Marital Assets and Divorce
Why do you need accurate records?
Part 3 of The High Net Worth Guide To Divorce
This is part 3 of a 7-part guide for affluent and high net worth individuals considering divorce. In this section, we cover why is it so important to have accurate records of marital assets before announcing divorce. And how do you generate an accurate record?
Jurnex is an independent registered investment advisor that specializes in supporting women going through divorce. If you’d like to learn more about how we can help, contact us for a consultation today.
What’s the single biggest difference between an ordinary divorce and a high net worth one? The value of assets at stake. In the case of affluent, this generally means $500,000 or more investable assets. For high net worth, this means $5 million or more.
You must have a very clear sense of marital assets before announcing a divorce. The moment you notify your spouse, it can become tempting for them to hide assets that would otherwise be part of equitable distribution. Or they may somehow “forget” about assets. In this article, we cover the concept of finding these assets first.
Why is it important to record all assets?
If you forget to record an asset, the asset won’t magically get divided and awarded to you during a divorce. Judges and lawyers are not psychics. There’s no way for a court to *know* what your family owns. In the US, there is no registry of all asset ownership. That means if you forget about a safety deposit box, your spouse can walk away with it without you ever knowing.
So if you want a fair distribution, you must ensure all your assets are accounted for.
What marital assets should I record?
In a divorce, there are two types of property
- Marital Property
- Separate Property
If you live in an equitable distribution state, you should record BOTH. That’s because the marital property is not necessarily divided 50/50 in the absence of a premarital agreement. Instead, a judge will also consider separate property when dividing marital assets. 40 US states are equitable distribution states.
If you live in a community property state, you only need to record marital assets. In these states, community property is divided 50/50 without regard to separate property. But you still must be diligent in recording all marital property. If you forget about a joint account, your spouse can still empty the account after divorce without anyone ever knowing.
Keep in mind that career skills can also count as marital assets in some states. A high-earning spouse with significant career prospects may receive LESS tangible marital assets. That’s because a judge could rule that they have the ability to out-earn the other spouse.
There are eight community property states in the US.
- New Mexico
Alaska has an optional community property act (AS 34.77.090) and Wisconsin is essentially a community property state with some exceptions to the typical community property rules.
How to identify all marital assets?
For affluent and high net worth families, identifying all marital assets can be a challenge. Assets have a strange way of disappearing after divorce proceedings begin. To combat this, you need a clear sense of what you and your family own prior to starting the divorce proceedings.
1. Make a common-sense list of your assets
Before you reach out to your CPA, it can help to write out a rough blueprint of your assets. There is no substitute for good common sense. Even if you don’t get all assets the first time, this step is vital in creating a base for you to start painting an accurate picture of your family’s finances.
- Cash. Do you or your family keep substantial amounts of cash at home? A safety deposit box?
- Checking accounts. Create a list of all personal, joint, business and trust accounts. Additionally, you should go over all bank statements for the past few years too.
- Savings and money-market accounts. These accounts can be easy to lose track of. So make sure you record all accounts set up for “special purposes.” This includes accounts for Christmas savings and IRA contributions. Also, note all long-term savings accounts and CDs
- Children’s bank accounts. See whether your spouse has opened any custodial accounts in your children’s names.
- Retirement accounts. These include IRAs, 401(k)s, pension plans, and stock options. These are often funded directly from salary. This makes it easy to overlook. Also, don’t forget to include plans from previous employers.
- Investment accounts. These include brokerage accounts, mutual funds, annuities, the cash value of life insurance, and all stocks and bonds held in certificate form.
- Real estate and tangible property. Include your family home and any property owned. This includes vacation homes, rentals, land, business property, timeshares, and others. Tangible property includes cars, boats, aircraft, jewelry, and home furnishings.
- Deferred payments. Check to see whether your spouse is due for raise or a bonus that has not yet been collected. For business owners, deferred payments and accounts receivable can make up a very large portion of the business’ value
2. Talk to your CPA (or hire a third-party advisor)
If you need additional help, your CPA or accountant can also be a very good source of information. Be aware, however, that your CPA may alert your spouse depending on who he reports to. If this is the case, consider hiring a third-party accountant to review your past year’s tax returns instead. They should be able to go through your tax returns and identify assets within.
Keep in mind that the general 1099 tax filings only show income. It will not necessarily show the underlying assets that generated the income. For instance, you may see rental income on your tax returns. But the tax return will not explicitly list the rental property that generated that income.
Be sure to collect all additional tax schedules and W-2 forms too. These are good sources of additional information. 401(k) plans, for example, do not show up on tax returns. But the income deduction will show up on W-2 forms, alerting you of the existence of the plan.
3. Review prior year tax returns and bank statements
If possible, collect the past five years of tax returns and bank statements. Because having clear documentation can help you find assets even after the divorce proceedings have begun. A savvy CPA or financial advisor should be able to use these records and find any inconsistencies.
Tax returns and bank statements will also be key documents needed to create a Financial Affidavit, a standard form used by states as a master record of assets. These are filed with the court in court-driven divorces. Regardless of whether you go through courts or mediation, it is good practice to have a filled out financial affidavit for your separation.
Can Jurnex help?
Spouses often have a strong incentive to hide (or simply ignore) assets during a divorce. And it is impossible for a court to “magically know” about any unlisted bank account. If you’re concerned about having all your assets accounted for, contact us and see how we can help.
What happens next with marital assets?
Once you have a good record of your assets, you should start forming ideas on how the assets can be fairly divided.
Understand the laws of your state
Equitable distribution states will look to divide the husband and wife’s property equitably, or fairly. This does not necessarily mean a 50/50 split. For example, if one spouse has $50 million in separate property and the marital estate is $10 million, a 50/50 split of the marital estate could be considered inequitable. The same is true for a spouse with very high earning potential. If you gave up your career or took a lower paying job to help support your spouse in his career path, a 50/50 split of financial assets may also be considered unfair.
Community property states, on the other hand, will try splitting marital assets 50/50. In these cases, earning potential can make a very large difference in the eventual settlement. Depending on how career assets are valued, the eventual financial settlement can end up very differently.
Consider how property should be divided
At this stage, you should get a sense of what assets are most important to you. Ownership of memorabilia and real estate are often highly contested items in divorce. Have a good sense of what you will fight for. Remember the reverse is also true. There will be items that are meaningful to your spouse that you have no desire to keep. Keeping a mental list can help you trade assets so both of you end up with assets that each of you wants most.
This is why it is so important for you to list all your family’s assets. Couples are usually honest with each other. But when large sums of money are involved, your spouse has a large incentive to keep quiet about properties you have forgotten about. Because once the divorce is finalized, he may be able to transfer the assets into his name without you or the courts ever knowing.
How does mediation help with equitable distribution?
Rather than being forced to accept a settlement created by a judge, couples going through mediation can keep control of how their assets and liabilities are divided. Good mediators will understand the concept of fairness in dividing the property. And the right mediator can help couples come to a peaceful resolution without going through attorneys or the courts.
Mediation has become one of the most popular forms of divorce resolution because of its flexibility and cost savings. It also allows affluent and high net worth couples to avoid the publication of their financial assets in court documents. And if either spouse decides to threaten the other with legal action, the mediation process can also simply and, and the couple can default back towards an attorney and court-based divorce.
If you and your spouse agree to mediation, take the next step and see how Jurnex can help you come to an equitable solution.
Continue to Part 4: Finding hidden assets
Can Jurnex help?
If you want to be in control of your financial well-being, consider Jurnex as your financial advisor and divorce mediator. If you are looking for a peaceful and equitable resolution to your separation, book an initial consultation with us to see how we can help.