Whether you choose a Collaborative Divorce, divorce mediation, or conventional adversarial representation, one of the main tasks you will do as part of your divorce or separation is divide property and debt. Technically called “property division,” this task is necessary in every dissolution of marriage (divorce), legal separation, and the breakup of every “pseudomarital” (living together) relationship. The purpose is to clarify who owns what property and who is responsible for what debt once the divorce is concluded.
Property includes accounts, personal property, real estate, securities, business interests and professional goodwill, expectancies, retirement plans, and even airline miles and club memberships. Debts include credit cards and mortgages, but also contingent liabilities and contractual liabilities.
In a Collaborative divorce, it is important that the property division is agreeable both for you and your spouse. To assist with that, the couple’s attorneys and the neutral financial specialist will work to help each of you identify what is most important to your future and goals. With guidance and support, you will then divide property in a manner that best honors those goals, while respecting the marriage and your past and future. You may consider the source of their property or how the law would treat the property, if that is important to you.
For those going to court instead of making their own decisions, the law directs Washington courts to make a “just and equitable” division of all property and debt. While Washington is a “community property” state, in a divorce all property—whether community or separate property—is before the court and subject to being divided. Although the courts may try to respect a spouse’s separate property by awarding it to that person, the law gives judges the authority and discretion to award separate property to the other spouse, and that authority and discretion is commonly exercised. In doing so, the court considers legally relevant factors, including:
- The nature and extent of the community property.
- The nature and extent of the separate property.
- The duration of the marriage.
- The economic circumstances of each spouse at the time the division of property is to become effective, including the desirability of awarding the family home or the right to live therein for reasonable periods to a spouse with whom the children reside the majority of the time.
The legal definition of a just and equitable property division is different from an equal property division. Washington courts commonly make disproportionate property awards based on the judge’s view of equities. For example, a judge might award more property to a spouse who is viewed as economically disadvantaged, particularly after a longer marriage. There is no formula. There is no percentage that is automatically used.
In a separation or divorce, one or both spouses will typically need new housing. If new housing involves purchasing a house, it may be advantageous to delay filing a divorce case in the courts. Once the document that starts the divorce (called a petition for dissolution of marriage) is filed, the divorce becomes a public record that will be considered by a mortgage lender and may make mortgage financing difficult to get or even unavailable. By reaching a settlement and obtaining mortgage financing before filing a petition for dissolution, it may be possible for both parties to own houses after divorce when that would not have been possible had the divorce been filed with the court. In a litigated case, this possibility is not available, but it may be available in a Collaborative divorce or a mediated divorce.
Interrelated with a property division is the flexible concept of maintenance (often called alimony in other states). The court will typically award maintenance if one spouse has been out of the workforce for some time, or needs re-training to become self-sufficient. After a long-term marriage, the court will often try to equalize the parties’ standard of living for the rest of their lives, through a combination of a disproportionate property division and/or an award of maintenance in favor of the economically disadvantaged spouse. An award of maintenance and a disproportionate property division is much rarer following a short-term marriage, when the court will often try to place the parties in a similar financial position they would have enjoyed had they not married.
There are many tools available to create a workable division of property. In a collaborative divorce, a financial analyst may provide future net worth and other financial projections based on different scenarios and assumptions, including likely tax effects, so parties can make the best decisions for themselves.
Frequently Asked Questions (FAQs)
What happens to property that is not divided? If property is not listed in the decree as being awarded to one party or the other, it will continue to be owned by both parties. This is one reason why you should fully disclose and list all property.
How do we divide our house? Here are the two most common options. First, the house could be listed and sold, with the proceeds divided. There are several benefits to this, including that the closing costs will be shared, both parties will be released from the loan, and possible tax benefits. The second most common option would be for one spouse to be awarded the house, with the other party to be cashed out immediately or over time. A real estate appraiser’s services are commonly used to value real estate when one party will remain in possession. There may be some other possibilities, including continued co-ownership, which you should discuss with your attorney and tax advisor.
How does a divorce affect my ability to get a mortgage? Many financing options will not be available once a divorce petition has been formally filed with the court. For that reason, it is often best to address mortgage issues before filing a petition with the court, or after a case has been concluded. This is one of the main reasons why the formal court filing is often delayed in a collaborative divorce.
Does property division give rise to capital gains taxes? Generally not at the time of the dissolution of marriage, although there can be tax consequences later. A division of property pursuant to decree of dissolution of marriage is not a taxable event. A transfer of real estate pursuant to a decree of dissolution of marriage is also exempt from the real estate excise tax. There will probably be tax consequences for unmarried cohabitants. In any event, we strongly recommend consulting with a tax attorney or a tax accountant as part of every property division.
I am a member of a club. Should the membership be listed in the decree? Yes. Club memberships are considered to be “property” for purposes of dissolution of marriage, and should be listed. So should frequent flyer miles, season tickets, and possible lawsuits against others. Another item of property often overlooked is accrued vacation pay.
My husband is a physician. Is his practice worth anything? Quite possibly. A professional who is also an owner or co-owner of his or her practice may have “professional goodwill,” which is an asset to be divided in a dissolution of marriage. A professional who is just an employee of a large practice group probably does not have professional goodwill.
How do we divide a pension? There are a number of ways to accomplish this. The easiest way is to simply award a larger amount of other property to the other spouse. Otherwise, most pensions can be divided with court orders. For so-called “qualified plans” (for instance, 401K plans), a special “qualified domestic relations order” (QDRO) is required. For IRAs, the property division can simply be in the Decree. When dividing a pension plan or IRA (other than a Roth IRA or Roth 401K), remember that it has pre-tax dollars. Whoever makes the withdrawal must pay the taxes and penalty, if the withdrawal is made before age 59-1/2 (there is one circumstance when the 10% penalty may be waived). If the pension plan is a traditional “defined benefit” plan, some economic calculations can be made to estimate the value. Issues surrounding retirement plans can be complex, and it is best to get professional assistance.
Does Washington have “palimony” for unmarried cohabitants? Although Washington’s courts will divide property in a similar manner to a dissolution of marriage for unmarried cohabitants (same or opposite sex) in a “pseudomarital” relationship, no alimony or maintenance can be awarded if the decision is made by the court. Alimony or maintenance is only available for persons who were married. In a collaborative family law case, the parties may agree to provide support by agreement. The tax consequences for such support are different for unmarried couples than for divorcing couples.
What about stock options and awards? There are different types of stock options and awards that would be treated differently. If the court makes the decision, generally, vested options and awards, and a portion of the next-to-vest, will be community property if the purpose of the stock option or award is to provide incentive for continued employment. It is best to speak with an attorney about your specific situation, because there are exceptions to this rule, and ascertaining the purpose of the option or award is not always straightforward. The attorney will need, at a minimum, the following information:
- A copy of each stock option and award grant and vesting dates.
- A copy of any agreements pertaining to the exercise of the stock options.
- The exercise price for each option. (Usually in the foregoing documents)
- The strike price for each option. (Usually in the foregoing documents.)
- The expiration date for each option. (Usually in the foregoing documents.)
- For partially redeemed stock options, the dates, and amounts redeemed.
There are complicated tax rules for certain types of options and awards, making it best to obtain qualified tax advice.