Divorce is an emotionally charged and stressful process that can impact every aspect of your life. One of the most challenging aspects of divorce is dividing assets such as real estate, retirement accounts, and business ownership. These types of assets can be complex and require careful consideration to ensure that both parties receive a fair and equitable distribution. This article will discuss the division of real estate and other assets during divorce, including the tax implications, the importance of working with appraisers and other experts, and how using an attorney experienced in collaborative divorce can help you navigate this process.
Divorce can be complex and emotional, particularly when dividing assets such as real estate, investments, and personal property. These assets can hold significant financial and emotional value, and it can be challenging to agree on how to divide them fairly.
One option for navigating the division of assets during divorce is to use the collaborative divorce process. Collaborative divorce is a cooperative and non-adversarial approach to divorce in which both parties work together to reach a mutually beneficial settlement. This approach can be particularly effective when dividing real estate and other assets, as it allows both parties to work together to find creative and mutually beneficial solutions.
If you are considering a collaborative divorce, it’s essential to work with an experienced attorney/mediator who understands the nuances of this process and can help guide you through it. Anna Krolikowska “Anna K”, an attorney and mediator, is such an attorney. Anna practices family law in Cook, Lake and DuPage Counties in Illinois. She works with your unique situation and set of challenges to address your family law needs.
Collaborative Divorce Process
Approaching the division of assets collaboratively and respectfully is possible. One option for navigating the division of assets during divorce is to use the collaborative divorce process. Collaborative divorce is a process in which both parties work together to agree on the division of assets and other issues related to the divorce.
Collaborative divorce can be less stressful and less costly than traditional divorce litigation. It also allows both parties to have more control over the outcome of the divorce and can result in a more amicable relationship after the divorce is finalized.
In a collaborative divorce, both parties typically hire their own attorneys who are trained in collaborative divorce, and as part of that training are also trained as mediators. They also work with other professionals, such as appraisers and financial advisors, to agree on the division of assets. In addition to dividing assets, the collaborative process can help couples address other vital issues, such as child custody and support, spousal support, and post-divorce financial planning.
Dividing Assets: Real Estate, Retirement Accounts, and Business Ownership
Dividing Real Estate
Real estate is often one of the most significant assets involved in a divorce. Depending on the circumstances, the couple may own one or multiple properties, such as a family home, vacation, or investment property. Real estate is often the most valuable asset that a couple owns. If the couple owns a home together, they must decide whether one party will keep the home or if it will be sold and the proceeds divided. This decision can be complicated, as it often involves emotional ties to the home and financial considerations such as the cost of upkeep, property taxes, and mortgage payments.
One option for dividing real estate is to sell the property and divide the proceeds between the spouses in a way that makes sense to them. This approach can be beneficial if neither spouse wants to keep the property or if no children are involved.
Another option is for one spouse to buy out the other spouse’s share of the property. This approach can be beneficial if one spouse wants to keep the family home or if children are involved. For example, the spouse who keeps the property would need to refinance the mortgage and buy out the other spouse’s share based on either the property’s current market value or an agreed market value. The couple could also agree to trade the property and the equity in it for other assets.
Dividing Retirement Accounts
Retirement accounts are another asset that may need to be divided during a divorce. These accounts can include 401(k)s, IRAs, and pension plans. The division of retirement accounts is governed by federal law, specifically the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). Retirement accounts such as 401(k)s, IRAs, and pensions are commonly divided during divorce. These accounts can be complex, and it is essential to understand the tax implications of dividing them.
Sometimes, a Qualified Domestic Relations Order (QDRO) may be required to divide retirement accounts. A QDRO is a court order establishing how the retirement account will be divided, and the plan administrator must approve it.
Dividing Business Ownership
Dividing this asset during divorce can be challenging if one or both parties own a business. A business valuation is typically required to determine the value of the business, and an expert such as an appraiser may be needed. Once the value of the business is determined, the couple will need to decide how to divide the ownership or if one party will buy out the other.
One option is for one spouse to buy out the other spouse’s share of the business. This approach can be beneficial if one spouse wants to continue running the business or has no other viable options. The buyout price would be based on the business’s current market value, which would need to be determined by a professional appraiser, or another agreed value.
Another option is to sell the business and divide the proceeds equally between the spouses. This approach can be beneficial if neither spouse wants to continue running the business or if it is not profitable.
Some couples also choose to continue operating a business together for some time, but agree on detailed terms of co-operation and possible future sale or buy-out.
Tax Implications of Dividing Assets
Dividing assets during a divorce can have significant tax implications for both parties. Understanding these implications and working with a tax professional to minimize potential tax liabilities can offer significant benefits. For example, the division of a retirement account can result in taxes and penalties if not done correctly. Therefore, working with an experienced attorney and tax professional is essential to understand the tax implications of dividing assets and how to minimize tax liabilities.
For example, selling a home or investment property may result in capital gains taxes. However, there is an exception for spouses who are divorcing. Under current tax law, a spouse who sells a property as part of a divorce settlement can exclude up to $500,000 of capital gains from their income.
Dividing retirement accounts can also have tax implications. Withdrawals from traditional retirement accounts, such as 401(k)s and IRAs, are generally subject to income taxes. However, there is an exception for spouses who are divorcing. For example, suppose the retirement account is divided according to a QDRO. In that case, the receiving spouse can roll their share of the account into their own IRA without incurring any taxes or penalties.
Working with Appraisers and Other Experts
Dividing assets during a divorce often requires the assistance of appraisers and other experts. An appraiser can provide a professional opinion of the value of a property or business, which is essential in determining how to divide the assets. Therefore, it is vital to choose an appraiser who is qualified and experienced in the specific type of property or business being appraised.
Similarly, a financial advisor, or a financial neutral or accountant can guide the tax implications of dividing assets and help ensure fair and equitable division for both parties. In addition, these professionals can objectively assess the value of assets such as real estate and businesses, which can be critical in determining a fair distribution. Your attorney will be able to guide you as to which professionals would be helpful and to offer possible referrals.
Negotiating a Settlement
Once you have identified and valued your assets and considered the tax implications, it’s time to negotiate a settlement. In a collaborative divorce, both parties work together to find a fair and equitable solution that meets their needs and goals. This can involve a variety of strategies, including:
- Creating a list of priorities: Each party can identify their most important assets and work to negotiate a settlement that addresses their top priorities.
- Trading assets: You can negotiate a settlement in which one party keeps certain assets while the other party keeps different assets of similar value.
- Selling assets: If both parties agree, it may be possible to sell certain assets and divide the proceeds.
- Co-owning assets: In some cases, it may be possible to co-own certain assets, such as a vacation home or investment property, with each party owning a percentage of the asset.
Drafting a Settlement Agreement
Once you have settled, it’s essential to draft a formal agreement that outlines the terms of your division of assets. This agreement should be reviewed by both parties and their attorneys to ensure that it accurately reflects the terms of your settlement and protects your interests. Once the agreement is signed, and incorporated into a divorce judgment, it becomes a legally binding contract by which both parties must abide.
Let us Summarize!
By identifying and valuing assets, considering tax implications, negotiating a settlement and drafting a formal agreement, the collaborative divorce process can be an effective way for couples to navigate the division of real estate and other assets during a divorce.
By working together with their attorneys and other professionals, couples can achieve a fair and equitable distribution of assets and move forward with their lives. Working with an experienced attorney trained in collaborative divorce can be key to successfully navigating this process.
If you are in Cook, Lake, and DuPage Counties in Illinois, contact Anna Krolikowska for a free thirty-minute consultation. You may also call 847-715-9328 or email her at annna@annaklaw.com to discuss your family law questions.
