Techniques to help smoothly and efficiently divide the marital estate in a divorce

Governing Principles

It is important to enter divorce settlement negotiations with a clear understanding of two governing principles. First, a marriage is a partnership, much like any other partnership. By their very nature, partnerships assume the sharing of responsibility, labor, and profit. Also inherent in a partnership is the fact that the partners will not have the same jobs. For example, assume that a company manufactures lamps. One partner is in charge of the process of building the lamps, and the other partner is in charge of selling the lamps. Since the company cannot survive without both of these components, the services of both partners are considered equally important. Marriages are economic and emotional partnerships. Accordingly, like any other partnership, the parties are considered to have equal status, despite the differences in the duties they may have performed during the marriage. For example, it is not unusual for a wife to leave the labor market to raise the children while the husband pursues a job or career. This division of duties does not change the economic status of the parties. Both parties are equally responsible for the debts of the partnership and both parties have equal rights to the assets of the partnership. Consequently, all divisions of marital estates begin under the assumption that the marital estate will be divided equally. Secondly, it is important to understand that there are (primarily) two statutory methods of dividing marital estates in a divorce. Community property states more or less require the equal division of marital estates. Non-community property states require the equitable division of marital estates; these states require the marital estate to be divided in whatever manner is determined to be fair under the circumstances, and the division need not be equal. Both the equal and equitable divisions have problems. The equal division of the marital estate may not be fair, and the equitable division is highly subjective. In the final analysis, and perhaps in spite of legal requirements, applying common sense and sound economic principles, and addressing the personal needs of the divorcing parties are the keys to the successful management of a divorce.

The process of dividing the estate

Find common ground initially

As part of the divorce process, the negotiations to divide the marital estate should begin with laying the foundations for agreement. This means that the negotiations should begin by finding common ground. What items can the parties agree upon? Usually these are basic, simple, and, perhaps, obvious. By starting here, the divorce manager (at various times, this role might be filled by the divorce lawyers, a mediator, a family law attorney or a collaborative law attorney) can reduce the polarity of the parties and pave the way for future agreements. The parties begin by agreeing, for example, on the value of their savings accounts. The manager then moves the parties through the rest of the valuation and summarization of the marital estate. Theoretically, by the time the parties are ready to begin actually dividing the marital estate, they have been acclimated to the idea that not everything associated with the divorce has to be a battle. They may also have adopted a problem-solving attitude as opposed to an angry or defensive position. The groundwork accomplished by building and valuing the marital estate will normally reveal the issues that the couple perceives as the most critical. Since the couple will be distracted by these issues, and will put everything into the context of how these issues are going to be resolved, it is best to handle these high-value, high-stress issues first.

Address issues related to children once, early in the process, and don’t revisit these issues

Children and the related issue of child support normally entail high emotions and will often stymie progress if they are not handled first. Experienced divorce lawyers understand that the very best way to handle children is to remove them from the equation as soon as possible. Children are not assets or bargaining chips, and treating them as such is destructive and will significantly hinder the parties’ ability to function as parents in the future. A parenting plan should be developed first. It should be unrelated (except for the child support issue) to the economics of the situation. Based on the parenting plan, a child support calculation should be performed. Once the parties have agreed upon a parenting plan and the child support calculation is complete, it is best to segregate these issues permanently from the rest of the divorce process. Allowing a return to these topics (e.g., “I’ll let you have the kids one more night per week if you pay off the debt on my car.”) incorporates them as components in the division of the marital estate and will reduce the integrity of the parties as parents. In addition, it is highly possible that this type of “negotiation” will very quickly result in the settlement process spinning out of control and the spouses heading to a court of last resort. Dollars and other assets are only things. The emotions related to things, while they do exist, are nothing like the emotional impact of children. Mixing the two will elevate the emotional impact of things to the emotional impact of children. This will virtually guarantee an incredibly difficult or perhaps impossible negotiated settlement.

Address the parties’ residence next

After the children (if any) have been addressed, the division of the marital estate proper can begin. Unlike the children, anything in this arena is fair game and can be negotiated and renegotiated on the road to an equitable settlement. There is only one rule in this area that divorce managers should consider enforcing: the party who assumes an asset also assumes the debt on that asset. For example, assume the wife has a car valued at $20,000 with a note due on the vehicle of $10,000. Under this rule, if the wife takes the car as part of the settlement, the wife should also assume the debt. If the couple owns a residence, it is likely that it will be a point of contention because of the emotions attached to it and the possibility of significant equity. Before any type of negotiations are entered into on the house, the budget process should have been completed if preliminary indications are that someone wishes to retain the residence. The budget process will indicate whether or not either party can afford to assume occupation of the residence. Once it has been established that one party can reasonably assume possession of the house, the equity in the residence is placed in that person’s column of the summary. Inclusion of the asset in the husband’s column, for example, will require him to provide the wife with equivalent assets in compensation for her portion of the equity in the house. Alimony (maintenance) arguments are often raised at this point in the negotiations. For example, the wife may contend, “I can keep the house if he pays me $3,000 per month.” This may or may not be a reasonable expectation on the part of the wife. If neither party is willing or able to assume possession of the residence, then sale of the residence is another option. In that case, the parties can agree to split the proceeds from the sale equally (50/50) or equitably. If the proceeds from the house are going to be divided equally, then a simple indication of a 50/50 split can be entered into the valuation summary, without concern as to the net values. However, if the value of the house is going to be split equitably, on a ratio other than 50/50, then it is best to estimate the proceeds from the sale of the house because of the mathematical differences in total cash received caused by other than equal divisions. For example, assume that a house has an expected net value of $100,000. If the parties agree that the proceeds are to be split equally, there will be no difference in the amounts the parties receive ($50,000 each). This is true even if the proceeds drop to $80,000 ($40,000 each). However, under the assumption that the wife will receive 60% and the husband 40%, the bottom line changes. If the house has a net value of $100,000, the difference between the two shares will be $20,000 ($60,000 – $40,000); at a proceed amount of $80,000 the difference will be only $16,000 ($48,000 – $16,000). These types of differences skew the bottom line division of the marital estate. In the first example, the wife will have to pay the husband $10,000 to equalize the marital estate. If, however, the house only sells for $80,000, then the wife will only have to pay $8,000 to equalize. If absolute equality of the bottom line amounts is imperative for the parties or required by local regulation, then the divorce lawyers (or the mediator or other divorce manager) should recognize that a change in sales price when unequal ratios are used will cause a difference in the bottom line.

Next, address items to be divided according to logic or sentiment

Once the residence has been addressed, division of the marital estate will move onto other assets. A number of the assets (and associated liabilities) of the marital estate will be subject to a logical or natural division. For example, the wife will take her clothing and toiletries, the husband will take his. The wife will take her hobbies (stereotypically: sewing, knitting, crafts) and the husband his (stereotypically: golfing, wood working, hunting, fishing). If the wife will be charged with most of the transport of the children to and from school or to activities, it would be logical that she would take the family van and the husband take the vehicle which is less child-friendly. A business should, logically, remain in the possession of the person who runs it on a regular basis or who has the best chance of making it profitable. Pension plans are initially placed in the column of the individual whose earnings created them. However, these items may have extremely high value relative to the rest of the marital estate, and this assignment may ultimately be inequitable and have to be revisited. The items of sentimental value should go to the party who values them. For example, a scrap book of the children’s formative years, compiled by the wife, may have significant sentimental value to the wife and very little to the husband. Logically, the scrapbook should remain in the wife’s possession. Family pets can be included in this category and should remain with the party who has formed an emotional bond with the animals. It may not always be obvious to an outsider (e.g., a divorce lawyer or other divorce manager) which assets can be divided using the logic described above. Often, though, the parties’ relationship to particular items will become very obvious because one or both of the parties will make it obvious. The red flag for divorce managers in this area is when one party wants an asset when there is no logical reason for that party to have it. Assume, for example, a husband wants the wife’s knitting machines as part of the division of the marital estate. If the husband has never run the machines and has no idea how they operate, it is safe to assume either (1) an ulterior motive (e.g., an attempt to insure that another he really wants is not pursued by the wife, as in “I’ll give you your knitting machines, if you’ll give me my fishing tackle.”) or (2) an act of revenge, an expression of anger, or an attempt to control the spouse, the process, or the divorce manager. A smart divorce lawyer can thwart the illogical assignment of assets by first pointing out the absurdity of that assignment and then asking for an explanation. This will usually make the underlying motive apparent and provide the divorce lawyer with an issue that can be addressed.

Lastly, address other remaining items

After the high stress assets have been addressed and the logical asset divisions have been made, the rest of the marital estate can be dealt with. Examples of what might remain would be household effects, financial assets, and unsecured liabilities. The best way to dispense with household effects is to divide them by utility. That is, the parties share the items that are necessary to live so that replacement costs are minimized. Financial assets that are equivalent to cash are usually the last assets to be divided in that they are easily transferable between the parties and can be used to equalize the marital estate division, or effect whatever type of division the couple deems to be equitable. Caution: While, the transfer of cash and cash equivalents between the parties normally does not cause problems, the transfer of funds in deferred compensation plans or individual retirement accounts can. Credit card debt, if it exists, will normally be the major component of the unsecured liability section. There are at least two schools of thought in the resolution of unsecured liabilities. The first is that the liabilities should simply be thrown into the pool of assets and liabilities and be divided equally between the parties. The second is that these types of liabilities should be divided based on the parties’ ability to pay. As might be expected, the best approach has components of both. There is truth to the contention that the parties are equally responsible for the debt, and they should respond to the debt equally. Equal response to the debt works if the abilities of the parties to generate income are roughly equal. However, if one party is operating at the poverty level, and the other is significantly above it, saddling the low income party with half of the unsecured debt makes little or no economic sense because of the differences in access to ready cash and borrowing power between the parties. For example, assume that a wife earns minimum wage and is given a car with $20,000 worth of equity and also $20,000 worth of credit card debt. The husband, on the other hand, is given his car worth $20,000 and credit card debt of $20,000, but he makes $60,000 per year. The net division to both the parties is zero and, therefore, equal. However, even though the wife has equal assets and debt, she has no reasonable way to respond to the debt she has been assigned. She cannot sell her car to resolve the debt, as it is required to keep her employment, and she does not have enough cash flow to meet the debt service. Economic logic would indicate a proportional division of the debt based on the relative earnings of the parties or the husband simply taking all of the debt to avoid having to support the wife by means of alimony. At times, other assets in the marital estate can be used to offset the unsecured liabilities. For example, assume that a couple owns recreational property valued at $150,000, with a mortgage due of $125,000. The husband has the higher income and is, therefore, assigned this property, as well as $25,000 worth of credit card debt. The effect on the marital estate division is zero, as the husband is getting as many assets as liabilities. However, under the assumption that the husband has higher income, he has the ability to meet the current payments on the property and the credit cards while selling the property to pay off the debts, or refinancing the debt to pay off the credit cards, or spending additional funds to improve the property so its sale can be assured. On the other hand, if the wife (assuming little disposable income) is assigned the property and the credit cards, she will immediately run into trouble because she cannot meet the minimum payments necessary to maintain the debts while the property is sold. She also may not have the ability to refinance the property and is unlikely to have the funds to improve the property. The preparation of a competent post-divorce budget is likely to point out the disparities in the current positions of the parties and the potential problems. However, divorce lawyers and managers who keep in mind the practical considerations associated with the assumption of unsecured debts can immediately point out problems or ask relevant questions that may expedite the division process.