Which Assets and Liabilities Will You Keep in the Divorce Settlement?
A necessary part of divorce in Pennsylvania is dividing marital property, both assets and debts. Property division is not as straightforward as it might sometimes seem, and the consequences of potential mistakes can be quite costly. What each spouse keeps and how it impacts their future financial health is dependent on
- Proper specification of what portion of each asset and debt is marital vs separate
- Your choice of divorce process and the extent to which the court gets involved
- Proper valuation of each type of asset
- The impact of taxes
- Whether the division will allow each spouse to meet both short-term cash flow requirements and long-term net worth goals
Separate vs Marital Property
Definitions. It is marital property, not your individual separate property, that is subject to division. Assets are marital property when they have been acquired during the marriage. In Pennsylvania, they also include the increase in value of any asset that was owned individually before marriage. For example, if the value of the home you alone bought and owned was worth $200,000 when you were married and the current value is $500,000, the marital portion is $300,000.
Examples of marital assets include your home, vacation properties, rental properties, furniture, jewelry, bank and brokerage accounts, retirement accounts and pensions, executive compensation, personal property, and autos. Marital debts are handled similarly to marital assets and they include mortgages, auto loans, personal loans, student loans and credit cards.
Exclusions. Typically excluded from marital property in Pennsylvania is what’s been specified as separate in a pre or post-nuptial agreement, gifts, inheritances, medical malpractice or accident settlements, and debt accrued in marital deception (e.g., affairs, gambling). Also excluded from marital property is the growth of an individual’s asset, e.g., an employee retirement plan, which occurs after the date of separation.
Commingling. Commingling refers to mixing funds from separate assets with marital funds. Commingling of property may make what was originally separate property entirely marital. For example, if you inherited $100,000 and then deposited it in a joint bank account, it’s no longer considered separate. In some cases it is still possible to distinguish what portion of a commingled asset remains separate based on “separate property tracing.” If that’s applicable to your case, you will need a divorce financial analyst to help you with this, as it is not straightforward, and most lawyers and courts will take the path of least resistance and rule that the commingled asset is entirely marital.
Passive vs Active Appreciation. In separating marital from separate property the court may consider whether the growth in the value of an asset that was separate at the time of marriage was passively or actively created by the spouse who originally held the separate property. Passive appreciation in an asset (e.g. economic circumstances contributing to a retirement fund’s growth) makes it more likely that it will be treated as marital. Active appreciation (e.g., resulting from active management of a business) will substantiate a claim that it remains separate property.
Transmutation of Assets. In some Pennsylvania counties a court may also reduce the amount of an asset’s separate value over the duration of the marriage (called transmutation of separate assets). Using our prior example, if the value of the home you’d owned before the marriage was worth $200,000 and the current value is $500,000 and you’ve been married for several years, the marital portion may be deemed to have increased to $350,000 as its separate value has converted to marital over time.
Hidden Assets. One may believe that their spouse has been secretly funneling money to a separate account. In such cases, you will need a forensic expert to trace these assets. Fraud is the one thing that can overturn a divorce settlement after the divorce decree has been entered.
How Pennsylvania Approaches Property Division
Pennsylvania is an equitable distribution state, not a community property state. This means the legal system doesn’t necessarily see an equitable distribution as a 50/50 split. Instead, the courts will divide property per factors including the age of the parties and their ability to add to their future retirement, monetary and nonmonetary contributions made by each party to the marriage, the circumstances of the divorce, duration of the marriage, alimony awarded, and any other factor the court considers necessary or appropriate. In other words, a 60/40 or even 80/20 split of property is acceptable in Pennsylvania.
The Role of Your Choice of a Divorce Process
How division of property is achieved can be dependent on how you go about your divorce.
Litigation. If you litigate and allow the court to decide, then the judge or hearing officer will divide your property based on their view of equitable distribution. Because there is a fair amount of subjectivity involved, you will have little control over how the hearing officer or judge will rule. Your attorney may be telling you it will turn out one way and the decision might just be entirely another.
Represented Negotiation. If you and your spouse both hire attorneys and have them negotiate on your behalf, you are still relinquishing control and you’re going to spend a lot of money on lawyer fees before you get to an agreement, money that could remain in your own pockets. In attorney negotiation, your lawyers will talk to you, to your spouse, then to each other, file petitions and motions to posture, talk to you and your spouse again, and on and on—all at an outrageous billable rate.
Mediation or Collaborative Divorce. If you want to control how your property is divided and keep more of your own money, you should instead consider mediation or, possibly, a collaborative process that is committed to resolving your divorce outside of the courts. Mediation involves working with a “neutral” who will facilitate your negotiations and help you find a settlement that will work best for the both of you. The goal using a collaborative process is much the same, but it involves two attorneys, a financial specialist, a divorce coach, and, if applicable, a child specialist. In mediation or collaborative, you make the decisions.
If you mediate with a Certified Divorce Financial Analyst (CDFA®), or have the support of one in collaboration, you get assurance you’ve properly identified and valued all your marital assets and guidance on the impact of various settlement options on both the short and long-term horizon, including capital gains and income taxes, liquidity, and asset growth rates. The relative benefit of mediation over collaboration is that is typically far less expensive than Collaborative Law.
The Cost of Mistakes
Mistakes in settlement agreements are too frequently made. You certainly don’t want to discover that you didn’t get or keep what you were entitled to. Keep in mind that property division, once you have your divorce decree, can’t be modified unless there is evidence of fraud on the part of either party.
You only get one chance to get it right and we’re here to help you get an optimal divorce settlement in Pennsylvania. Download our free 29-point divorce financial planning guide and then schedule a short call and we’ll explore your best path forward.
Take Control of Your Future
When you consider divorce, or if you know someone who is contemplating divorce, one of the biggest realities for those in the divorce process is the financial settlement and financial analysis post-divorce. Get the assistance of Berni Stevens, a Mediator and Certified Divorce Financial Analyst® (CDFA®.)
Berni provides step-by-step guidance on matters related to divorce. With a wide range of experience and expertise related to divorce issues, Berni will simplify the process and provide much-needed clarity in areas such as long-term tax consequences, asset, and debt analysis, dividing pension plans, continued health care coverage, stock option elections, protecting support with life insurance, and much more.