What Comes Next? How Bridge Can Help You Manage The Post-Divorce Transition
Divorce changes everything. Your time, relationships, and even your home may be drastically different after the judge declares your marriage dissolved.
Financial transitions alone can feel overwhelming, but they don’t have to be. With support, guidance, and accurate information, you can make a smooth post-divorce transition. Let’s look at how asset transfers work after a divorce and how Bridge can help you keep what rightfully belongs to you.
How are Assets Usually Split in a Divorce?
Many people believe assets are split equally in a divorce, but that depends on the state you live in. Some states operate on the principle of community property, and others work on a system of equitable distribution.
Community Property — Under this concept, both spouses get the property they brought into the marriage and an equal share of the property acquired during the marriage. In addition, each spouse is entitled to an equal share of any mutual debt incurred after the date of separation or filing for divorce.
Equitable Distribution — In equitable distribution states, courts divide a couple’s assets “equitably” but not necessarily equally. Sometimes, these states require a separate asset settlement.
Under Title 25 of the Arizona Revised Statutes, Arizona is a community property state. Regardless of where you live, though, if you can’t come to an agreement on how to split your assets and debts with your spouse or ex-spouse, there are options available to help you divide them fairly.
Of course, property rarely gets physically divided up. Instead, the court awards each party a percentage of assets. That’s why knowing what you own, when you got it, and who purchased it can be critical to getting your fair share of property in a divorce settlement.
What Types of Assets are Typically Divided in a Divorce?
Property division is a sticky issue in divorce because some assets are much easier to divide than others. A small, easily liquidated investment vehicle such as a savings account may be straightforward, but an asset such as real estate or a business often presents thornier concerns.
Typically, common property includes real property that was purchased during the marriage, such as houses or cars. Savings accounts are also typically divided, as well as retirement accounts such as 401(k)s and IRAs. A family business or farm could be divided as could valuable collectibles such as furniture, art, or jewelry. Remember, that debts such as credit cards, lines of credit, loans, and mortgages also get divided during the proceedings.
If you have not kept your assets separated during your marriage, the court may be inclined to consider everything as joint property.
But there is more to consider than just dividing these assets after a divorce; you will also need to discuss how the money will be managed in the future. For example, your new partner may have children from another relationship and you need to figure out what steps to take to assure that your assets remain with your heirs alone.
Are Transfers Between Spouses Taxable?
Transfers of assets between spouses after a divorce are generally not taxable, but there are some exceptions. For example, transfers that happen more than six years after a divorce may not be considered a reallocation of assets. Instead, they might qualify as gifts and be taxable as such.
Additionally, when one spouse receives cash from the other spouse for support payments, the IRS does not generally allow the payer to deduct these expenses or require the recipient to report it as income.
Who Pays Capital Gains Taxes in a Divorce?
Under current tax law, a taxpayer pays capital gains taxes on the sale of assets when they are sold. Assets are property or other things with monetary value that can be exchanged for cash or used to buy other property. This seems straightforward, and it is until you throw a divorce decree into the mix.
In a divorce, one spouse could be considered the owner of an asset and the other spouse could have been given the right to use it during the marriage. The person who owns an asset is taxed on any capital gains that occur in the year it is sold, even if he or she doesn’t receive any money from it at that time.
As an example, let’s say you were entitled to use a spouse’s car while married, but you sell it after your divorce agreement takes effect. Then, you will owe capital gains taxes on any increased value.
How do I Avoid Capital Gains Tax in a Divorce?
Capital gains exclusions are often the stickiest wicket in a divorce proceeding especially if it is a high-asset divorce. How will a divorce affect your taxes? Will you have to pay more than your share?
Let’s start with most people’s biggest asset — a home. You should not owe capital gains taxes on your home if you have claimed it as your personal residence for at least two of the last five years. In addition, you cannot have claimed a capital gains exemption on a home in the last two years. Unless you and your former spouse jointly owned multiple homes, you will probably not have to worry about paying this tax.
For non-real assets, the best way to avoid capital gains taxes may be to roll the asset over into a qualified retirement plan, such as a traditional IRA or 401(k). This allows you to defer any tax on the appreciation of the asset until you withdraw it from your qualified retirement plan.
However, if you do not have enough money in your qualified retirement account to cover the cost of rolling over the asset into it, you may be able to take advantage of a Roth conversion. With this option, an individual can pay current income tax on their assets and then move them into their Roth account which will allow them to avoid capital gains taxes in the future.
You can also move assets that are not held in a retirement account by selling them and then buying an identical replacement.
How is a House Buyout Calculated in a Divorce?
A house buyout is calculated based on how much equity each person has in their individual share of the house, their mortgage obligations for that share, and any damages caused by the marriage breakup. You determine equity by subtracting your mortgage obligation from the appraised value of the home.
If you and your former spouse jointly owned a home, one of you may be awarded sole ownership of the property. In other cases, you may need to split it, with one party maintaining ownership and the other receiving an interest in the home. Alternatively, you might agree to sell the property and divide up the proceeds according to a prenuptial agreement.
Transferring Ownership of Assets
After a divorce decree, you may need to transfer assets to your former spouse or receive a transfer from them. For real property, such as cars or artwork, this may involve an actual physical transfer along with filing the legal documents. For example, if you want to change the title on a car from joint tenants into one person’s name only, it can be done at the DMV.
Transferring a retirement account is not as easy. For most 401(k)s or IRAs, you will likely need a Qualified Domestic Relations Order from the court to make the transfer. Never just withdraw money from a retirement account to give to your former spouse. You could wind up owing huge penalties for doing so.
To transfer a bank account, you will need to talk to your bank about what paperwork they require.
What Happens if my Spouse Transfers Property to Someone else before the Divorce is Filed?
If your spouse transfers property to someone else before the divorce is filed, you may be entitled to a percentage of that property through equitable distribution. It’s important to know how this process works because transferring property before filing for divorce can actually have a negative impact on your post-divorce financial stability.
Consider the consequences of fraudulent conveyance of property:
- When one spouse transfers assets without the knowledge of the other spouse during marriage, this may also be known as hiding assets.
- Parties who attempt to hide assets in a divorce can be held in contempt of court. The judge may order all of a couple’s assets frozen until a final settlement is reached.
- In order to claim ownership of hidden assets through equitable distribution, it must be shown that the transfer was done without full knowledge or consent from the other party.
How can Bridge Help you Manage the Post-divorce Transition?
Bridge Divorce Strategies can help you retain your share of your assets after a divorce. We have the expertise and resources to help you through every step of your transition, including financial planning and asset management. Working with a team of experts means that you will be well supported through the process and protected from any potential threats.
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