In a divorce, should you just take what’s yours and walk away?
In a divorce, there’s no doubt that agreeing to take your own assets is a cleaner and simpler process than going through each asset or piece of property and deciding how it should be divided. It won’t take as long, and may be less fraught emotionally. In some cases, this will be the best way to move through the process.
A division like this is best if both parties are roughly at the same stage in their careers and their assets are approximately the same; for example, if both have about the same amount in their retirement accounts and they can split the taxable account between them.
This will not work if one spouse is strenuously arguing for it, but the other is concerned about whether they can support themselves, or suspects the spouse who wants to has more money hidden away somewhere. It may not be appropriate either if there are minor children in the family.
If one spouse runs a business, it may be complicated to figure it out how to divide it equally. That’s not a good reason for the other spouse to walk away from it, particularly if they participated in the business themselves. Business valuators can be hired to determine how much the business is worth.
In any scenario, if one spouse took care of the home and children during the marriage, they have contributed to the success of the household and should participate in the proceeds of that success.
Make sure you’re taking care of yourself
This question of whether to take your own assets and walk, as well as the whole process, should be considered as objectively as possible. There are a lot of emotions during a divorce, and the ability to wrap everything up more quickly may seem very attractive, especially if the process has already been taking some time. Those who are working through it relatively amicably may not want to muddy the waters or potentially cause issues if it’s been smooth so far. Your spouse may or may not be trying to pressure you, but even if they’re not, they’re taking care of themselves. You have to take care of yourself, financially and emotionally. If you don’t, who will?
Your spouse may be the one who handled financial matters while you were married, and if that is the case, it’s necessary to review all the assets and property for yourself and make sure that the split is actually equitable. Your spouse may be offering you a settlement that they claim is equitable, but you don’t know that it is until you do the analysis (or hire someone to do it for you.) They may genuinely believe that the settlement is fair, and be offering a settlement that they honestly think is equitable, but it might not be fair in reality.
There are some nuances to the finances that your spouse probably wouldn’t know if they’re not experts in personal finance themselves.
A major area to consider includes retirement. If your spouse has a pension and you don’t, my advice is to strongly consider not walking away from it. The two caveats here are that you were married for most of the time your spouse was at the company (until separation) and the payment amount is reasonable. If you were married for only a short time, your share of the pension will be prorated (though if the pension is large enough you might still consider taking your share), then it might not be worth it. The present value of a pension can be calculated by a financial professional. This process adds up the payments over a likely lifetime, and then takes the time value of money into account — money in the future is worth less than money now. Once the calculation is done, the value of the pension is often higher than people think, just looking at the projected monthly payment. Once you have that number, you can figure out whether it’s worth it, bearing mind that it could be an income stream in retirement you can’t outlive.
You also need to look at the tax effects of your financial accounts. If one spouse has a Roth retirement plan and the other has a Traditional, those accounts are not necessarily equivalent, even if the bottom line amounts look similar. Once you’ve reached the age of 59 ½, distributions from the Roth are tax-free and those from the Traditional are taxable at ordinary income. The Roth is more valuable than the Traditional due to the tax features when it comes time to withdraw money, so you need to make sure that the asset split is equitable on a tax-equivalent basis.
When dividing an investment account, capital gains taxes should be taken into account as well to ensure that one party is not left responsible for all the taxes.
Are you both at about the same stage in your careers? If you both have been working for the same amount of time, or are both at retirement, or you each have well-established businesses, walking away will be easier, at least as far as income goes. But what if you’re the spouse who stayed home with the children while the other one worked? You might have a good degree from a good school, but if it’s been five years or more that you were out of the workforce, you will likely need training or more school or some other kind of help to get back to a career. In this case, you’ll need more support from your spouse, and taking only your own assets will probably hurt you in the long run.
How will you handle the house? The easiest way to do so is to sell it, paying off the remaining mortgage if any, and split the after-tax proceeds for a clean break. If instead one of you stays in it, where does the equivalent asset for the other spouse come from? You may need a get a valuation on the house to make sure that the spouse who leaves will have enough to find another home elsewhere. Will the spouse who remains be able to handle mortgage (if any) and maintenance costs on their own? Similar considerations apply to rental property bought during the marriage.
Will you sell it, or does one of you want to keep it and the income it generates? If so, an equivalent amount of assets and income must be found to compensate the non-owning spouse. If there’s a mortgage on any of your property and both of you are on it, and one spouse will remain, how will the nonowning spouse be taken off the debt? The house itself can be deeded to one spouse, but the mortgage is separate from the deed. Usually one owner has to refinance into their own name to get the other one off.
In addition to a mortgage, any other debt needs to be taken into account as well. If your spouse has a credit card that they promise to pay off but don’t, and your name is on the card, the company can still come after you for the debt, even after the divorce. The easiest way to handle joint debt is to pay it off before the divorce is final. Your spouse might have the best intentions (or they might not), but the credit card or car loan company doesn’t care that they promised you they would pay it off.
If your name is on that debt, you are legally liable for it whether or not you’re still married.
Get it in writing
You can’t rely on promises to ensure the property division is equitable. As noted before, your job during the process is to protect yourself, not your spouse. If the settlement is only equitable because your spouse promises to send you money, or pay off the debt, or whatever, you are not protected. It doesn’t matter that right now things are amicable and you trust them, because circumstances change. I’ve had a number of clients who believed their spouse would do the right thing, and then were in financial trouble when they didn’t.
Your spouse could get upset at a decision you made or something you said and then that’s it, they’re not supporting you anymore. Likewise, your spouse could get married to someone who sees the money going out the door and puts a stop to it. These are not fictional situations, incidentally. They happen all the time. Either way, if all you have is a promise and you don’t have a court judgment that specifies support amount, you have no recourse. You could get lucky and have an ex-spouse who actually does provide in the manner they promised. But do you want to rely on luck?
As a financial planner, I saw what happened when couples didn’t consider the facts objectively, even during an amicable split with the best of intentions, and didn’t think about (or understand) the future effects of the asset division. A settlement that looks equitable now may not be in a few years, or farther into the future.
A pension is a good example of this. Unless the worker is currently retired, it’s a future asset, and the monthly payments (calculated using the company’s formula) may look small. But once it’s projected out over a lifetime, and the time value of money is included, the amount will likely appear substantially larger. And if the worker’s spouse has no retirement assets, ignoring the pension to walk away from the marriage could be a mistake bitterly regretted later.
That being said, once everything is taken into account, if each side is roughly equivalent, then taking your assets and walking away could very well be the right thing to do. Sometimes those getting a divorce feel that they are owed something for being married, especially over a long period of time. There may be nothing to “show for” the years of the marriage, unless you have children. But that’s OK; partnerships dissolve, and this frees up the pair to start over. If you are confident and have thought through all of the issues above to make sure that you’re not leaving anything on the table, then you’re in a good position to walk away with your assets and begin your new life.
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Originally published on www.divorcenest.com.