouse. This method of distribution is basically a deferred distribution or a wait and see method, rather than valuing the options presently and using other assets to offset the value.^TOP
Are Stock Options Considered Income For Child Support Payments?
Stock options can also be part of the income for the employee/spouse for purposes of calculation of income available for support. For example, just because the employee has options and decides not to exercise the options, does not necessarily mean that they are not income available for support. If the option could have been sold and value received, then income should be considered for the employee spouse. ^TOP
In a case where one of the spouses owns his or her own company, that business can be a significant asset with regard to the overall marital estate, often being the largest asset. It also can be the most complicated asset in which to value. However, even if both spouses work in the company, subsequent to a divorce, it is almost always best to extricate one of the spouses from the business. Therefore, it is imperative that the business be valued by a credible expert or experts. ^TOP
Often times there are other assets in the estate in which the spouse who will not be retaining the business can be compensated for the value of the business. Otherwise, there will have to be a payout structured over time, often involving interest and security for the asset. The negotiation and implementation of security provisions can often be complicated but are critical particularly in the current economy. Although some spouses wish to retain an interest in the company, that is generally disfavored. The spouse who is “in control” of the business can make sure that there are no profits to be distributed to the spouse who retains an ownership interest but is not actively involved. Further, it continues contact and communication between the spouses that is generally not healthy or productive.
Therefore, in order to proceed with a distribution of the business, a valuation expert needs to be retained. The first question that needs to be asked is whether or not the parties should jointly obtain a business appraiser or each party should obtain their own. Often, this depends on the level of cooperation between the parties and the attorneys, the extent of the knowledge of both spouses, the concern with regard to whether there is cash in the business or inappropriate write-offs or allegations relating to misuse of funds.
There are a number of different methods that the experts use to value the businesses. Most experts use some combination of all these methods. This includes and income approach, a book value approach, a capitalization approach and a market valuation. For each business, a different approach is more or less relevant. Business valuations are, certainly, more art than science and experts may vary in their approaches and ultimate valuation.
Often times in a divorce situation, one or both spouses own a business or an interest in a privately-held business. This business is often the primary source of income for the couple as well as the most significant marital asset when it comes time for equitable distribution. Given the impact that the business can have on equitable distribution, as well as alimony and child support, it only makes sense to hire a professional experienced in business valuations, determination of income available for alimony/child support, and examining the tax consequences of structured settlements.^TOP
There are many obstacles that can get in the way of a smooth business transaction, perhaps the biggest being the differing views on what the business is actually worth. The same obstacle tends to arise in divorce situations, when husband and wife have differing views on what the business is worth, and this can often turn the negotiations into a stalemate.^TOP
It is often said that business valuation is a combination of science and art. The science part deals with the ability to analyze historical financial statements or tax returns for the business and compare the company’s financial performance to industry levels. The business appraiser must also be able to take the historical data, or perhaps financial projections for a company, and convert that data into a value for the business. The art of business valuations is where the years of experience come into play and justifies the hiring of a qualified business appraiser. This experience allows the appraiser to analyze the historical performance and ask the critical questions which will help them understand what factors are driving increases/decreases in revenue, improvements/deterioration in profit margins, and how these factors might influence the future prospects of a business. The seasoned business appraiser is also able to gauge the market’s perception of similar companies operating in the same industry and impacted by the same market forces, and convert these perceptions into value.^TOP
This combination of science and art allows the qualified business appraiser to avoid the stalemate that often arises in divorce proceedings. The qualified business appraiser can look beyond the fact that the better part of a lifetime, and sometimes several generations, may have been devoted to growing the business to its current status, and instead focus on the true “fair market value” of the business. The qualified business appraiser can determine reasonable compensation and “perks” for the business owner based on market salaries for similar positions, not just because it is what the business owner feels they deserve. The qualified business appraiser can examine the totality of the facts and arrive at a reasonable value that is fair to both parties and far less time consuming and expensive than a protracted battle via the court system.^TOP
During the divorce process, retirement benefits are often part of the marital estate and thereby subject to division between the parties at equitable distribution. Said retirement accounts may include a savings plan, profit sharing plan, 401(k) plan, Individual Retirement Account (IRA), SEP IRA, Roth IRA, Rollover IRA, and defined benefit plans, such as pensions and PSERS.
Are All of the Retirement Benefits Divided in the Divorce?
If the retirement plans are opened and participated in during the marriage, then their full value would be subject to division as part of the marital estate, less any contributions made to said plans post-separation. However, if said retirement plans existed prior to the marriage, then the marital portion thereof would be limited to the lesser increase in value of the retirement account from the date of marriage to either the date of separation or the date of distribution. Retirement plans that are started post-separation with post-separation income are non-marital, and thus, not subject to distribution at all.^TOP
Under Pennsylvania law, spouses have a claim on the retirement or pension of a spouse. This means that pension funds and retirement savings may be divided, just as other marital assets are divided during divorce. Depending upon the type of retirement plan, dividing such assets may be as easy as rolling the funds over from one account to another or transferring an account to the other party’s name, or as complicated as requiring special documentation, such as a Qualified Domestic Relations Order (QDRO), so that taxes and penalties are avoided. The Internal Revenue Code and ERISA regulate how retirement and pension funds are exempted from taxation and distributed. There are tax implications in divorce and distribution of pension assets to consider. IRAs are very flexible retirement vehicles, created privately or from rollovers of corporate plans. You can transfer IRA assets into an ex-spouse’s name easily, without a lot of paperwork, but you must roll it into another qualified tax-deferred account or you will face tax penalties. Corporate pension or 401(k) plans, whether they are defined benefit plans or defined contribution plans, usually fall under ERISA or IRS regulations and require extra work to transfer them properly.^TOP
At divorce, retirement benefits are often part of the marital estate. At times, the retirement benefits are shared between the divorcing spouses and divided by Qualified Domestic Relations Order (QDRO) so that there are not taxes or penalties incurred. Other times, one spouse may retain the retirement benefits earned during the marriage and the other spouse will keep other assets such as the house or an investment account. As part of the agreement between the divorcing couple, interests in retirement plans owned or distributed are waived. That is to say, that after the divorce, neither spouse will have any interest in the other’s retirement plans other than provided in the marital settlement agreement.^TOP
After the divorce, it is important for participants in retirement plans to check the beneficiary designations on their retirement plan assets to determine that such designations continue to meet their needs and intentions. Even though there is a waiver of the benefits in the divorce, at death, the beneficiary designation will control. Therefore, at death, the person named as beneficiary of the retirement plan benefits will receive the benefits even if that person is a former spouse who waived any rights to such benefits. In other words, the administrator of the pension plan must pay the benefits to the person named in writing by the plan participant. This is the 2009 holding of the United States Supreme Court in Kennedy versus DuPont Savings and Investment Plan.^TOP
After a divorce is finalized, neither spouse will have any interest in the other’s retirement plans, other than that which is provided in the marital settlement agreement. However, it is important for participants in retirement plans to check the beneficiary designations on their retirement plan assets to determine that such designations continue to meet their needs and intentions, post-divorce. Even if there is a waiver of the benefits in the divorce, if the prior beneficiary designation of the plan is not changed, it will continue to control. Therefore, in the event of death, the person named as beneficiary of the retirement plan benefits will receive the benefits even if that person is a former spouse who waived any rights to such benefits in a prior marital settlement agreement. Thus, you must be sure to change your beneficiary designation on your retirement plan as soon as the divorce is finalized.
Participants in retirement plans, pension plans, 401 (k) plans, etc. should check the beneficiary designations submitted to the retirement plan administrator on a regular basis to make sure that the person named is the intended recipient of the retirement benefits on death. ^TOP
Personal property division is often the most emotional aspect of asset division even though personal property is of least monetary value. It often represents the first tangible sign that a separation and divorce is happening. Many attorneys recommend that personal property division be left to the end of the matter and is generally treated as a literal “housekeeping matter”.^TOP
There are many methods for dividing personal property, all of which start with the parties creating a comprehensive inventory of the marital property. Non-marital property such as inherited pieces are generally not marital, though in some instances, if the item has been used by the couple for many years, it may have been “contributed” to the marriage. Items brought into the marriage by either party is also typically non-marital. So, how do couples resolve the division?
· Appraisal. Hire an auctioneer who will value the assets at auction value, not retail or replacement value. Then divide the money value appropriately.
· Private auction. Flip a coin and the first person gets their first choice of the items. The other person gets then next two choices and then alternate until divided.
· Mediation. The parties make a list of the important items to them and then discuss their division in mediation. Many attorneys feel that this is the appropriate forum for resolution because it can take time to work through the emotional aspects and it is more economical for people to resolve in this manner.
· Four way meeting. Personal property division can be addressed in the four-way meeting format like division of other assets and may be appropriate when there are items of significant value (i.e., paintings, antiques)^TOP
Divorcing couples face the problem of having to make important decisions at a time when communication is difficult. The home represents the family’s emotional center and often its greatest financial asset. ^TOP
There is no correct value for the home. An appraiser will value it based on different criteria than a real estate agent. In an “up” market, agents can support higher values by “grossing up” the price based on historical appreciation rates, while appraises are required to use the most recent sales only. It is challenging in a “down” market to determine the value because there are no recent comparable sales. It sometimes makes sense to use more than one approach and split the difference.^TOP
Do Buyers Know That the Sellers are Getting a Divorce?
Houses out on the market in a divorce situation are fair game for agents looking for a bargain for their clients. Do not empty out the husband’s closet or let routine maintenance go—these are tell-tale signs that there is a divorce pending.^TOP
Both parties need to agree on the listing agent if the house is being sold. If you interview agents, be sure not to give them any information that may come back to haunt you, such as how much you need to get for the house or the divorce status—there is no confidentiality requirement unless and until you sign a listing agreement with one of them.^TOP
Can You Afford to Keep the House After the Divorce?
Many women make unsound financial decisions when they decide to remain in the family home after the divorce. Many parents decide that they need to keep the marital home “for the kids”. Sometimes it is helpful to discuss these issues with a psychologist. Many times reassurance can be had that the emotional ties a parents believes children have to a house are not as significant at the parent believes. Less expensive alternatives do exist and the kids who participate in finding them may be better off with a parent who is not financially strapped.^TOP
What Real Estate Agent Should You Use to Buy a House?
If you decide to buy, use a buyer’s agent. They are legally required to represent your interests and many have been through divorces themselves and can be a great help. They will help you evaluate the home’s maintenance and repairs issues, find the right mortgage, and get you through the paperwork with as little stress as possible.^TOP