Aside from the emotional/psychological aspect of divorce, the divorcing couple will certainly have to deal with the financial aspect of it. In many cases, the emotional aspect of divorce often interferes with the effective distribution of the marital estate.
The ill feeling towards the other partner may create communication barriers between spouses. However, this thing is really unavoidable, so whether they like it or not, ex couples would really have to come together and settle their marital estate.
Dividing the marital estate during divorce can be quite difficult. This is true when the couple has numerous properties and the answer to the question “Who gets what” will really be challenging.
Divorce Settlement Agreement
Experts suggest that during divorce, assets should not necessarily be divided according to their dollar value. A party in a divorce property settlement should understand which assets are best for his/her short term as well as long term financial security.
In the process, the party better needs to understand the asset itself, its liquidity, its cost and market values and the tax implications associated with the sale of the asset. It is important for couples to know which are the separate and which are the marital property in the marriage.
States though differ in several details.
Property Settlement Agreement After Divorce
In a property settlement, the court determines what is fair, just and reasonable distribution of assets in 41 states. In legal parlance these are called the equitable distribution sates.
The court may decide to award a spouse from zero to all of the marital estate depending on factors such as how long the marriage has lasted, the earning capacity of each spouse, the property brought into the marriage by the spouses, the responsibilities of the spouses in raising and supporting the children, the future employability of each spouse, the tax consequences of asset distribution and debt allocation, among others.
Divorce Property Settlement Agreement
Further, assets acquired during the marriage are subject to division. This is without regard to the name of the asset title or the money used to acquire the asset.
The other nine states are community property states. These states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, property is owned concurrently between spouses.
The earnings of the divorcing couple are considered community property and will therefore be divided equally between them. The same is true for assets acquired by either spouse during the marriage using funds earned during the marriage.
Separate property will include those owned before marriage and brought into the marriage as his/her own and those acquired by gratuitous title during marriage- either by gift or by inheritance. In some states, property which have been purchased out of the proceeds from the sale of exclusive property will also remain as separate property.
Tax Considerations
It is important to note that any transfer between divorcing spouses during marriage property settlement will not produce any taxable gain or gift tax liability. Under the general rule, a transfer of property to a former spouse incident to a divorce will not produce any gain or loss.
Transfer of property is deemed incident to divorce if the transfer occurs within one year from the date the marriage ceases or is related to the “cessation of the marriage” which requires that the transfer is pursuant to a divorce or separation instrument or occurs not more than six years after the marriage ceases.
Further, a transfer of marital property or property right from one spouse to another, under a property settlement agreement and incorporated in a divorce decree is not subject to gift tax. If a transfer is not made under a property settlement agreement incorporated in a divorce decree, it may still be subject to gift tax.
The Code states that transfers of property or interests in property in settlement of marital property rights are treated as made for full and adequate consideration if the transfers are made pursuant to a written agreement and the divorce occurs within three years or if the transfer occurs any time as long as it is in pursuant to an agreement entered into by the spouses during the three-year period.
Alimony
Alimony is defined as cash transfer between the divorcing couple under a separation instrument. Alimony payments do not include payments for child support, will not continue after the death of the recipient and the spouses do not live in the same household when the transfer of cash is made.
Generally, the amount of cash transfer-the alimony- is deductible by the payor and will constitute taxable income on the part of the recipient.
According to experts, there is inherent tension between property settlement and alimony. The payor spouse would prefer low property settlement and high alimony because of its tax deductibility.
On the other hand, the recipient spouse in a settlement would [refer the reverse- higher property settlement that is not taxable and lower taxable alimony.
Divorce property settlement can really be difficult, but the spouses will really have to deal with the financial aspect of divorce. Protect yourself and seek advice from one of our experienced debt settlement attorneys today.