Contentious Issues: 3 Costly Mistakes to Avoid when Dividing Assets in a Divorce

dividing assets

Divorce is nothing to be taken lightly, people who have gone through it can attest to the fact that it is not a great experience. Yet, divorce rates have been increasing all around the world during the pandemic, most especially true in the U.S.

While the thought of separation can be nerve-wracking, the divvying up of assets can bring things to chaos. It can really be contentious. Small wonder why, more often than not, divorced couples end up becoming bitter enemies in the aftermath. Ideally, the couple should be able to settle and decide unanimously on how the assets would be shared.

But that is not always the case. So, to avoid regrets and complicated issues that may come up later on, it is best to consider grave mistakes before they compound things. And yes, not being able to keep your partner for life doesn’t mean you should not be able to avoid these pitfalls.

Not All Assets are Equal

Some properties seem to have the same values. However, when you consider the taxes, they might not appear so identical. Having a hundred dollars cash in hand is not the same as having a stock valued at the same price. That is because if you decide to sell the stock, there would be a tax impact on it.

And even if there are two assets with the same worth right now, there may be a difference in their cost basis. One might have more taxes or even less in comparison to the other.

If you are going for an equitable division, the taxes should be subtracted from the worth. This is something you have to pay attention to, avoid making mistakes.

Retirement Accounts

One other thing to be mindful of is your place of work retirement account. If your partner who would soon be your ex has an entitlement to a part, you have to be careful with the way you handle the split.

Some people just take out what they have in the account and hand it over to their spouse. And when they do this, there would be a withholding tax of 20%. And you might be wondering what a withholding tax is. It is simply the amount that an employer keeps back from his employee’s salaries and pays it to the government directly.

And, if you are not above age 59½, you could receive a penalty for making a premature withdrawal.

As an alternative, asking your trusted family lawyer to draw up a QDRO (qualified domestic relations order) is wise. This should get the court approval and should also be forwarded to your plan administrator who must also approve it.

And if you would be splitting more than just one account, a different order should be drafted for each. The different ways your soon-to-be-ex could get their share must be clearly stated in the QDRO.

On the other hand, some ex-spouses prefer that the QDRO specifies that they would receive funds from the plan directly. And with this option, there would be a 10% penalty for making an early withdrawal. But ordinary taxes would be applied on every amount that doesn’t get contributed within two months to an IRA (Individual Retirement Account) rollover.

divorcing couple

Also, ensure that if the plan is that each spouse will get for instance 50% of the assets in the retirement’s account, the QDRO or divorce decree should state the percentage and not the dollar amount.

For instance, this happens when the total of $50,000 is in the account, then the receiving spouse is supposed to receive 50%. And the order states that the receiving spouse is to get $25,000 which was the 50% at the period the attorney drafted the order. If the account happens to experience losses or gains before the spouse receives their share, $25,000 will no longer represent 50%.

The Family House

At times, couples getting a divorce sell what used to be their family house and then divide the profits as stated in their settlement. There are also times when one spouse stays back. In this case, considering the specifics, there are some things to be watchful of.

First and foremost, if your ex is not going to maintain joint ownership or won’t take on any responsibility as far as the mortgage is concerned, you would have to refinance the mortgage and meet the requirements for it all on your own. However, while having divorce discussions, and the properties are being valued, ensure you get the appraisal of the assets as well as the purchase price.

Keep in mind that once the property is now in your name, and you decide to put it up for sale, you will have to pay for the taxes on the profit that surpasses the exclusion of two hundred and fifty dollars per person.

Avoid having extra stress added to your divorce by avoiding these mistakes that usually complicate everything and make things messier. Be proactive and you should have a smooth experience along the way.

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