Divorce is hard. Really hard. The emotional toll can feel pretty overwhelming when trying to extricate two lives which have been melted together over years or even decades. It’s not just the “big” stuff like mortgages and investment accounts which have to be sorted out; it’s the little, often unspoken, arrangements for who sends holiday presents, changes the oil, or walks the dog which must be rearranged. If you share children, the repercussions of divorce are even more critical. When you’re in the middle of trying to figure it all out, feeling an urgent need to “just get it done” is common. Unfortunately, rushing through painful but critical decisions without considering long-term financial implications is like ripping off the scab with the band-aid. It’s not pretty. It’s going to hurt. And, it’s going to take longer to heal.
While the emotional aspects are likely the most taxing during a divorce, the financial aspects can exacerbate a tough situation, and practically, create longer-term consequences. Splitting the marital assets is more complicated than dividing the balance sheet in two. At least it should be! Not all assets are created equal, and depending on your situation, a dollar can have significantly more or less value for one spouse or the other.
One example I see frequently is the issue of the home, especially if it’s paid off or has a low mortgage compared to its value. Often times, one spouse has a strong desire to keep the house, especially if they will have primary custody of children. The family home is usually one of the largest assets, if not the largest asset, in the family’s net worth. The challenge is that the home is an illiquid asset, which means that the value usually can’t be accessed for expenses. Further, if there is a mortgage on the home, the monthly payment might require a disproportionate portion of cash each month—if the home-retaining spouse can even qualify for the mortgage on their own. This doesn’t even consider the additional costs of property taxes or maintenance.
An simplistic example of this scenario is a family with a $500,000 home with no mortgage, a retirement account of $250,000, and a taxable investment account with $250,000. The assets could be split equally by giving one spouse the home and the other spouse the investment and retirement accounts. Technically, this is equal! But, while one spouse would have a home and no cash, the other spouse could use some of the investment account to put a down payment on a new home, and still have plenty of liquid assets left over for living expenses. The spouse who received the home might decide to sell it to unlock the equity, but then they would likely pay a significant commission of 6%, reducing their $500,000 asset by $30,000.
Splitting assets “equally” without regard to liquidity can have obvious ramifications. Retirement accounts can have a similar impact as illiquid assets because they can’t be accessed before age 59.5 without a steep penalty. There are too many scenarios to run through because every family has their own set of financial “Lego® blocks, so it’s critical for you to get financial guidance from an expert in addition to legal advice from a qualified divorce attorney.
Regardless of what led to the decision to divorce, you have an incentive to work together to figure out an optimal and fair division of marital assets. If you have kids, this process can set the stage for co-parenting for the rest of your lives. But kids or no, unexpected financial challenges can make a difficult situation even worse, so get professional assistance so you can focus on healing and moving forward with confidence.
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