Welcome to money-issue Wednesday.
Today we’re posting an article we found on Forbes.com that addresses a big problem divorcing couples seem to have, no matter how big or small the asset. The examples given in the article happen to have assets that are worth a lot. But don’t stop reading thinking that this article doesn’t apply to you. The lessons learned apply to everyone.
How to Handle Difficult to Divide Assets
by Jeff Landers
Divorce involves the division of marital property. From the imported porcelain vase Aunt Martha gave you and your husband on your second anniversary to the vacation condo you both bought while you were in Costa Rica just last year, it all must be split according to the rules in your state.
Naturally, some items will be easier to divide than others. Maybe you’ve decided you never want to vacation in Costa Rica again, and you’d rather have a larger portion of the stock portfolio, instead (provided you understand the cost basis of each asset and what the tax implications will be upon a sale, of course). Or, perhaps your husband has absolutely no interest in your family’s heirloom china.
With a qualified divorce team you’ll be able to work through all these nitty-gritty details, and in most cases, negotiations should proceed in a productive and timely fashion (for the most part).
However, every now and then, the division of marital property can become enormously complex. Some couples jointly own “priceless” art or huge, multi-faceted entities, such as professional sports teams. For them, divorce proceedings can take years . . . and unfortunately, the process can get ugly.
Case in point: The divorce between Frank and Jamie McCourt, who co-owned the Los Angeles Dodgers –or, at least, at one point, the Courts decided they did. Read this excellent re-cap of the McCourt divorce debacle, and you’ll learn that alleged mistakes in the couple’s marital property agreement (signed during the marriage) left ownership of the Dodgers in question. Remarkably, even though it appears the original agreement was for Frank to own the baseball franchise and Jamie to own everything else, certain copies of the documents actually said otherwise. Ultimately, a California court awarded Jamie half of the Dodgers, but as is so often the case in disputes like this, that initial Court ruling was only the beginning of a long and bitter story. (See hereand here, e.g.)
In sharp contrast, the co-owners of the Philadelphia Eagles recentlyannounced they’re divorcing, but said they’re committed to a continued “team effort” both on and off the field. Likewise, it seems as though Julia Calhoun and retired Microsoft executive Christopher Larson had hoped for an amicable divorce –until emotions flared over their art collection, valued at a cool $102 million.
What lessons can be learned from these cases involving difficult-to-divide assets?
Here are the key points you need to consider:
● Your best offense is a good defense. Marital property and/or postnuptial agreements (including the establishment of trusts) signed during the marriage clarify who owns what.
Even though the thought of divorce may be the furthest thing from your mind while you are drafting an agreement, it’s essential that you consider “the possibility” of a future breakup while you are establishing the terms. Will your assets be protected from your husband (or other unanticipated recipient) if you divorce? Are the proper safeguards in place?
● “Selling it all” to split the proceeds is not always a viable option.As Ms. Calhoun and Mr. Larson discovered, sometimes the tax implications and/or other associated costs of selling certain assets outweigh the benefits of liquidation. Make sure you fully understand all potential financial consequences before you agree to “sell it all.”
● Not all assets that are valued the same are actually worth the same. This point can be particularly relevant if you’re deciding whether or not you want to keep your marital residence. Here’s an example to illustrate my point:
Let’s say you’re trying to decide whether to keep a $600,000 bank account or a $600,000 house that’s completely paid off. You really love the house, and you’re leaning in that direction. Great idea? Maybe. But, you need to carefully assess how the house will impact your bottom line –both now and years down the road. Even mortgage-free home ownership involves expenses, such as real estate taxes that need to be paid every year, upkeep and maintenance, fuel costs, etc.
In addition, when you eventually sell your home you may be hit with a big capital gains tax bill. Let’s assume you bought the home for $200,000, and it’s now worth $600,000. Your capital gain is $400,000. Subtract your $250,000 capital gains exclusion as a single person, and you’ll have to pay capital gains tax on $150,000. At the current capital gains tax rate of 15 percent, that amounts to a $22,500 tax bill! (And chances are pretty good that those tax rates will increase in the near future.)
Once you complete this type of analysis, the cash may look like a much better option than the house.
● Thinking Financially, Not Emotionally® is always optimal. You may think you can’t possibly live without your beachfront getaway, that antique watch or the impressionist painting you see every evening in the dining room. But the truth is this: You can. I’m not saying you have to; I’m saying you can.
I understand that maintaining emotional distance when it comes to negotiating certain assets may not be easy. But if you can successfully do so, you’ll put yourself in a better position to strategically manage your marital property and develop a comprehensive plan for financial stability and security in the future.