There are very few assets you own individually when you're married. Most assets and property are shared between you and your spouse. But what happens to those assets once you and your spouse decide to get a divorce? The short answer is, they become divided between you and your spouse. The process is much more complex than it sounds, however.
Divorcing spouses often experience legal and personal challenges when divvying up assets, most of which can be avoided simply by being aware of the most common errors people make during the process. The divorce lawyers at Hocker Law, LLC in Indianapolis explain how to avoid these errors and what course of action you can take to protect your assets during a divorce. Here's what you should know.
Error 1 - Failure to factor in taxes
Some assets may appear to have equal value, but that is often not the case once taxes are factored in during liquidation. For example, if you and your spouse have $10,000 in a savings account and another $10,000 in stocks, the value of each is going to be different once the tax implications are considered. The $10,000 you and your spouse own in stocks may have a capital gain of $2,000 (for example). That capital gain will be taxed, causing one spouse to lose some of the value.
There is a tax on most investments (such as stocks) that result in a capital gain once sold. When divvying up assets that have a capital gain, it's important that you subtract the taxes from the total value. Otherwise, one spouse could end up with more tax liability than the other. It's important that you discuss this with an experienced divorce lawyer who can accurately determine the take-home value of assets so they can be divided fairly.
Error 2 - Failure to account for living costs after divorce
Life isn't the same after a divorce. You will no longer be sharing expenses and financial obligations with your spouse. One of the biggest mistakes those getting a divorce can make is not considering what a post-divorce life will be like. It's important that you consider what assets you will need to have financial access to in order to get back on your feet. This takes in-depth planning ahead and accounting for:
- Living costs, such as mortgage or rent
- Child support or alimony
- Insurance expenses, such as health insurance and car insurance
Error 3 - Withdrawing money from a retirement account
Be very cautious about how your 401(k) or other workplace retirement account is handled during a divorce. Some people withdraw money from their retirement accounts and give some of it to their spouses. There is a 20 percent tax withholding on this. For account holders younger than age 59 1/2, a 10 percent penalty for early withdrawal also applies.
This is where an attorney needs to draft a qualified domestic relations order (QDRO), which is separate from your divorce agreement. It will need to be approved by the court and sent to the plan administrator of your retirement account for approval. Separate QDROs are needed if one retirement account is being split between you and your spouse.
Error 4 - Not considering the implications of selling the house
If you and your spouse own a house together, there are generally three things that will happen after a divorce:
- One spouse will buy out the other spouse's home equity and assume full ownership.
- One spouse maintains occupancy of the house while the other spouse maintains shared ownership. This can be temporary. For example, one spouse maintains occupancy until the youngest child turns 18.
- The house is sold and both spouses divide the proceeds.
The amount of mortgage debt or equity you have on the home, your overall financial circumstances and your children's needs will determine which option best suits you. Your best bet is to discuss this with an attorney who can help you explore your options and inform you on the tax implications and other challenges you may face.
Error 5 - Not planning ahead
When getting a divorce, emotions can be high. You may want to get out of a bad situation as quickly as possible. This can often lead to making decisions that can affect your quality of life after your divorce. Before you make any decisions during your divorce, it's important that you discuss your matter with an experienced Indianapolis divorce lawyer. The legal team at Hocker Law, LLC has nearly two decades of experience helping people through difficult divorces and asset division situations.
No matter how complex your questions may be, we have answers. Contact us online or call us for a free legal consultation. Due to the COVID-19 pandemic, we are taking measures to ensure the safety of our staff and clients. We offer remote legal consultations via Skype or telephone.