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The Anatomy of a Divorce,
Part 2: Asset Distribution

In reaching a divorce property settlement, the parties should try to agree that each spouse will receive certain community assets, with each receiving equivalent net value.

John McKindles

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Mesa Arizona Divorce Attorney John McKindlesIn Part 1 of this series (The Divorce Plan), we identified five fundamental issues generally involved in most divorce actions.

The first of these fundamental issues is asset distribution, which this article discusses in some detail.

In preparing your divorce plan, you will identify your assets and gather information and documentation pertaining to them. Your inventory may include both separate assets and community assets.

Separate Property

Separate assets include:

  • assets owned by each party prior to marriage,

  • inheritances,

  • personal gifts, and

  • the growth value and/or income from those assets during marriage.

It is important to trace any change in such assets in order for them to retain their nature as separate property. For example, if the list of separate assets includes real property (such as a residence owned by one party prior to marriage), a conveyance of title after marriage into both parties’ names will generally raise a legal presumption that the property was gifted into the marital community. However, that presumption does not necessarily apply to personal property conveyances, such as placing a separate bank account into the names of both parties as joint tenants.

Community Property

Community property includes:

  • property that was acquired during marriage (including any property or assets that were gifted to the spouses as a couple),

  • any increase in the value of separate property that was achieved through the efforts of either spouse, and

  • basically any asset that is not clearly separate property.

In contrast to separate property, which generally remains with its owner, community property will be distributed “equitably” (or more or less equally, under typical circumstances). Where it makes sense to do so, the parties should try to agree that each spouse will receive certain community assets, preferably in such a way that the value of the assets that go to one spouse will be comparable to the value of the assets that go to the other. This leads to a cleaner transfer and eliminates the need to sell assets – often at a huge discount – in order to generate cash that will be divided equally.

It is usually in both parties’ interest to negotiate the division of community assets; if they fail to agree on the disposition of an asset, the Court may order that it be sold and then equally divide the discounted proceeds between the parties.

Complicating Factors

One critical consideration in attributing an asset to one spouse or the other is the tax status of the asset. You do not want to accept pre-tax or untaxed assets while your spouse receives assets of the same face value for which taxes have already been paid. Related to this issue is whether any such assets have been depreciated for tax purposes or have enjoyed an appreciation in value since purchased or obtained.

The value of some major assets – such as securities, jewelry, art or a business – can be a moving target (subject to market fluctuations) or may need to be professionally appraised in order to achieve an equitable distribution of community property. In those cases, disagreements sometimes occur regarding the effective date of the valuation. Should it be the date on which the Petition for Dissolution was served on the other party? The date on which the appraisal was completed? Some other date (invariably, one that favors one party over the other)? As a practical matter, unless the parties agree to a value, or to a method of determining value, the real value may well be the price realized after a court-ordered sale.

Further complications can arise regarding such issues as evaluating ownership and operation of a closely-held business, determining actual income from a cash-intensive sole proprietorship, and ascertaining each party’s interest in the value of retirement accounts that extend beyond the marriage time frame. Although a determination of these issues will be fact-based, the overriding focus of the court will be, again, to achieve an equitable, or as close to equal, distribution of marital assets as practicable.

Reducing the Pain and Expense of Divorce

Property settlement and the division of assets and debts underscore the importance of becoming as knowledgeable concerning your financial status (both assets and income) as reasonably possible. Once a comfort level is achieved with your knowledge of community assets and income, a fair distribution is much more likely.

In the absence of shared knowledge of the couple’s finances, the resulting secrecy and hard feelings may lead to independent examination of their financial and property records. The burgeoning use of financial investigation, including forensic imaging of computer hard drives and other investigative measures, in an effort to unearth hidden assets and further learn of each party’s affairs and financial maneuverings, results in protracted and more expensive proceedings en route to the issuance of the divorce decree.