March 17, 2021

How Do You Avoid Pitfalls When Dividing Assets in Divorce?

The emotional upheaval of divorce can cloud the cut-and-dried financial details that are a large part of both ending a marriage and setting a course for the future. With the median cost of divorce at $7,500, the cost of the split can potentially be high in other ways as well.

As Michigan is an equitable division state, the judge will determine what is a fair division of property when taking into account many factors such as the relative wealth of the two spouses and their future earning potential, who is more responsible for the household debt and whether one spouse is to blame for ending the marriage.

Are all assets equal?

Not all assets are equal, even when they appear to have the same face value. A hundred dollars in cash in a checking account is not the same as a stock with the same value, because the profit on the stock will be taxed when it is sold.

The same can be said for retirement accounts. Taking cash out of a 401K and giving it to the other spouse as part of the split also has tax implications. There is an automatic 20% withholding from a withdrawal like this, plus an additional 10% if the other spouse is younger than 60.

Drafting a qualified domestic relations order, or QDRO, might be a better way to go, as long as the split is spelled out in percentages, not dollars. IRAs do not have to be part of a QDRO, but they should be taken care of in a trustee-to-trustee transfer to a rollover account.

What to do with the house?

Whether the two parties agree to sell the family home and split the proceeds or for one to remain, there are things to consider. If one spouse is no longer responsible for the mortgage, the other will have to refinance the loan and qualify for it.

It is important, first of all, to get an appraisal during the divorce discussions and to get a cost basis of the property. The sole owner will be responsible during a future home sale for capital gains on any profit in excess of $250,000, instead of $500,000 for married couples. If the house was bought before 1997, deferred gains may have rolled over from another home sale.

For Michigan and Detroit area residents, it is important to be able to discuss options with a skilled divorce attorney who will advocate on your behalf for a favorable distribution of assets in the divorce settlement.