Divorce Property Division in Maryland

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Which Assets and Liabilities Will You Keep in the Divorce Settlement?

A necessary part of divorce in Maryland 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 Maryland, 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 Maryland 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 jurisdictions, but not prevalent in Maryland, 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 Maryland Approaches Property Division

Maryland 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 Maryland.

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.

Conclusion

You only get one chance to get it right and we’re here to help you get an optimal divorce settlement in Maryland. 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.

Schedule Your Complimentary Divorce Strategy Session Today!

 

Divorce Property Division in Pennsylvania

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Divorce Property Division in Pennsylvania | Trunorth Divorce

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.

Conclusion

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.

Schedule Your Complimentary Divorce Strategy Session Today!

 

11 Costly Financial Mistakes in Divorce Settlements

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11 Costly Financial Mistakes in Divorce Settlements

Divorce is expensive even without mistakes and getting comprehensive guidance on divorce financial planning is critical. Read on to learn of the top eleven most common financial mistakes made in divorce.

1. Mis-Specifying Marital vs. Separate Assets

What’s considered marital property and subject to division? Most will say that any comingling of assets (e.g., depositing the funds in a joint account or using marital funds to pay the mortgage) constitutes an asset as marital. And in some states and counties, even if a portion of an asset that was separate on the date of marriage will, over the years, transition to marital. This can impact considerations of real estate, retirement, inheritances, and more.

2. Dividing Each Asset 50/50

Too often, lawyers, hearing officers, and judges take the easy way out by forcing division of each asset equally. Why? It’s easy and not easily challenged. This approach, though, fails to consider the needs and wants of each spouse, as well as the tax consequences of and administrative effort in dividing each asset.

3. Not Considering an Alimony Buyout

No one likes alimony. Payors hate writing the check and the recipient hates depending on it. Plus, if the payor dies or is disabled, the payments stop (an example of why insurance is important post-divorce). Instead, if there are sufficient assets to cover it, calculate the present value of the stream of anticipated payments at an appropriate discount rate and build it into the division of assets.

4. Errors in Valuing Executive Compensation

If there’s one financial topic that befuddles many, it’s how to treat deferred compensation, including stock options, both qualified and not qualified, as well as restricted stock and restricted stock units. Are they marital or separate? Are they based on past or future performance? Can they be transferred to a spouse/former spouse? What is the correct valuation method: intrinsic value, Black-Scholes, or the binomial method? How are taxes accounted for?

5. Not Considering the Possibility of Hidden Assets

Given the opportunity and motive, many a spouse will start stashing away funds in anticipation of a divorce, whether for financial security, sense of ownership, or vindication. Tax returns, W-2’s, credit card statements, and bank account statements are all sources to identify diverted funds. Even when not suspected by a client spouse, a quick review of these documents may reveal otherwise unidentified assets.

6. Not Looking at Creative Settlement Options to Meet Each Spouse’s Unique Needs

What if a spouse wants to keep the house for and can’t get approval for a mortgage buyout? It’s easy to just say “sell” and move on, but there are ways to facilitate the desire of a spouse who wants to remain in the home for a period without undue legal or financial burden to the co-owner spouse. As another example, maybe retirement funds are of utmost concern and alimony/cash flow not so much? A skilled divorce financial expert will come up with alternative settlement options to address the unique needs of each spouse.

7. Mistakes in Retirement/Pension Valuation and Division Orders

Retirement plans, and especially pensions, are widely misunderstood in divorce. The one who’s name is on the retirement plan thinks they are the rightful owners. Some incorrectly think the “current value” on a pension statement is the value of the pension. Pensions of all kinds, and especially military and federal pensions, require an expert for valuation and drafting of appropriate orders for submission to the custodian.

8. Failing to Consider Tax Consequences

All assets are not alike when it comes to splitting them in divorce. $250,000 in a 401k is not the same as $250,000 of equity in a house. The former is taxed at an ordinary income tax rate upon withdrawal while the latter may be largely excluded from any taxation and otherwise taxed at the capital gains rate.

9. Allowing One Spouse to Keep the House When it’s Not Financially Feasible or Beneficial

The marital home is an asset laden with emotion and sentimentality. It’s common to want to keep the house for emotional stability without consideration of the impact on future financial health. Houses don’t necessarily appreciate significantly over time, maintenance expenses are often overlooked or discounted, and a house is not a liquid asset. An objective evaluation is critical before deciding to keep or sell the marital home.

10. Not Properly Accounting for a Closely Held Business

If a spouse owns a business, is it a source of income, an asset to be valued and divided, or both? If a source of income, do we just look at the tax returns for the business? If to be valued, do you pay a business valuation expert thousands of dollars to get an accurate figure? Get the advice of a divorce financial expert is necessary if one of the spouses owns a business.

11. Not Accurately Budgeting for Your Post-Divorce Life

Do you have a good hold on where your money goes? Have you really assessed how much you will need post-divorce? Your choice in divorce settlement options needs to be balanced between short-term cash flow needs and long-term net worth.

Work with a qualified divorce financial professional, i.e., a Certified Divorce Financial Analyst® (CDFA®) to help you avoid costly mistakes in divorce. You only get one chance to get it right.

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.

Schedule Your Complimentary Divorce Strategy Session Today!

Checklist for Getting Your Best Divorce Settlement

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Knowing that you got your best divorce settlement means you’ve considered a lot of things that aren’t necessarily on an attorney’s radar or within the realm of his capabilities. There are many mistakes that can be made. Here’s a list of items that you should include when putting together your divorce settlement agreement. A CDFA® divorce financial planner or mediator is your best resource for ensuring you and your spouse are agreeing on a settlement that is fair and strategically planned for an optimal outcome.

 

ITEM WHY IT’S IMPORTANT CONSIDERATIONS
Proper identification of marital and separate property You split marital assets but keep your own separate property. It’s not always clear about what constitutes marital property. Co-mingling of funds, growth on real estate and owned businesses may have an impact on the amount to be divided. A Certified Divorce Financial Analyst (CDFA) can conduct a separate property tracing to determine what is marital and what is separate.
Assessment of tax implications No all assets are treated the same with respect to taxes. Trading assets of equal value but different tax treatments can have a huge impact on long-term financial health. What are the applicable tax classifications for retirement funds vs. real estate vs. stock options, etc.?
Consideration for both short- and long-term financial implications Alimony, child support, and how you split assets can result in substantial differences in long-term financial health even when the short-term needs are met and the division of assets looks fair. It’s important that you look at the impact of the divorce on near-term as well as future financial health. A CDFA can provide financial projections for both spouses before they agree on a particular settlement.
Provision for allowing spouse to remain in marital home under adverse financial circumstances Sometimes one spouse wants to continue to live in the marital home but can’t re-finance it on their own. Maybe, too, the house is “under water” and can only be sold as a short sale or foreclosed. Additionally, there are capital gains tax exclusions considerations to consider when transferring ownership to one spouse. There are some clever ways of handling the marital home to allow one spouse to continue living in the property for a period of time without the other losing out.
Accurate valuation and division of pensions Many misunderstand what figures to use for division of a pension. Pensions are subject to a coverture fraction, accurate identification of payout amounts, cost-of-living increases, and the appropriate discount rate.
Streamlining of asset division Simplify administrative and legal follow-up Sometimes it’s better to leave a pension, other retirement account, or business owned whole and aligned with just one of the spouses. Other assets or structured notes can be used to avoid selling assets or dealing with Qualified Domestic Relations Orders (QDRO’s).
Treatment of employee bonuses and other non-cash benefits Executives and business owners may receive a large portion of their compensation in the form of bonuses, stock, car allowances, and other benefits that don’t readily show up as income or assets. It’s important to thoroughly review employee agreements for executives and accounting records for business owners.
Proper accounting of stock options and restricted stock units (RSU’s) Employee stock options earned while married are a marital asset whether or not paid before separation or divorce. Determining the marital portion, vesting, and valuation of stock options and RSU’s is complicated and best left to financial specialists.
Option for alimony buyout Nobody likes alimony. Alimony payments are painful to the obligor and uncertain to the obligee. Why not just determine the present value of the future payments and include it in the division of assets?
Accurate identification of separation date The separation date can have substantial impact on valuation of assets. Is it the date the divorce complaint is filed, the spouses started living in separate bedrooms, or something else? What if there is a temporary reconciliation?
Optimizing filing status and deductions The difference between filing single vs. head of household can make a big difference in tax payments. Under shared custody arrangements, child exemptions can be rotated to allow both parents to file as head of household.
Protection of future alimony and child support with life insurance If a buyout isn’t possible, the oblige should have protection is something happens to the obligor. Obtain insurance protection that you know won’t be cancelled.
Inclusion of a detailed parenting plan Even if you and  spouse fundamentally agree on custody and how to raise the children, there may come a time when circumstances change or there is a difference of opinion. Parenting plans that address a wide array of issues should be included in a property settlement agreement to protect the children and both parents.
Impact on future college financial aid for the children Custody decisions and child support can have implications for college financial aid. One should consider how settlement decisions might affect future financial aid to pay for college expenses. 529 plans should be managed so they have minimal impact on financial aid awards.
Assurance that all assets have been accounted for Are there any suspicions that one spouse has been “preparing” for the divorce and diverting assets? Consider the use of a forensics specialist to examine financial records for hidden assets.
Accurate business valuations There are a variety of ways to value businesses in divorce, some more expensive and time-consuming than others. Make sure you have an accurate valuation of businesses owned before settlement options are reviewed.
Timing of divorce on Social Security Timing of divorce can impact future social security payments. You may want to delay your divorce to optimize future social security.
Identify follow-up tasks to ensure compliance It’s not time to rest when the property settlement has been filed and the final divorce decree is received. Follow-up is essential to obtaining and protecting rights to assets. Insurance, QDRO’s, quit-claim deeds, beneficiaries, and more need to be handled after a divorce. Make sure you get a comprehensive list of what still needs to be done once your divorce is final.

 

 

 

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