Asset Division in Divorce: an Overview

Divorce typically involves physical separation, meaning that each side will have temporary possession and responsibility for various properties pending the final outcome. Each party, with the assistance of their legal counsel, should maintain open lines of communication with third parties, including lenders and property managers, to ensure that ongoing financial obligations related to properties are being met.

Property division orders are not modifiable in the future, which can limit the ability of a court to act in certain circumstances. It is an unpleasant surprise to be awarded and take possession of valuable property only to learn that foreclosure is imminent because the other side was irresponsible while the divorce was pending and before the property was turned over.

In addition to requiring both parties to maintain all marital property and ensuring timely payments, a temporary order should also grant the non-possessing spouse visibility into the status of all marital assets throughout the divorce proceedings.

A common property division term is for one party to be required to refinance debt within a certain period of time after a divorce. After years of low interest loans, debt assumption – as opposed to refinancing – may be a viable option, depending on the lender and the financial circumstances of the parties.

Assumption of a loan may avoid many fees and costs associated with refinancing. If the existing loan has an interest rate lower than the current market rate, an assumption would preserve the beneficial rate, while refinancing would mean a new loan at the current, higher rate. A frequent error is to omit any contingent consequences for a failure to timely comply with the assumption or refinance requirement; as property division terms may not be modified after the fact, such an oversight may limit the ability of a court to take desired enforcement action. Without repercussions for non-compliance, the other party who relied on compliance with the decree may find themselves disadvantaged.

Any order requiring a future action should give the affected party and court an immediate course of action, such as a sale or money damages, in the event of non-compliance. A creative loan restructuring requirement can carry the proper incentives to motivate all parties to adhere to the court order.

Generally, there are no capital gains consequences for property divided during a divorce, as property division incident to a divorce is a tax-free transfer. This can be deceptive, as the unaware party may not appropriately factor tax consequences for sale or gift transactions planned immediately following the divorce. Cash, real property, traditional investments, retirement savings and other tax-advantaged accounts such as HSAs and IRAs all have different tax treatments.

Although the division of property itself is not taxed, without proper planning and foresight, the receiving party may encounter unanticipated tax consequences after their divorce when selling, gifting or otherwise disposing of assets received as a result of the divorce.

A tax adviser is an important part of the team for any divorcing individual with interests in valuable assets. Important questions to ask your lawyer and tax adviser include the following.

Just because the property division activity was not taxed, do not assume that there will not be any taxes on transactions after the divorce. Stay in communication with your advisers and discuss the tax implications of contemplated activity with your lawyer and tax professional.