The beauty of going through the collaborative divorce process is that the decisions made between husband and wife are bound by what the couple wants, of course with guidance from their respective attorneys. Generally, the financial separation of assets is done at the time of the signing of the divorce agreement. However, it can occur at any time if agreed upon by the parties.
If a couple has already reached a financial agreement of how the marital assets should be divided, there is no need to wait until the divorce is signed. If each asset is split down the middle, it is an easy task, however this is not always the case. There are no taxes to be paid for transfers between spouses. Even if you split each asset, you must know the value of the contribution made/invested. Although two assets may have the same current value, they may not be equal. Knowing the “cost basis” will help in the division of assets for “tax impacting” when divided.
For example: If there are two brokerage accounts worth $100,000 each but one account started out with a value of $75,000 (A) and the other $125,000 (B), are they really equal? It may seem easier to say to your spouse, you take account (A) and I’ll take account (B), however in the long run this could be detrimental to your financial health. If both accounts are sold today, account A would have a capital gains tax on $25,000 profit. At a minimum, that reduces the profit and account balance by $3,750 or 15% of the gain. Account B will have a loss if sold of $25,000 and will receive 100% of the proceeds or $100,000. Does that seem equal? Account B will have a $25,000 tax loss and potential “carry over” of that loss for future years. This in and of itself is a valuable asset that will help to reduce taxes going forward. So, all balances are not “equal.”
Non-retirement asset division is a bit more complex. Asset division generally is I’ll take mine, you take yours and we’ll divide up the rest to make it equitable. When retirement plans are eventually sold, there are taxes to be paid since contributions and earnings have never been taxed. If there are Roth IRA’s, the taxes have already been paid on the contributions and when the money is withdrawn, the balance comes out tax free. So again, if there are Roth IRA’s in the mix, we must consider the tax impact of each asset as if it were sold today to get the proper valuation.
Prior to divorce, you cannot divide up retirement assets. You can though have your spouse set up another IRA account and deposit the designated portion into a new account with you as the beneficiary, and with “Power of Attorney.” This way you can change the investment strategy that may be more suitable to meet your individual goals and objectives. The statements can go to your new address. At the time of divorce, the name can be changed on the account.
Corporate retirement plans (Money Purchase, Profit Sharing, Pension or 401K plans) require a QDRO in order to split up the asset. A QDRO is a “Qualified Domestic Relations Order” that must be submitted to the employer. Although this asset cannot be divided prior to divorce, at least you will be able to take control of some of your assets sooner rather than later.
A financial professional will be able to assist with the tax implications of the division of assets.