When a couple decides that divorce or legal separation is the appropriate decision, their assets need to be distributed between them. The assets they may have could include various types of wealth, including possessions, vehicles, stocks, pensions, retirement funds, bank accounts, and real property, among others.
What Is “Equitable” Distribution?
When a couple’s assets are divided during the divorce, the distribution must be “equitable.” Equitable distribution can be confusing for anyone in the middle of a divorce. Legally, “equitable” isn’t the same as equal. One or both parties may expect their assets and debts to be split evenly in half, but this is not always the case and may not be the most fair division of the assets in question.
In some circumstances, the couple is able to create a mutual agreement for the distribution of their debts and assets. If the couple is unable to reach an agreement on their own, mediation may be an option to help them resolve their issues. A judge must approve whatever settlement agreement the parties reach. If they cannot reach a mutually acceptable agreement, their case will proceed to trial. In this case, the judge decides how the debts and assets should be divided.
In a majority of divorce cases, the couple reaches an agreement as opposed to letting their case go to trial. Rather than having an arbitrary third party decide on settlement amounts and distribution, most individuals prefer to compromise.
What Assets Do Most Couples Need to Split?
Every divorce is unique, but most cases involve the following types of asset division.
- Investments. This category includes various investment-related assets such as brokerage accounts, stock options, and stock and mutual funds.
- Business interests. Assets ascribed to any business the couple may own or own interest in, such as merchandise, account receivable, property, and goods must be valued and distributed between the parties.
- Taxes. This may include tax credits and tax refunds. If there is a shared business, taxes may become more complex.
- Home and real property. Real property includes any homes the couple may own and the land those homes sit on. This may include their primary residence as well as rental properties, vacation homes, and unimproved land.
- Retirement accounts. These assets include IRAs, pensions, 403(b) accounts, 401(k) accounts, and other tax-deferred retirement funds. In most cases, these accounts face tax penalties when they are liquidated, although pensions (defined benefit accounts) have unique rules.
- Cash. This includes cash the couple has on hand, as well as any savings or checking accounts they may have.
- Other. Other possessions the couple may share fall into this category. Some of the more common items couples must split include household furnishings, boats, vehicles, items held in safety deposit boxes, valuable possessions, insurance policies, copyrights and patents, and art.
When an individual is facing divorce, it is crucial to understand what property they may need to split with their spouse, as well as its value. Establishing an equitable settlement that is fair to both parties relies on an accurate appraisal of their property and possessions.
Dividing Assets in a Community Property State
California is known as a “community property” state. This means that all debts and assets acquired during a marriage are legally owned by each of the parties. The state considers any type of debt, loans, possessions, land, or money acquired while married to be jointly owned.
However, some exceptions may apply. The details are complicated, but not all property falls under “community property.” The best way to determine whether an individual’s possessions are community property or not is to seek the counsel of an experienced divorce attorney. Such professionals have the experience and legal understanding to help with valuation, category delineation, itemization, and proposal for the equitable division in the divorce. This is especially important for a couple who has been married for a long time, as they likely have greater and more diverse assets that need to be addressed.
Understanding Separate Property vs. Community Property
The term “separate property” refers to any property, possessions, and other items one of the parties owns that were obtained outside of the marriage. It may also include items acquired during the marriage that meet the parameters for an exception. Since these items are not “community property,” they may not need to be divided in a divorce. Some of the most common examples of separate property include the following.
- Real estate one of the individuals owned before they were married
- Certain gifts either of the parties received either before or during their marriage
- Inheritances either party received before or during the marriage
- Purchases one of the spouses made using separate property (such as inheritance money)
In divorce cases, all property, both community and separate, goes before the court for equitable distribution. In some cases, a judge may award one of the parties’ separate property to the other individual as a means of settling on an equitable, fair division of property.
Distribution of assets is sometimes complicated because couples may have used separate property to purchase items that are community property in their marriage. For instance, one of the individuals may have inherited money that the couple used to pay for items such as:
- A down payment on their home
- Home improvement projects
Since these purchases clearly make it more difficult to determine what is community property and what is not, it is always wise to have a skilled attorney assisting with the divorce and division of assets.
What Category Do Retirement Accounts Fit Into?
When retirement accounts are divided, part of the plan may be community property, and part may be separate property. It isn’t possible to make this determination by simply looking at the account balance on the date of separation because their value varies on a daily basis due to returns on the investment and interest. These accounts are typically divided through domestic relations orders that the plan administrator can use to implement the division, either by dollar amount or percentage.
Place Your Trust in an Attorney Who Cares
Stephanie Squires has more than two decades of experience in divorce and family law and has built a reputation as a compassionate, caring legal representative. If you are facing a divorce and want to be sure that your assets are divided equitably, visit our website today.